In a recent decision, the Court of Appeal has confirmed that the terms of an English law facility agreement in respect of Tier 2 Capital, allowed the borrower to withhold payment of interest instalments where there was a risk of secondary sanctions being imposed on the borrower under US law. In the view of the Court of Appeal, this result effectively balanced the competing interests of the lender to be paid timeously against the borrower’s ability to delay making a payment where it would be illegal (in a broad sense of the word, and under a different system of law to the facility agreement) and therefore affect the borrower’s ability to conduct its ordinary business: Lamesa Investments Limited v Cynergy Bank Limited [2020] EWCA Civ 821.

English law does not generally excuse contractual performance by reference to a foreign law unless it is the law of the contract or the place of performance (and these exceptions did not apply here). However, parties can contract out of this general rule, which is what happened in this case. Clause 9.1 of the facility agreement permitted the borrower to withhold payment of interest instalments “in order to comply with any mandatory provision of law, regulation or order of any court of competent jurisdiction”.

At first instance, the High Court, applying the usual principles of contractual interpretation, found that the clause covered the relevant US legislation even though it only gave rise to the possibility of secondary sanctions being imposed on the borrower, rather than expressly prohibiting the borrower from transacting with the lender (read our previous banking litigation blog post).

The Court of Appeal agreed with the High Court’s outcome but adopted different reasoning. In particular, the Court of Appeal emphasised that the relevant clause was a standard term and the factual background therefore had a much more limited role to play in the interpretation than that ascribed by the High Court. Whereas the High Court focused on the specific intentions of the parties to the facility agreement in question, the Court of Appeal focused on the more general context of agreements for the provision of Tier 2 Capital within the EU.

While the High Court decision could be seen as limited to the specific facts of the case, the Court of Appeal’s conclusion that “the balance between the interests of the parties to this type of facility agreement in respect of Tier 2 Capital favours the application of the proviso to clause 9.1 to the standard form of US secondary sanctions legislation” potentially has broader implications for the interpretation of similar clauses in similar agreements. The decision emphasises the need for parties to consider the potential impact of extraterritorial sanctions regimes on the performance of their obligations, to include a clear contractual allocation of risk in this regard and to pay close attention to any standard form clauses which might affect the allocation of this risk.

Many sanctions practitioners were surprised with the first instance decision in this case – and in particular the proposition that secondary sanctions (which may be imposed on a discretionary basis under a legal system which is not applicable to the parties or the contract) amount to a “mandatory provision of law” with which “compliance” is required. Whilst the case turned on the construction of a particular contract, it raised new uncertainty as to the ability of parties to avoid contractual performance in light of secondary sanctions risk, in the absence of clear wording to that effect. In this context, the Court of Appeal judgment is broadly helpful by focusing on the particular backdrop of EU Tier 2 capital requirements – although, as noted above, the emphasis on the fact that this was a standard clause means the case has read-across value in respect of similar agreements.


The claimant, Lamesa Investments Limited, is a Cypriot company whose ultimate beneficial owner is Mr Viktor Vekselberg. On 19 December 2017, the claimant entered into a facility agreement with the defendant, Cynergy Bank Limited, an English company.

Under the facility agreement, the claimant lent £30 million to the defendant as Tier 2 Capital for a term of 10 years, with interest payable on 21 June and 21 December of each year throughout the term of the loan. Clause 9.1 of the facility agreement provided that the borrower would not be in default if sums due were not paid “in order to comply with any mandatory provision of law, regulation or order of any court of competent jurisdiction”. The facility agreement was governed by English law.

On 6 April 2018, the US placed Mr Vekselberg on the list of “Specially Designated Nationals” (SDNs), pursuant to Executive Order 13662 (made under the International Emergency Economic Powers Act). As a result, the lender became a “Blocked Person” by reason of its indirect ownership by Mr Vekselberg.

The US sanctions on Russia (in common with a small number of other US sanctions regimes, including for example the regime applicable to Iran), contain so-called “secondary sanctions” provisions. By contrast to traditional “primary sanctions”, which apply to US persons and to conduct within the territorial jurisdiction of the US, secondary sanctions seek to target non-US persons who engage in certain specified activities that have no US jurisdictional nexus. A non-US party that engages in the specified activities can itself be subjected to retaliatory measures by the US government. For example, pursuant to US/Russian sanctions, knowingly facilitating a “significant” transaction with a SDN is secondarily sanctionable.

This meant that if the borrower knowingly facilitated a significant financial transaction on behalf of the lender, then the borrower could be subjected to secondary sanctions. Under a particular provision of US legislation, namely Section 5 of the Ukraine Freedom Support Act 2014, the borrower could be blocked from opening or maintaining a correspondent account in the US or have strict conditions imposed on the maintaining of such an account.

A significant part of the borrower’s business was denominated in US dollars, and US dollars deposited by its retail customers were deposited in a correspondent account maintained by the borrower with JP Morgan in the US. As a result of the significant risk to its business, the borrower relied on clause 9.1 of the facility agreement to withhold payment of £3.6 million of interest instalments that had fallen due (although it had ring-fenced the funds).

The lender sought a declaration that the borrower was obliged to continue making the payments under the facility agreement notwithstanding the risk that it would be subjected to secondary sanctions.

High Court decision

The High Court held that the borrower was entitled to rely on clause 9.1 of the facility agreement for as long as Mr Vekselberg remained a SDN and the lender remained a Blocked Person by reason of it being owned by Mr Vekselberg.

The High Court reiterated the general position that, unless the contract provides otherwise, English law will not excuse contractual performance by reference to foreign law, unless that law is the law of the contract or the law of the place of performance. The facility agreement was not governed by US law and the US was not the place of performance. The sole issue was therefore whether, on its true construction, clause 9.1 of the facility agreement excused performance by reference to the relevant provisions of US law. The High Court found that it did.

The High Court’s reasoning is summarised in our previous blog post here.

Court of Appeal decision

The lender appealed against the High Court’s decision on the basis that:

  1. The relevant US legislation contained no express legal prohibition on payment and the borrower could not say that it refused to pay “in order to comply with [a] mandatory provision of law”, when the relevant legislation did not even purport to bind the borrower to act or not act in a particular way.
  2. The High Court was wrong to construe clause 9.1 as if it were a one-off negotiated provision when it was in fact a standard form clause.

The Court of Appeal dismissed the appeal. Sir Geoffrey Vos (with whom Males LJ and Arnold LJ agreed) held that the High Court had made the correct order, but the Court of Appeal did not agree entirely with the reasons given at first instance.

The Court of Appeal set out the usual principles of contractual interpretation and noted a number of additional relevant factors that the High Court may have overlooked.

  • Clause 9.1 of the facility agreement was a standard term in common usage at the time. The Court of Appeal referred to previous authority emphasising that standard form agreements should, as far as possible, be interpreted in a way that achieves clarity, certainty and predictability so that the large number of parties who use the standard forms know where they stand. A standard form is not context specific and evidence of the particular factual background or matrix has a much more limited, if any, part to play in the interpretation. 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 knowledge of the market (Re Lehman Brothers (No 8) [2016] EWHC 2417 (Ch)).
  • The Court of Appeal said that consideration of the context of the facility agreement that led to the inclusion of the standard term, had to be against the background of two more general considerations: (i) that it would take clear words to abrogate a repayment obligation in a loan agreement; and (ii) that, in construing a commercial contract, the court must always take into account the commercial interests of both parties. The Court of Appeal noted that there were indications in the High Court’s decision that it was more focused on the commercial interests of the borrower than those of the lender.
  • The process of interpretation is a unitary exercise. The court 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. The court must consider the contract as a whole and give more or less weight to elements of the wider context in reaching its view as to its objective meaning.

The Court of Appeal went on to consider the relevant context to the facility agreement.

  • This was a standard provision in a loan agreement used for the provision of Tier 2 Capital to an international bank. The capital was required under the Capital Regulations including CRD IV (Directive 2013/36/EU). The non-payment provisions in this type of loan are different to ordinary loan agreements. The loan is subordinated and can only be enforced by winding up the borrower and repayment events are controlled.
  • The High Court seemed to have lost sight of the fact that clause 9.1 was drafted to deal with possible future events that went far beyond sanctions in general and US sanctions in particular. The High Court seemed to have treated clause 9.1 as if it had been inserted to deal only with prospective possible US sanctions affecting the lender.
  • It was important that clause 9.1 did not extinguish the borrower’s repayment obligation entirely. It merely abrogated any default so that the lender could not enforce payment by presenting a winding-up petition. The argument was therefore about the timing of the payments rather than about whether those payments would ever be made.
  • The Court of Appeal concluded that the context to clause 9.1 was a balance between the desire of the lender to be paid timeously and the desire of the borrower not to infringe mandatory provisions of law, regulation or court orders.

The Court of Appeal then considered the competing meanings of the clause. In particular, whether the wording of clause 9.1 meant that the reason for non-payment must be:

  1. To comply with a statute that binds the borrower and directly requires the borrower not to pay the sums in question (the lender’s argument); or
  2. To comply with an actual or implied prohibition on making such payments in legislation (or regulation or order) that affects the borrower (the borrower’s argument).

The Court of Appeal followed the unitary process to determine the correct interpretation, accepting that the wording of the clause was ambiguous and it was therefore relevant to consider the admissible context and commercial common sense.

There were three aspects of admissible context that the Court of Appeal considered were of great importance:

  • The terms of the EU Blocking Regulation that must have been known to the parties and the drafters of the standard clause. The EU Blocking Regulation does not apply to the US/Russia sanctions, but in the context of other US secondary sanctions measures (notably in relation to Iran and Cuba) it regards specified US secondary sanctions legislation as imposing, in the court’s view, a “requirement or prohibition” with which EU parties are required to “comply”. The EU Blocking Regulation therefore uses similar language to clause 9.1.
  • The fact that clause 9.1 was a standard clause.
  • US secondary sanctions would have been at the relevant time one (but not the only) potential problem affecting parties to agreements for the provision of Tier 2 Capital within the EU. The drafter of the clause must have intended the borrower to be capable of obtaining relief from default if its reason for non-payment was to “comply” with a foreign statute that would otherwise be triggered.

Taking this context into consideration, the Court of Appeal reflected on the rival meanings of clause 9.1 as follows:

  • The lender’s main argument was that, once one accepted that the clause was ambiguous, the wording could not be clear enough to excuse something so crucial to the agreement as non-payment. That, however, assumed that payment would be abrogated rather than delayed. Adopting the unitary approach, it also needed to be considered that the utility of clause 9.1 would be badly dented if the lender’s interpretation was correct.
  • If a “mandatory provision of law” only referred to one that directly bound the borrower not to pay, it would have almost no possibility of taking effect.
  • While the US legislation cannot, and does not purport to, prohibit a payment by the borrower to the lender, its effect is clearly one of prohibition.
  • As noted above, a compelling argument in favour of the borrower’s interpretation was the drafting of the EU Blocking Regulation. Interestingly, the court dismissed an argument that the wider drafting of the Blocking Regulation was a distinguishing feature (the Regulation refers to persons “[complying]…with any requirement or prohibition, based on or resulting, directly or indirectly, from the laws specified in the Annex…”, rather than persons complying with the laws themselves).
  • It was not certain that payment under the facility agreement would attract the imposition of a sanction on the borrower, but it was clear that (as a matter of US law) the imposition of a sanction would be mandatory, subject to the payment not being deemed “significant” or the President otherwise deciding that it was not in US interests to impose the sanction. There seems to have been little weight ascribed to the practical experience of secondary sanctions enforcement, with the court observing that “what matters here is [the borrower’s] reason for the non-payment, not whether [the borrower] is certain or only likely to be sanctioned if it makes the payment”.
  • The Court of Appeal noted that the competing interests of the parties to a Tier 2 Capital facility agreement including clause 9.1 are the lender’s interest in being paid timeously and the borrower’s interest in being able delay payment if, put broadly, payment would be illegal, not only under English law but under any system of law which would affect the borrower’s ability to conduct its ordinary business. Overall, the balance between the interests of the parties to this type of facility agreement favours the application of clause 9.1 to US secondary sanctions legislation.

The Court of Appeal therefore dismissed the appeal.


It is clear from this decision that parties should consider the potential impact of extraterritorial sanctions regimes on the performance of their obligations, to include a clear contractual allocation of risk in this regard and to pay close attention to any standard form clauses which might affect the allocation of this risk.

The case also raises an interesting Blocking Regulation point. Particularly following the revisions to the Blocking Regulation arising from the US withdrawal from the Joint Comprehensive Plan of Action (JCPOA), EU businesses wishing to contract on terms that require performance not to be conducted in a way which is secondarily sanctionable, have been struggling with how to ensure that such contractual language is “Blocking Regulation compliant”. There is a concern that contracting on such terms (by either party) may amount to compliance with a requirement or prohibition which is based on the Blocked Laws. Here, the relevant sanctions regime was the US/Russia regime, and accordingly the Blocking Regulation was inapplicable. However, the court appears to have considered that a contractual provision that required compliance with US secondary sanctions as well as potentially other foreign law – which must logically include the Blocked Laws under the Blocking Regulation, as well as the US/Russia sanctions – did not itself constitute an infringement of the Blocking Regulation. The enforceability of the clause would no doubt have been impacted if it had been relied upon in the context of the Iran or Cuba secondary sanctions, but it does not appear to have been argued that the clause itself was unlawful because of its implicit coverage of, inter alia, the Blocked Laws. It does not appear that this point was argued, and accordingly one would need to be cautious about placing undue weight upon it, but it adds to the incrementally growing body of judicial observations that will be relevant to the interpretation of the Blocking Regulation, if and when it is finally considered directly in a dispute or enforcement action.

Susannah Cogman
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