The Term "Mandatory Provision Of Law" In An English Law Loan Agreement Found To Cover U.S. Secondary Sanctions

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The English Court of Appeal handed down judgment in the case of Lamesa Investments Limited v. Cynergy Bank Limited [2020] EWCA Civ 821 on 30 June 2020.
United States Litigation, Mediation & Arbitration
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The English Court of Appeal handed down judgment in the case of Lamesa Investments Limited v. Cynergy Bank Limited [2020] EWCA Civ 821 on 30 June 2020.

The Court of Appeal upheld the High Court's decision that U.S. sanctions targeting Lamesa Investments Limited's (LIL) ultimate owner justified Cynergy Bank Limited's (CBL) withholding of interest payments on a £30 million loan from LIL. Our full review of the background to this case and first instance decision can be found at

Appeal issues

In the High Court decision, HHJ Pelling QC held that (i) CBL's non-payment fell within the scope of clause 9.1 of the facility agreement between CBL and LIL (FA), which provided that a party "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" (Clause 9.1); and (ii) that clause effectively excused CBL's obligation to pay interest by virtue of the risk of its actions causing it to become subject to the U.S. secondary sanctions.

The issue raised on appeal was whether the judge at first instance was right to hold that CBL was justified in refusing to pay interest to LIL. The case is of interest to anyone drafting or interpreting a provision of an agreement that grants a party rights if another party is affected by some form of illegality, including illegality clauses and sanctions clauses.

The Court of Appeal decision

The Court of Appeal dismissed LIL's appeal and concluded that the judge at first instance had made the correct order. However, the Court of Appeal did not agree entirely with the judge's reasons, and highlighted two factors relevant to the proper interpretation of Clause 9.1 that it considered the judge had overlooked.

First, Clause 9.1 was a standard term in common usage at the time of the FA. Therefore, contrary to the reasoning by the judge at first instance, contextual evidence of the factual background or matrix should be given less weight in the interpretation process. Instead, the focus "is ultimately on the words used, which should be taken to have been selected after considerable thought and with the benefit of the input and continuing review of users of the standard forms and of knowledge of the market".

Second, the focus should not have been on the parties' probable intentions in the drafting of Clause 9.1. In this regard, whilst the context of the FA that led to the inclusion of the standard term was relevant, that had to be considered with regard to two more general considerations.

  1. Clear words would be required to establish a common intention that CBL would not meet its repayment obligation under the FA, where there was merely a risk that payment would incur a sanction, without having to show that the payment was prohibited as a matter of law.
  2. The court must always take into account the commercial interests of both parties when construing commercial contracts. In this instance, the Court of Appeal suggested that the judge at first instance may have focused more on the commercial interests of CBL than of LIL.

Applying the principles of contractual interpretation set out in Wood v. Capita Insurance Services Ltd [2017] 2 WLR 1095, the Court of Appeal clarified that the process of interpretation required was a unitary exercise, which "starts with the words and relevant context, and moves to an iterative process checking each suggested interpretation against the provisions of the contract and its commercial consequences". Further, the court must consider the contract as a whole as well as the elements of the wider context before coming to a conclusion on its objective meaning.

The relevant context

The relevant context in this case was that Clause 9.1 was a standard clause in a loan agreement used for the provision of finance qualifying as tier 2 regulatory capital to an international bank.

The clause balances, on one hand, the lender's desire to be paid on time and, on the other hand, the borrower's desire not to infringe mandatory provisions of law, regulation or court orders. The Court of Appeal considered it obvious that the clause had been drafted to "deal with possible future events that went beyond sanctions in general, and U.S. sanctions in particular". This is in contrast with the High Court's approach, which treated the clause as if it was included to deal only with prospective U.S. sanctions affecting LIL.

Competing meaning of the words

The Court of Appeal accepted that the proviso to Clause 9.1, "in order to comply with any mandatory provision of law", could be interpreted as meaning:

  1. CBL complying with the law binding on it, which directly requires it not to pay the sums in question; or
  2. as the judge at first instance held, CBL complying with "a provision of law that the parties cannot vary or dis-apply" (i.e., CBL complying with an actual or implied prohibition in legislation that affects it, such as, in this case, the U.S. secondary sanctions).

In this case, the Court of Appeal did not accept that the word "mandatory" meant a provision from which the parties could not derogate. Instead, it held that "a provision is mandatory if it imposes a 'requirement or prohibition' . which requires a person to do or to refrain from doing a specified act", as is the case under article 5 of Council Regulation (EC) No. 2271/96 (EU Blocking Regulation).

The unitary process

In the present case, the Court of Appeal had particular regard to three aspects of "admissible context" which supported the conclusion that the proviso to Clause 9.1 applied to U.S. secondary sanctions legislation:

  1. The terms of the EU Blocking Regulation must be taken to have been known to the parties and the drafters of Clause 9.1. The EU Blocking Regulation uses similar language to Clause 9.1, and regards U.S. secondary sanctions as imposing a "requirement or prohibition" with which EU parties are required to "comply".
  2. The fact that Clause 9.1 is a standard clause (as discussed above).
  3. The fact that, at the relevant time, U.S. secondary sanctions would have been one (but not the only) potential problem affecting parties to agreements for the provision of regulatory capital within the EU at the relevant time.


The Court of Appeal's decision confirms the High Court's decision that a "mandatory provision of law" in this context does not only refer to a prohibition that directly binds the borrower not to pay, but also the possibility of being subject to U.S secondary sanctions, and that CBL was complying with a mandatory provision.

This decision also confirms that clauses such as Clause 9.1 can be used to manage U.S. secondary sanctions risks under English law, albeit on slightly different grounds from the High Court decision.

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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