Lamesa: A path through the US sanctions maze?
A recent UK court judgement has finally provided clarity for businesses operating globally around how to manage US sanctions risk contractually, including risks arising from secondary sanctions. But whether this ruling blunts the potency of the US’ sanctions in the UK remains to be seen.
President Trump has rolled out sanctions far more aggressively than his predecessors, causing understandable concern for global businesses. In 2018, nearly 1,500 people, companies, and entities were sanctioned – the most in a single year. And it’s not just the volume of sanctions that’s changed, but how they operate, too.
Secondary sanctions, designed to discourage non-US persons from engaging in conduct against US foreign policy interests, have also been significantly expanded. That these sanctions have caused concern and confusion in equal measure is demonstrated by Adobe’s announcement that it would be pulling out of Venezuela and unable to refund customers for fear of losing access to the US.
Thankfully, for firms operating under English law at least, some clarity may at last have been provided.
On 12 September 2019, the English High Court in Lamesa Investments Limited v. Cynergy Bank Limited confirmed that parties are able to manage sanctions risk contractually, including US secondary sanctions.
Cynergy Bank (CB), a bank registered under the laws of England and Wales, had entered into a facility agreement under which Lamesa Investments (LI) loaned CBL £30 million on the condition that CBL was obliged to make interest payments every six months. The facility agreement was governed by English law and subject to the exclusive jurisdiction of the English courts.
As a result of LI’s beneficial ownership by a US ‘Specially Designated National’ (SDN), CB was exposed to the risk of US secondary sanctions if the interest payments to LI were found to facilitate a “significant financial transaction”.
Under English common law, contractual performance will not be excused by reference to foreign law unless that law governs the contract or the jurisdiction in which the contract is performed. The parties may, however, provide for the different treatment of sanctions risk under the contract.
The judgment rested on clause 9.1 in the facility agreement which found that “[CBL] 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”. The question before Judge Pelling QC was whether clause 9.1 in the facility agreement enabled CB to withhold interest payments to LI while CB was exposed to the risk of US secondary sanctions.
Considering the proper construction of clause 9.1, Judge Pelling QC applied the standard rules of contractual interpretation, adopting a broad reading of “mandatory provisions of law” as meaning a “provision of law that the parties cannot vary or dis-apply”.
Rejecting LI’s argument that the phrase “in order to comply” necessitated a restrictive reading of the clause to apply only to laws that expressly prohibited CB from acting (which US secondary sanctions did not do), Judge Pelling QC noted three possible interpretations of the phrase, each not mutually exclusive to the other.
- compliance arises only in relation to a statute that expressly prohibits payment by imposing sanctions or penalties;
- compliance occurs where a party acts or refrains from acting to avoid being subject to a sanction or penalty imposed by legislation; and/or
- compliance occurs where a party acts or refrains from acting to avoid the possibility of being subject to a sanction or penalty imposed by legislation.
Ultimately, the court decided that clause 9.1 had been drafted sufficiently widely to capture all possible interpretations of ‘compliance’ and therefore enabled CB to withhold interest payments to LI.
Central to the court’s determination of Lamesa was the factual and commercial context within which the agreement operated. Particularly significant to the court was CB’s exposure to US banking relationships and the potential for this to exacerbate the negative effect of US secondary sanctions on the business. This factor appears to have had considerable influence over the court’s decision that the parties had intended to cover such risk.
Implications of the decision for businesses
The decision in Lamesa highlights the need for clear contractual language that adequately considers and apportions risks associated with sanctions. Parties may wish, for example, to explicitly deal with secondary sanctions risk and/or clearly define the territorial scope of mechanisms like the “mandatory provisions of law” clause.
Moreover, parties should ensure agreements continue to be drafted with the necessary representations, warranties and undertakings. For example, a party may want to clearly outline that no liability will flow from the fact that a counterparty or individual associated with a counterparty is subject to sanctions.
In addition, it is important that businesses also look retrospectively and conduct a review of existing contracts to determine how certain provisions might be interpreted in the event that one party seeks to rely upon certain drafting to avoid its contractual obligations and such reliance is challenged by the other party.
Beyond contractual considerations, businesses should still endeavour to maintain robust screening procedures alongside sanctions policies that are sufficiently flexible to move with ever-changing geopolitical and economic landscapes.
Wider impact of the decision
The UK’s close commercial relationship with the US ensures that US sanctions will remain a potent force in the UK for the foreseeable future. However, for those looking for relief from the influence of US sanctions in the UK, there are still unanswered questions.
Since the Lamesa court did not need to address the issue of the European Union’s Blocking Regulation, it is unclear whether the result would have been the same had the sanctions involved Iran or Cuba, for example. In another case involving US sanctions, Mamancochet Mining Ltd v Aegis Managing Agency Ltd  EWHC 2643 (Comm), the judge’s obiter comments on the interaction between a contractual exclusion clause and the EU Blocking Regulation indicate that UK courts might still rely on contractual language to settle disputes involving US sanctions. Though non-binding, the judge appeared to be of the view that insurers may be able to suspend payments to their assured that would otherwise contravene US secondary sanctions, without being in breach of the EU Blocking Regulation. The insurers’ answer to allegations of a breach of the Blocking Regulation would be that the decision not to pay was predicated on a contractual entitlement rather than on compliance with a third country’s prohibition. The judge was not required to reach a firm conclusion on this because, on the facts, no secondary sanctions were engaged.
The court’s decision in Lamesa, invites more questions than it answers, particularly in relation to the circumstances in which an agreement with no jurisdictional connection to the US will be deemed by the English courts to allocate relevant US sanctions risk. Notwithstanding the fact that many commercial parties might argue extraterritorial sanctions regimes – like the US secondary sanctions considered in Lamesa – should not properly be considered a “mandatory provision of law”, the decision opens the door to other secondary sanctions regimes or similar sanctions mechanisms being afforded the same treatment under English law.
This article was co-authored with Brett Hillis, partner at Reed Smith, and Ray-Shio Ho, associate at Reed Smith.