What does “mandatory law” really mean? Lamesa v Cynergy

Many finance contracts contain general provisions regarding compliance with “mandatory” laws. What actually constitutes a mandatory law in the field of international sanctions is not, however, always clear. In Lamesa Investments Limited v Cynergy Bank Limited, the High Court has given guidance on the extent to which foreign sanctions will fall within the definition of “mandatory” law. In this case, Cynergy Bank was not found liable for breach of contract where it failed to make payment due to the potential application of US secondary sanctions.

Background

Lamesa is a Cypriot company, ultimately owned by Russian businessman, Viktor Vekselberg. Cynergy Bank is a UK retail bank with a US Dollar correspondent account with a US bank. Lamesa lent £30 million to Cynergy and under the Finance Agreement, Cynergy was required to make interest payments.

In 2018, Mr Vekselberg was placed on a list of “Specially Designated Nationals” by the US Government and Lamesa became a “blocked person”. In addition to the primary sanction applied, US legislation provides that “secondary sanctions” can also be imposed on non-US persons in wholly non-US transactions. It was common ground that the US Government could impose a secondary sanction on Cynergy if it determined that payment of interest to Lamesa constituted a “significant financial transaction”.

Cynergy claimed that because of the potential secondary sanctions, it was unable to pay the circa £3 million due to Lamesa in interest payments, although it had “ring-fenced” this amount. Lamesa brought a Part 8 claim for a declaration on Cynergy’s obligations pursuant to the Finance Agreement.

Legal Principles applied to the Clause

The key contractual clause provided that: “[Cynergy] 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.”

English law will not allow the application of foreign law as a defence to a breach of contract claim, unless that law is the law of the contract or the law of the place of performance. Neither was the case here. The court therefore analysed the relevant clause to see if the parties had agreed to reverse the general common law principle.

Cynergy argued that because there was a risk of secondary sanctions being applied to it, this constituted a “mandatory provision of law” from a “court of competent jurisdiction”, justifying its non-payment.

Lamesa’s position was that the risk of secondary sanction was not an express prohibition and that the word “mandatory” should be construed as to mean compulsory. It also appeared to argue that in the context of the Finance Agreement, the reference to “provision of law” should be construed as meaning English law.

How was the clause interpreted?

The court did not accept Lamesa’s argument that a mandatory law was one which had to be complied with. All laws have to be complied with, it pointed out. Instead, it held that it meant a law which the parties could not vary or dis-apply. Prior to the parties entering into the Finance Contract, the evidence suggested both parties were aware of the possibility of secondary sanctions being imposed. The court also accepted that the lawyers drafting the contract at the time would have had in mind the meaning given to the word “mandatory” in the Rome Convention/Rome I Regulation on Choice of Law. It therefore concluded that mandatory meant a law which the parties could not dis-apply.

The greater debate concerned the meaning of “in order to comply”. Lamesa claimed this meant a law which expressly prohibited payment, rather than a law which potentially imposed a fine or penalty as a consequence. The court concluded there were three possible meanings:

1. compliance can only arise when a law expressly prohibits payment
2. compliance occurs whenever a party acts or does not act in a way which would otherwise incur a statutory penalty or sanction
3. compliance occurs whenever a party acts or does not act in a way which would otherwise incur a possible statutory penalty or sanction [emphasis added].

Given the factual context of the parties’ awareness of the possibility of sanctions, the court concluded that the clause was deliberately drafted widely enough to encompass not just an express prohibition but the possibility of a secondary sanction applying.

The court rejected Lamesa’s submission that it was giving extraterritorial effect to US foreign policy by construing the contract in this way. It held that the parties were aware of the risk of a situation arising and deliberately drafted a clause wide enough to mitigate that risk.

Commentary

The Court has held that, whether by accident or design, the clause in this case was drafted widely enough to cover the imposition of possible US secondary sanctions. Typically, a standard force majeure clause would not be sufficient to mitigate that risk. The imposition of sanctions is on the rise, and in many cases sanctions are imposed without warning. At the drafting stage, parties to finance agreements need to take informed decisions about the allocation of risk and ensure that contracts are clearly and fully drafted to reflect the parties’ agreed positions.