Introduction

The case of Lamesa Investments Ltd v. Cynergy Bank Ltd ([2019] EWHC 1877 (Comm)) was adjudicated in the England and Wales High Court (Commercial Court) on September 12, 2019. This litigation centered on a Part 8 Claim by Lamesa Investments Ltd ("LIL") seeking clarity on whether Cynergy Bank Ltd ("CBL") remains obligated to make repayments under a Facility Agreement ("FA") dated December 19, 2017. The crux of the dispute involved the interpretation of contractual clauses in light of U.S. sanctions imposed on one of LIL's major stakeholders, Viktor Vekselberg ("VV"), classified as a "Specially Designated National" ("SDN") by the U.S. Department of Treasury's Office for Foreign Assets Control ("OFAC").

The key issues revolved around whether CBL could invoke clause 9.1 of the FA to withhold interest payments due to the potential imposition of U.S. secondary sanctions, despite the absence of a direct prohibition under U.S. primary sanctions law.

Summary of the Judgment

The High Court examined whether clause 9.1 of the FA permitted CBL to refrain from paying the accrued interest of £3.6 million to LIL due to the risks associated with U.S. secondary sanctions. CBL contended that complying with the FA by making payments could expose it to severe economic penalties under U.S. law, particularly section 5(c) of the Ukraine Freedom Support Act 2014 ("UFSA"), which allows for secondary sanctions on foreign financial institutions facilitating significant transactions with SDNs.

The court analyzed the contractual language, especially the interpretation of "mandatory provision of law," and concluded that this term encompasses not only explicit legal prohibitions but also implied restrictions stemming from the risk of sanctions. Therefore, CBL was entitled to rely on clause 9.1 to avoid making the interest payments while VV remained an SDN and LIL a Blocked Person.

Analysis

Precedents Cited

The judgment extensively referenced several pivotal cases to establish the interpretation framework for contractual clauses. Notably:

• Ralli Brothers v. Campania Naviera Sota Y Aznar [1920] 2 KB 287 – Affirmed that English law does not excuse contractual performance based on foreign law unless it directly applies to the contract or place of performance.
• Kleinwort Sons & Co v. UBIA [1939] 2 KB 678 – Reinforced the principle that contractual obligations are primarily governed by the contract's own terms and the governing law specified within.
• Libyan Arab Foreign Bank v. Bankers Trust Co [1989] 1 QB 728 – Highlighted that the imposition of sanctions could be treated as implied prohibitions, thereby affecting contractual performance.
• National Bank of Kazakhstan and another v. Bank of New York Mellon [2018] EWCA Civ 1390 – Demonstrated that contractual clauses can effectively manage risks associated with sanctions, provided their construction aligns with the parties' intentions.
• Arnold v. Britton [2015] UKSC 36 – Provided comprehensive guidelines on contractual interpretation, emphasizing the importance of natural and ordinary meaning, context, and commercial common sense.
• Rainy Sky SA v. Kookmin Bank [2011] UKSC 50 – Established that clear and unambiguous contractual language must be applied as-is, while ambiguity allows for broader interpretative approaches.
• Wood v. Capita Insurance Services Limited [2017] UKSC 24 – Reinforced that sophisticated contracts drafted by professionals are primarily subject to textual analysis unless ambiguity is present.

These precedents collectively underscored the judiciary's approach to contractual interpretation, particularly in contexts involving international sanctions and the necessity to honor or adjust contractual obligations accordingly.

Legal Reasoning

The court employed a methodical approach to interpret clause 9.1 of the FA, focusing on the phrase "mandatory provision of law." The judgment delved into the documentary, factual, and commercial contexts, determining that "mandatory provision of law" extends beyond explicit legal prohibitions to include implied restrictions such as the risk of secondary sanctions.

Key principles applied included:

• Understanding contractual language in its natural and ordinary sense, within the full context of the agreement.
• Recognizing that ambiguities in contracts allow for broader interpretations aligned with commercial reasonableness and the parties' intentions.
• Acknowledging that "mandatory provision of law" can encompass implied obligations arising from the risk of sanctions, even if not explicitly codified as prohibitions.

The court reasoned that CBL, aware of the potential for secondary sanctions based on standard U.S. OFAC guidelines, was justified in invoking clause 9.1 to mitigate the "double jeopardy" risk—facing both contractual obligations and the threat of severe economic penalties.

Impact

This judgment has significant implications for international commercial contracts, particularly in the banking and financial sectors where sanctions risks are prevalent. It establishes that contractual clauses referencing "mandatory provisions of law" can be interpreted to include not only explicit legal prohibitions but also implied restrictions based on the potential imposition of sanctions.

Future contracts may incorporate similar clauses with greater clarity, understanding that such provisions can provide a legal pathway to manage and mitigate risks associated with international sanctions. Additionally, courts may adopt this expansive interpretation in similar contexts, offering parties more flexibility in navigating complex legal landscapes influenced by international regulations.

Complex Concepts Simplified

Conclusion

The judgment in Lamesa Investments Ltd v. Cynergy Bank Ltd serves as a pivotal reference point for the interpretation of contractual obligations in the face of international sanctions. By affirming that "mandatory provision of law" within a contract can encompass implied restrictions such as the risk of secondary sanctions, the court provided parties with a broader framework to manage legal and economic risks.

This decision underscores the necessity for meticulous drafting of contractual clauses, ensuring that risk management provisions are sufficiently comprehensive to address both explicit and implicit legal challenges. As global financial transactions continue to navigate complex regulatory environments, this judgment reinforces the judiciary's role in upholding contractual autonomy while acknowledging the pervasive influence of international law.