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.

Background

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions