The Court of Appeal has upheld the judgment that a borrower was justified in its refusal to make payments under a loan where the ultimate beneficial owner of the lender was an OFAC SDN.
Cynergy Bank (a UK bank) had borrowed £30m from Lamesa Investments under a facility agreement of December 2017, as Tier 2 capital. Lamesa is a Cypriot company, and the wholly owned subsidiary of a BVI company which, in turn, is wholly owned by a Russian national who, 3 months after the facility agreement was signed, was designated as an SDN, and as a result Lamesa became a “blocked person”. This meant that all persons dealing with Lamesa became subject to US secondary legislation. Cynergy does not operate in the US but maintains a USD correspondent account with a US bank, thus meaning sanctions would be imposed on its property.
Cynergy had claimed it could refuse to pay Lamesa on the basis of compliance with a “mandatory provision” of law – stating that the Ukraine Freedom Support Act would allow the US to ban it from opening a correspondent account, if it has “knowingly facilitated a financial transaction” on behalf of an SDN.
At first instance, the judge said this was a mandatory provision of law, and was not the less so simply because it created a risk of a penalty or sanction rather than actually requiring or prohibiting an action. The judge had also noted that the parties were both aware of the likely designation at the time of signing the facility, so would not have been likely to have intended to limit the words “in order to comply” in the facility agreement to only an express statutory prohibition, given that they would understand the potentially “ruinous” effect of secondary sanctions on Cynergy’s business.
The High Court found that the judge had perhaps overlooked some relevant factors – specifically that the clause in question was a standard term in common usage, so a detailed consideration of the parties’ intention in using it may not have been appropriate. The judge said the process of interpretation should be a unitary exercise, starting with the words and relevant context, and then an iterative process checking each suggested interpretation against the provisions of the contract and its commercial consequences. He said the “relevant context” in this case was that the court was considering a standard provision in a loan agreement used for Tier 2 capital and that the facility agreement made it clear the capital was required under “Capital Regulations” including CRD 4. He said non-payment provisions for loans of Tier 2 capital are not of the kind seen in ordinary loan agreements because the loans are subordinated and repayment events controlled. The original borrower had been the UK subsidiary of a Cypriot bank, which was subsequently sold to the Cynergy group. It appeared to the Court of Appeal that the relevant clause was drafted, in principle, to deal with possible future events beyond sanctions, and that the High Court had lost sight of this. The key, said the Court of Appeal, was that clause 9 did not extinguish the entitlement to be repaid, but that if the proviso is engaged, there would be no default and therefore the lender could not seek to wind up the borrower. He concluded the context to the clause was a balance between the desire of the lender to be paid timeously and the desire of the borrower not to beach any laws etc.
Next then, the court considered what a “mandatory provision of law” would mean in the context and concluded it was possible to give it different meanings – either compliance with a statute or, more broadly, that it can relate to actual or implied provisions of law. In this case, Cynergy was relying on the EU Blocking Regulation wording which, in a different context, uses similar language to prevent compliance with US statutes that impose secondary sanctions. Ultimately, the judge felt that the clause had been drafted by those who understood the nature of international sanctions, and the effects of US secondary sanctions, so the drafter must surely have intended the borrower to be able to seek relief in these circumstances.
So, all in all, although the Court of Appeal did not necessarily agree with all the reasoning of the High Court it agreed with the order.