Court of Appeal finds US secondary sanctions are a “mandatory provision of law” in UK facility agreement

02/07/20

Cynergy Capital Ltd borrowed £30 million of Tier 2 Capital from Lamesa Investments Ltd, a Cyprus company, in 2017. Lamesa’s parent company was owned by Viktor Vekselberg, and Mr Vekselberg was put on the USA’s Russia sanctions list as a “specially designated national” (SDN) a few months after the Facility Agreement was signed. 

Cynergy refused to repay the interest due on the loan because it was concerned that it would be subject to US secondary sanctions if the US authorities were to assess that by paying Lamesa interest it was “facilitating a significant transaction” with a US SDN. A clause in the Facility Agreement provided that Cynergy would not be in default if it did not make payment in order to comply with a “mandatory provision of law”, and Cynergy argued that US secondary sanctions were a mandatory provision of law.  Lamesa’s case was that Cynergy might have a commercial concern about making payment, but US secondary sanctions did not prohibit the payment and could not be a “mandatory provision of law” applicable to a UK contract with no US nexus.

The Court of Appeal has held in Lamesa Investments Limited v Cynergy Bank Limited [2020] EWCA 821 that Cynergy was “complying” with US secondary sanctions by not paying interest, and that secondary sanctions were a mandatory provision of law under the agreement, because a “mandatory provision” did not only refer to a prohibition that directly bound the borrower not to pay.  US secondary sanctions were an “effective prohibition”, and Cynergy’s reason for non-payment (which was what the Court said mattered) was to comply with them.  Accordingly, although the “black letter meaning” of the agreement suggested that it was only intended to excuse default where the non-payment was mandated or required by a law binding on the borrower, “context and commercial common sense” suggested that Lamesa was complying with a mandatory provision.  In particular, the EU Blocking Regulation regarded the US secondary sanctions in its annex as imposing a “requirement or prohibition” with which EU parties were required to “comply”.

The judgment is here.