Lamesa Investments Ltd v Cynergy Bank Ltd

Factual and Procedural Background

This opinion concerns a Part 8 Claim brought by the Plaintiff seeking a determination as to whether the Defendant remains obliged to make repayments under a Facility Agreement dated 19 December 2017 ("FA") in light of subsequent events and the proper construction of the FA.

The Plaintiff is a company registered in the Republic of Cyprus, wholly owned by Company A, which is in turn wholly owned by an individual designated as a "Specially Designated National" ("SDN") by the US Department of the Treasury Office for Foreign Assets Control ("OFAC"). The Defendant is a UK-registered retail bank carrying on business in England, with a US Dollar correspondent account maintained with a US bank.

Under the FA, the Plaintiff lent £30 million to the Defendant, with contractual obligations for the Defendant to make semi-annual interest payments. Interest totalling £3.6 million has become due but remains unpaid, though it has been "ring-fenced" by the Defendant pending resolution of the dispute.

On 6 April 2018, the individual ultimately controlling the Plaintiff was designated as an SDN, rendering the Plaintiff a "Blocked Person" under US sanctions law. This designation triggered US primary and secondary sanctions regimes. The Defendant faces potential secondary sanctions under US law if it facilitates significant financial transactions with the Plaintiff, which could be "obviously ruinous" to its business due to its reliance on US Dollar operations.

The dispute centers on whether clause 9.1 of the FA excuses the Defendant from making payments that would expose it to secondary sanctions, considering English law principles on contractual performance and foreign law.

Legal Issues Presented

1. Whether the Defendant is obliged under the Facility Agreement to continue making repayments despite the risk of US secondary sanctions arising from payments to the Plaintiff, a Blocked Person.
2. Whether clause 9.1 of the Facility Agreement modifies the common law rule that English law does not excuse contractual performance by reference to foreign law unless that law is the law of the contract or the place of performance.
3. The proper construction of clause 9.1 of the Facility Agreement, particularly the meaning of "mandatory provision of law" and "in order to comply" within the context of potential sanctions.

Arguments of the Parties

Defendant's Arguments

• Section 5(b) of the Ukraine Freedom Support Act 2014 ("UFSA") constitutes a mandatory provision of law under clause 9.1 of the FA, imposing an implied obligation not to knowingly facilitate significant financial transactions with SDNs or Blocked Persons.
• The Plaintiff is a Blocked Person, and payment of interest under the FA is arguably a significant financial transaction.
• There is no realistic prospect of a presidential waiver of sanctions, placing the Defendant at serious risk of secondary sanctions if it pays the Plaintiff.
• Clause 9.1 entitles the Defendant to avoid this risk by withholding payment, thereby excusing non-payment under the FA.
• The term "mandatory provision of law" means a provision that cannot be varied or dis-applied by the parties, supporting their interpretation of clause 9.1.

Plaintiff's Arguments

• Clause 9.1 requires that the Defendant demonstrate an express legal prohibition on payment; US secondary sanctions do not expressly prohibit payment but only create a risk of sanctions.
• The word "mandatory" means a law applying to UK parties acting in the UK under a contract governed by English law that expressly prohibits payment.
• The Defendant is merely avoiding the risk of sanctions, which is insufficient to engage clause 9.1.
• The common law rule that foreign law does not excuse contractual performance absent express provision should prevail.
• The UK's policy against extraterritorial effect of US secondary sanctions supports the Plaintiff's interpretation.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Ralli Brothers v. Campania Naviera Sota Y Aznar [1920] 2 KB 287	English law does not excuse contractual performance by reference to foreign law unless it is the law of the contract or place of performance.	Established the common law baseline against which clause 9.1's effect was tested.
Kleinwort Sons & Co v. UBIA [1939] 2 KB 678	Same principle as Ralli Brothers regarding foreign law and contractual performance.	Supported the common law principle relevant to the case.
Libyan Arab Foreign Bank v. Bankers Trust Co [1989] 1 QB 728	Contracts may be impliedly prohibited if statute imposes penalties, affecting contractual obligations.	Supported the idea that implied prohibitions due to penalties can excuse performance.
National Bank of Kazakhstan and another v. Bank of New York Mellon [2018] EWCA Civ 1390	Express contractual provisions can reverse common law position on foreign law and contractual performance.	Used as a comparative authority for clause 9.1's potential effect.
Arnold v. Britton [2015] UKSC 36	Principles of contractual construction including context, natural meaning, and commercial common sense.	Guided the court’s approach to interpreting clause 9.1 in its full documentary and commercial context.
Rainy Sky SA v. Kookmin Bank [2011] UKSC 50	Where there are two constructions, courts prefer the one consistent with business common sense.	Applied in assessing the reasonable interpretation of clause 9.1.
Wood v. Capita Insurance Services Limited [2017] UKSC 24	Complex agreements drafted by professionals are primarily interpreted textually unless unclear.	Supported a textual and contextual interpretation of clause 9.1.
Cope v. Rowlands [1836] 2 M & W 150	Statutory penalties imply prohibitions that can affect contract validity/performance.	Supported the view that avoiding penalties equates to complying with implied prohibitions.
Phoenix General Insurance Co of Greece SA v. Halvanon Insurance Company Limited [1988] 1 QB 216	Confirmed the principle that statutory penalties imply prohibitions affecting contracts.	Reinforced the legal basis for implied prohibitions relevant to clause 9.1.
Société Eram Shipping Co Ltd v. Cie Internationale de Navigation [2004] 1 AC 260	Principle against extraterritorial effect of foreign laws in contract performance.	Considered but held not to preclude parties from agreeing to alternative arrangements as in clause 9.1.

Court's Reasoning and Analysis

The court began by affirming the common law principle that English law does not excuse contractual performance by reference to foreign law unless that foreign law is the law of the contract or place of performance. The pivotal question was whether clause 9.1 of the FA modified this principle.

The court analyzed the wording of clause 9.1, especially the phrase "mandatory provision of law" and the requirement that non-payment be "in order to comply" with such a provision. The contractual definition of "regulation" was broad and unqualified territorially, indicating no limitation to English law alone.

The court found that "mandatory provision of law" means a law that the parties cannot vary or dis-apply, i.e., a binding provision that must be complied with. This interpretation aligns with the parties' commercial context and the purpose of clause 9.1, which is to allow the Defendant to avoid contractual obligations where compliance with an unalterable law prevents payment.

The court rejected the Plaintiff's narrower interpretation that clause 9.1 applies only where payment is expressly prohibited. Instead, the court held that clause 9.1 encompasses situations where payment is prohibited by implication due to the risk of sanctions, including the risk of secondary sanctions under US law.

The court noted that the parties were aware at the time of contract formation of the potential for US sanctions and that the clause was intended to manage the "double jeopardy" risk of having to pay despite the risk of sanctions.

Furthermore, the court found no mandatory English law or policy that precluded the parties from agreeing to such a contractual arrangement, nor did principles of territoriality limit the clause's operation. The clause was drafted widely to protect the Defendant from the risk of sanctions, including secondary sanctions, which could be ruinous to its business.

Holding and Implications

The court held that the Defendant is entitled to rely on clause 9.1 of the Facility Agreement to excuse non-payment of interest for as long as the individual controlling the Plaintiff remains an SDN and the Plaintiff remains a Blocked Person.

This decision means the Defendant is not contractually obliged to make payments that would expose it to the risk of secondary sanctions under US law. The ruling does not establish any new legal precedent beyond the interpretation of the specific contractual clause and its application to the facts. The effect is limited to the parties' rights and obligations under the FA in the context of the identified sanctions regime.