United States: Sanctions Risk: Drafting Contracts To Avoid ‘Double Jeopardy'

Last Updated: October 14 2019
Article by Susanna Charlwood, Jonathan Swil and James Matthews

In the recent case of Lamesa Investments Ltd v Cynergy Bank Ltd [2019] EWHC 1877 (Comm), the High Court upheld the bank’s attempt to avoid a common banking dilemma: the ‘double jeopardy’ of being contractually liable to make a payment in one jurisdiction that risks the imposition of criminal or regulatory liability in another. In this case, if the bank had paid interest under a loan, it risked the imposition of U.S. ‘secondary sanctions.’

Following soon after National Bank of Kazakhstan v. Bank of New York Mellon [2018] EWCA Civ 1390, Lamesa re-confirms that the English Court will enforce clearly drafted contractual provisions aimed at avoiding ‘double jeopardy’ liability.

The High Court’s judgment also provides reassurance to non-U.S. financial institutions seeking to manage, contractually, their exposure to the global reach of U.S. sanctions. And it serves as a reminder of the need for those institutions to consider carefully the implications of U.S. sanctions.


Lamesa was a company registered in Cyprus. It was wholly owned by a BVI company, which in turn was wholly owned by Mr. Viktor Vekselberg. Cynergy was a U.K. registered company carrying on business in England as a retail bank.

Lamesa advanced a £30 million loan to Cynergy, with interest payments due every 6 months. Cynergy subsequently withheld £3.6 million in interest on the basis of an exclusion clause in the loan agreement that provided:

[Cynergy] shall not be in default if…such sums were not paid in order to comply with any mandatory provision of law, regulation or order of any court of competent jurisdiction.

On 6 April 2018, Mr. Vekselberg was placed on a list of “Specially Designated Nationals” (SDN) by the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC). Consequently, Lamesa became a “blocked person.”

This meant that any U.S. person anywhere in the world, any person dealing with property subject to U.S. jurisdiction or any person operating in the U.S. is potentially subject to ‘primary sanctions’ if they deal with Mr. Vekselberg, as a SDN, or Lamesa, as a blocked person.

However, non-U.S. persons with no property or operational connection to the U.S. can also be subject to sanctions—known as ‘secondary sanctions’—in relation to a SDN or blocked person. In particular, under the U.S. Ukraine Freedom Support Act 2014 (part of the suite of sanctions legislation targeting Russian interests) the U.S. President is required to impose secondary sanctions on foreign financial institutions that knowingly facilitate “significant” financial transactions on behalf of a blocked person, unless the President determines that it is not in the U.S.’s interest to do so.

The sanction that is to be imposed is the prohibition on the opening, or prohibition or imposition of conditions on the maintaining, of a U.S. correspondent account by the foreign financial institution.

It was common ground that if Cynergy’s payment of interest to Lamesa was a “significant financial transaction,” the U.S. Government had the power to impose secondary sanctions on Cynergy. It was accepted by the Court that such a sanction would be ruinous to Cynergy’s business, as a substantial part of it was denominated in U.S. Dollars and transacted through a U.S. correspondent account. Cynergy argued that the risk of secondary sanctions to which it was exposed fell within the scope of the exclusion clause and that it was therefore not required to pay the £3.6 million in outstanding interest.

Lamesa sought a declaration to the effect that the exclusion clause did not entitle Cynergy to avoid payment and that the outstanding interest was due and payable.

Supervening Illegality and Contractual Construction—The Principles and Application

The Common Law Position

There was no dispute that English law will only excuse contractual performance of an English law contract by reason of supervening illegality (i.e. where it becomes unlawful to perform the contract after it is executed) in two cases: if it is illegal to perform it under English law or under the law of the place where the contract is to be performed (Ralli Brothers v. Campania Naviera Sota Y Aznar [1920] 2 KB 287). Neither of those rules applied in this case. Cynergy was therefore potentially exposed to ‘double jeopardy’, the first well-known example of which occurred in Libyan Arab Foreign Bank v. Bankers Trust Co [1989] 1 QB 728: either being in breach of contract if it did not make the interest payment or risking the imposition of sanctions (and having no recourse against Lamesa) if it did.

However, subsequent cases (including National Bank of Kazakhstan) have confirmed that the common law position can be reversed by express agreement. Therefore, the core dispute for the High Court to determine was what on its true construction did the parties intend the exclusion clause to mean: was it wide enough to cover the potential imposition of U.S. secondary sanctions and thereby reverse the common law position in this case?

Lamesa’s Arguments

Lamesa’s case rested on two main arguments:

  • By referring to a “mandatory” provision of law, the exclusion clause was intended to cover only laws that expressly prohibit something, rather than laws that merely create a risk of a penalty if something is done, or not done. The U.S. sanctions were only of the latter kind and therefore did not fall within the scope of the clause.
  • The “provision of law” covered by the clause had to be a law that applies to a U.K. party, acting in the U.K., that had agreed to make a sterling payment pursuant to a contract governed by English law. The risk that Cynergy might become subject to the secondary sanctions did not meet those requirements.

The Court’s Findings

Applying the now well-known principles of contractual construction recently clarified by the Supreme Court (in e.g., Arnold v. Britton [2015] UKSC 36 [2015] AC 1619 and Wood v. Capita Insurance Services Limited [2017] UKSC 24), the Court rejected both arguments.

First, preferring the natural English meaning of the words used, the Court accepted Cynergy’s position that the reference to a “mandatory” law simply meant a law that could not be derogated from. The parties had been legally represented when preparing the contract and English lawyers would not understand a “mandatory law” to be one that requires compliance, not least as all provisions of law have to be complied with. Given that the exclusion clause was aimed at avoiding what would otherwise be Cynergy’s clear contractual obligations, it made contextual sense for the clause to apply to a law that could not be disapplied by the parties and it would make no sense to agree to it where the law could be disapplied.

Secondly, on a literal and plain English reading, the Court noted that the exclusion clause was drawn widely, referring to “any court of competent jurisdiction” and that the definition of “regulation” was also very wide: “any regulation, rule, official direction, request or guideline […] of any governmental […] agency or of any regulatory […] organisation.” The parties did not include any territorial qualification in the clause. If such a qualification was intended by the parties, they could have easily included an express term to that effect. There was therefore no basis to limit the scope of the clause to a U.K.-centric law, as argued by Lamesa.

Having dealt with these two points, the High Court’s decision ultimately turned on the effect of the words in the exclusion clause “in order to comply with” a provision of law. It considered three potential scenarios in which the words could conceivably operate in practice. The first two scenarios followed from Lamesa’s argument as to the more restrictive meaning of “mandatory,” being compliance 1) with an express prohibition on payment on pain of the imposition of a penalty and 2) where a party acts (or refrains from acting) in a way which would otherwise attract a penalty imposed by statute. The third, and wider, scenario envisaged compliance in the same manner as the second scenario but where the imposition of a penalty was merely a possibility.

The Court found that neither the true construction of the word “mandatory” nor the factual matrix suggested the parties intended to limit the application of the clause to the first two scenarios. When entering into the loan agreement, both parties were aware that there was no primary sanctions risk for Cynergy, as neither party had a direct nexus to the U.S. in the required sense. However, given Mr. Vekselberg’s status (and his connection to Lamesa) there was the potential for secondary sanctions risk. OFAC’s guidance showed that the default position was that the secondary sanctions would generally apply to foreign financial institutions. There was also no evidence as at the date of the loan agreement to suggest either that Cynergy’s interest payment would not be “significant” or that it was likely to attract a Presidential waiver. Additionally, the High Court observed that the exclusion clause was intended to have prospective effect i.e., it provided no ‘after the event’ recourse and so was designed to avoid the imposition of sanctions in the first place. This was consistent with the usual commercial basis for such clauses: that is, to eliminate “double jeopardy” risk, not allow for it potentially to be ameliorated after it has arisen. 

Accordingly, it was highly unlikely that the parties had intended to draft a clause limited to the first two scenarios.

The Court also rejected Lamesa’s further argument that the broader interpretation of the clause created uncertainty and so could not have been what the parties intended. On the contrary, the parties could not know for certain what would happen in the future. All they could be certain of was that there was a risk of a potentially severe penalty that they had chosen to manage, and so had used wide and unqualified language to manage it properly and clearly contractually. Such clauses have to be drafted in wide terms to mitigate the rule in Ralli Brothers.

Therefore, the Court held that the possibility of secondary sanctions being imposed on Lamesa if it made the interest payments fell within the scope of the exclusion clause and Cynergy was entitled to rely on the clause for so long as Lamesa remained a “blocked person.”

Key Takeaways

Lamesa v Cynergy is a helpful reminder of the potentially wide ranging impact of U.S. sanctions on banking transactions and useful steps that banks can take to seek to avoid that impact.

  • Non-U.S. financial institutions (as much as U.S. financial institutions) should continue to be mindful of the very wide reach of U.S. sanctions. In this case, neither Lamesa nor Cynergy were U.S. persons or had significant business there. Cynergy itself was not a person targeted by U.S. sanctions against Russia (or directly connected to someone who was). Yet, the impact of Cynergy making what might seem otherwise innocuous interest payments could have been potentially catastrophic for its business.
  • Settlement of U.S. Dollars through U.S. correspondent accounts will catch at least some (if not a lot) of the business of many non-U.S. financial institutions and thus expose them to the risk of secondary sanctions, where they do business with parties who are SDNs or blocked persons.
  • The English common law provides very limited protection for international banks against sanctions risk, or any other double jeopardy risk, where liability might arise in a foreign jurisdiction as a result of a dispute between their counterparties/customers and third parties.
  • The English High Court therefore recognises the need for international banks to protect themselves against double jeopardy risk and is prepared to uphold contractual attempts to do so, particularly if they are drafted in clear and wide terms.
  • It is important to consider precisely what the ‘double jeopardy’ risks are, or might be, and their likelihood of eventuating. The less certain they are, the wider the language will likely need to be to capture as many eventualities as possible. Even where the drafting is clear and in wide terms, the parties’ knowledge of the risk factors at the time they enter the contract will likely also have a bearing on what the Court construes any contractual exclusions to mean.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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