High Court Strikes Out Illegality Defence Premised On Alleged Breaches Of US Sanctions

This decision reaffirms that the foreign illegality defence under English law has territorial limits (to English law or the law of the place where the contract was to be performed)

The High Court has struck out a defendant's foreign illegality defence for failing to plead the necessary territorial connection required by English law: Alliance Petrochemical v Mazzagatti & Anor [2025] EWHC 2155 (Comm).

Following the alleged misappropriation of funds by the chief executive officer and chief financial officer of the claimant company, proceedings were brought by the company to recover the sums taken. The defendants argued that the claim was barred by the defence of illegality as a result of US sanctions (which allegedly applied because the claimant company was actually controlled by a US citizen). The court struck out the defence on the basis that:

• Under English law, a foreign illegality defence is only available if the act in question is illegal under the governing law of the claim (here, the law of England and Wales) or under the law of the place where the act was, or was to be, performed.
• No relevant acts were alleged to have been performed in the United States, nor was US law alleged to be the governing law of the claim.

The decision will be of particular interest to financial institutions, as it provides a clear reaffirmation of the territorial limits of the foreign illegality defence under English law, a topic that has been much discussed in recent decisions involving international sanctions regimes (see our recent blog posts here). It confirms that English courts will not enforce foreign laws with extraterritorial reach, absent a direct connection to the place of performance or the governing law of the claim.

The judgment also underscores the need for precise pleading and factual specificity when raising such defences, and highlights the court's reluctance to resolve novel public policy issues or complex factual disputes on a summary basis.

We consider the decision in further detail below.

Background

The dispute arose between the claimant Singaporean company, Alliance Petrochemical Investment (Singapore) Pte Ltd (API), and two former senior officers: Mr Mazzagatti, its chief executive officer, and Mr Dixit Dominus, its chief financial officer.

The factual background centred on events following the acquisition of all of API's shares in 2018 by a company controlled by Mr Mazzagatti. It was alleged that following the acquisition, the defendants caused API to transfer substantial sums to Mr Mazzagatti's personal accounts via various companies. API brought proceedings in England and Wales, seeking recovery of approximately €143 million via claims against Mr Mazzagatti for breach of trust or fiduciary duty, and Mr Dixit Dominus in knowing receipt, unjust enrichment, and/or knowingly assisting in Mr Mazzagatti's breaches.

The defendants raised two principal defences. Firstly, that they did not control API, asserting instead that a third party, Mr Jahanpour (a US citizen), was in control of API and responsible for the alleged misappropriations. Secondly, they raised an "ex turpi causa" (illegality) defence, contending that US sanctions against Iran applied to any actions by API that were directed by Mr Jahanpour, or in which Mr Jahanpour was involved in any manner, thereby barring the claim.

API applied to strike out the illegality defence on three grounds:

1. That the defence was unarguable as a matter of English law in the absence of an allegation that either US law was the governing law of the claim or that the allegedly illegal activity relied on took place or was intended to take place in the US. Importantly, the defendants did not allege that API was a US-registered entity or person within the scope of the US sanctions on Iran, nor that it had ever dealt with any US counterparty or exported product to the USA. Accordingly, sole basis for the foreign illegality defence was that Mr Jahanpour is a US citizen;
2. That the defence was not available because UK public policy is opposed to US unilateral sanctions on Iran; and
3. Even if API arguably breached US sanctions, it would be contrary to English public policy to prevent it for that reason from recovering losses caused by dishonest breach of trust or fiduciary duty or by reference to the dishonest assistance of such breaches.

Decision

The court referred to the established approach to summary judgment applications articulated in EasyAir Ltd v Opal Telecom Ltd [2009] EWHC 339 Ch. Before considering the three grounds upon which it was said the illegality defence should be struck out, the court made some interesting observations of general principle:

• Some of the matters at issue on the application were in a developing area of the law, for which strikeout is unlikely to be appropriate (citing Byers v Samba Financial Group [2020] EWHC 853 Ch).
• Decisions on novel points of law, or where the points that arise are ones of general importance, should generally only be resolved at trial following the findings of relevant facts.
• An application to strike out should not be granted unless the court is certain that what is pleaded is bound to fail.

Territorial scope of foreign illegality defence

Having reviewed the leading authorities on the availability of a foreign law illegality defence, the court held that under English law, a foreign illegality defence is only available if the act in question is illegal under the governing law of the claim (here, the law of England and Wales) or under the law of the place where the act was (or was to be) performed. The court confirmed that this principle does not extend to acts performed outside the territory of the foreign state whose law is invoked.

In circumstances where the defendants' pleadings did not allege that any relevant acts were performed in the US, nor that US law was the governing law of the claim, the court held that the mere fact of Mr Jahanpour's US citizenship alone was insufficient basis for a defence in foreign illegality.

In so doing the court also rejected the contentions that: (1) different conditions should apply if the foreign law in question is expressed to have extraterritorial effect (as US sanctions law, at least in part, does), noting that this did not alter the territorial requirement under English law; and (2) that the territorial requirement under English law only applied to claims for breach of contract and therefore had no application in a claim in tort.

UK public policy and US sanctions

As foreshadowed above, the court declined to resolve whether UK public policy is opposed to US unilateral sanctions on Iran, noting that such questions were novel and fact-sensitive, and should be determined at trial (rather than summarily) if necessary, noting that it may not need to be resolved should the factual case advanced fail.

Illegality defence and fraud

The court similarly declined to hold that an illegality defence can never be available where a claim based on dishonest breach of trust or fiduciary duty is made (ie the defendants committed a fraud on the claimant).

The two authorities relied upon by the claimant as having this effect were Grondona v Stoffel & Co [2020] UKSC 42 and Mansion (Gibraltar) Ltd v Manasco (2025/GCA/001), a decision of the Court of Appeal of Gibraltar. However, the court found that the authorities relied upon did not establish a blanket rule that an illegality defence can never be available where a claim based on dishonest breach of trust or fiduciary duty is made, and that such a complex and nuanced point required a factual balancing exercise which was not suitable for being undertaken on a summary basis.

Outcome

Accordingly, the court granted the application to strike out the defence on the first ground, on the basis that there is an unquestionable territorial element to a foreign illegality defence, and the defendant had failed to plead a defence which satisfied this requirement.

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