FIN.

Borrower can withhold payment because of risk of US secondary sanctions

The High Court has held that a UK borrower was entitled to withhold payments under a loan from an entity that was a US Blocked Entity for fear of possible consequences from US secondary sanctions that would significantly affect its business.

Lamesa Investments Limited, a Cypriot company wholly owned by a BVI entity lent £30m to Cynergy Bank Limited, a UK retail bank.  Cynergy has no links with the US except for a USD correspondent account with a US bank for its dollar-denominated business.  It also has a number of FX swap contracts denominated in dollars and has long term service contracts with a number of US-based companies.

Cynergy did not make repayments under the loan, on the basis that the BVI entity’s owner had been placed on the OFAC SDN list, and as a result Lamesa became a “blocked person”. Cynergy claimed that by making the repayments it would leave itself open to US secondary sanctions, which could be “ruinous” given the scale of its dollar-denominated business, and that there was a risk the payment of interest was a “significant financial transaction” and the possibility of a waiver being obtained was minimal.

Lamesa said the finance agreement required Cynergy to show there was a legal provision that prohibited it from making the payment, and that the reason for refusal was not because there was a mandatory prohibition on payment but rather that there was a chance the secondary sanctions might bite.

It was common ground both that the parties were aware at the time of entering into the transaction that the sanctions might be imposed and also that there was no question of primary sanctions offences applying.

The judge held there was nothing in the behaviour of the parties to suggest the relevant clause would be interpreted solely to cover payments that were mandatorily prohibited, given they never would be.  The other possible permutations for interpretation were that a party was entitled to act or refrain from acting in a way that would attract penalties, or in a way that could attract penalties. Cynergy was relying on the last interpretation.  The Court held is was most unlikely the parties would have intended to exclude this last possibility, given the well-known attitude of the US authorities.

Lamesa’s contention that to interpret the clause so broadly flew in the face of the UK’s policy of not giving extraterritorial effect to US policy was rejected.  The judge said this was a contractual clause, and the parties were looking to manage their own positions.

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Emma Radmore