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

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Published 21 August 2020

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  • Services
  • Banking & financial disputes

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 ownerMr 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 Regulationwhich 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 

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Longer Reads

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

Published 21 August 2020

Associated sectors / services

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 ownerMr 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 Regulationwhich 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

Authors

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