Longer Reads

Sanctions Update: Appeal dismissed in Lamesa Investments Limited v Cynergy Bank Limited

1 minute read

Published 21 August 2020

Authors

Share

Key information

Background 

Last year, the High Court held that UK based retail bank Cynergy (“Defendant”) could cease to make interest repayments under a loan facility with Lamesa Investments (“Claimant”) due to the real risk of facing US secondary sanctions.  

The Claimant’s ultimate beneficial owner, Mr Vekselberg, had been placed on the US list of “Specially Designated Nationals”, which resulted in the Claimant becoming a “blocked person”. Anybody who knowingly facilitated a significant financial transaction with the Claimant therefore risked being sanctioned by the US Government.  

At the time, the Defendant owed the Claimant around £3 million in interest. However, the Defendant withheld payment, relying on a clause in the facility agreement which provided that it could avoid being in default if sums owing to the Claimant “were not paid in order to comply with any mandatory provision of law” (“Clause 9”). 

The Claimant sued and, at first instance, it was held that the Defendant’s non-payment fell within the scope of the clause. The words “mandatory provision of law” meant a provision of law that the parties could not vary or disapply. The Court rejected the Claimant’s submission that a distinction ought to be drawn between a statute which required or prohibited something, and one that created the risk of a penalty or sanction if something was done or not done. 

The Claimant appealed, submitting: 

  1. that if a debtor is to be relieved of its fundamental payment obligations, then the loan agreement would require clear and unambiguous wording to that effect, which was not the case here; and
  2. that the underlying US legislation (which enacted the sanctions) contained no express legal prohibition on a payment, so the Defendant could not say that it had refused to pay “in order to comply with [a] mandatory provision of the law”. 

Held 

The Court of Appeal upheld the first instance judgment.  It considered it an important piece of context that Clause 9 did not actually extinguish any entitlement to be paid interest and to be repaid capital under the Facility Agreement. It merely stated that failure to do so would not result in the Defendant being in default.  

The Court of Appeal further held that “mandatory“ simply meant compulsory or required.  

The question of whether secondary sanctions would definitely be imposed on the Defendant was irrelevant. What mattered was the Defendant’s reason for non-payment.  

The Court of Appeal considered that the drafter of Clause 9 must have intended for the borrower to be capable of obtaining relief from default if its reason for non-payment was to “comply” with a foreign statute that would otherwise be triggered. It drew attention to Article 5 of the EU Blocking Regulation, which clearly regards US secondary sanctions legislation as imposing a “requirement or prohibition” with which EU parties would otherwise be required to “comply”. 
Clause 9 would therefore protect the Defendant from being in default under the loan agreement if it continuesdto withhold repayments due to the risk of secondary sanctions.   

Comment 

Commercial counterparties using English law governed contracts should be aware of the effectiveness of similar clauses when considering how to manage their risk of being affected by sanctions.  

Related latest updates
PREV NEXT

Arrow Back to Insights

Longer Reads

Sanctions Update: Appeal dismissed in Lamesa Investments Limited v Cynergy Bank Limited

Published 21 August 2020

Associated sectors / services

  • Banking & financial disputes

Authors

Background 

Last year, the High Court held that UK based retail bank Cynergy (“Defendant”) could cease to make interest repayments under a loan facility with Lamesa Investments (“Claimant”) due to the real risk of facing US secondary sanctions.  

The Claimant’s ultimate beneficial owner, Mr Vekselberg, had been placed on the US list of “Specially Designated Nationals”, which resulted in the Claimant becoming a “blocked person”. Anybody who knowingly facilitated a significant financial transaction with the Claimant therefore risked being sanctioned by the US Government.  

At the time, the Defendant owed the Claimant around £3 million in interest. However, the Defendant withheld payment, relying on a clause in the facility agreement which provided that it could avoid being in default if sums owing to the Claimant “were not paid in order to comply with any mandatory provision of law” (“Clause 9”). 

The Claimant sued and, at first instance, it was held that the Defendant’s non-payment fell within the scope of the clause. The words “mandatory provision of law” meant a provision of law that the parties could not vary or disapply. The Court rejected the Claimant’s submission that a distinction ought to be drawn between a statute which required or prohibited something, and one that created the risk of a penalty or sanction if something was done or not done. 

The Claimant appealed, submitting: 

  1. that if a debtor is to be relieved of its fundamental payment obligations, then the loan agreement would require clear and unambiguous wording to that effect, which was not the case here; and
  2. that the underlying US legislation (which enacted the sanctions) contained no express legal prohibition on a payment, so the Defendant could not say that it had refused to pay “in order to comply with [a] mandatory provision of the law”. 

Held 

The Court of Appeal upheld the first instance judgment.  It considered it an important piece of context that Clause 9 did not actually extinguish any entitlement to be paid interest and to be repaid capital under the Facility Agreement. It merely stated that failure to do so would not result in the Defendant being in default.  

The Court of Appeal further held that “mandatory“ simply meant compulsory or required.  

The question of whether secondary sanctions would definitely be imposed on the Defendant was irrelevant. What mattered was the Defendant’s reason for non-payment.  

The Court of Appeal considered that the drafter of Clause 9 must have intended for the borrower to be capable of obtaining relief from default if its reason for non-payment was to “comply” with a foreign statute that would otherwise be triggered. It drew attention to Article 5 of the EU Blocking Regulation, which clearly regards US secondary sanctions legislation as imposing a “requirement or prohibition” with which EU parties would otherwise be required to “comply”. 
Clause 9 would therefore protect the Defendant from being in default under the loan agreement if it continuesdto withhold repayments due to the risk of secondary sanctions.   

Comment 

Commercial counterparties using English law governed contracts should be aware of the effectiveness of similar clauses when considering how to manage their risk of being affected by sanctions.  

Associated sectors / services

  • Banking & financial disputes

Authors

Need some more information? Make an enquiry below.

    Subscribe

    Please add your details and your areas of interest below

    Specialist sectors:

    Legal services:

    Other information:

    Jurisdictions of interest to you (other than UK):



    Article contributors

    Enjoy reading our articles? why not subscribe to notifications so you’ll never miss one?

    Subscribe to our articles

    Message us on WhatsApp (calling not available)

    Please note that Collyer Bristow provides this service during office hours for general information and enquiries only and that no legal or other professional advice will be provided over the WhatsApp platform. Please also note that if you choose to use this platform your personal data is likely to be processed outside the UK and EEA, including in the US. Appropriate legal or other professional opinion should be taken before taking or omitting to take any action in respect of any specific problem. Collyer Bristow LLP accepts no liability for any loss or damage which may arise from reliance on information provided. All information will be deleted immediately upon completion of a conversation.

    I accept Close

    Close
    Scroll up

    Find out about Business

    Find out about Dispute Resolution

    Find out about Individuals & Families

    Find out about Real Estate

    We are Collyer Bristow - The law firm for those that
    value individuality, creativity and collaboration.

    Legal & Pricing info Regulatory InformationAccessibilitySitemapPricing and service information

    Listen to our latest podcast: Budget Miniseries: Impacts on Families with US Connections (Part 3)

    Listen to our latest podcast: Budget Miniseries: Impacts on Families with US Connections (Part 2)

    Read our latest article: Employment Law Update Seminar 2024: The Key Points

    Read our latest news: Christmas opening times 2024

    Listen to our latest podcast: Budget Miniseries: Impacts on Families with US Connections (Part 1)

    ExpandNeed some help?Toggle

    < Back to menu

    I have an issue and need your help

    Scroll to see our A-Z list of expertise

    Get in touch

    Get in touch using our form below.



      Business Close
      Private Wealth Close
      Hot Topics Close