English High Court Holds That Reference To Compliance With A 'Mandatory Provision Of Law' In A Facility Agreement Encompasses The Risk Of Being Subject To Restrictive Measures Under US Secondary Sanctions

What is meant by the words "a mandatory provision of law"? The English High Court recently considered this question in Lamesa Investments Ltd v Cynergy Bank Ltd [2019] EWHC 1877 (Comm). In this case, the Defendant (CBL) argued that its failure to make payments under a facility agreement with the Claimant (LIL) was not a default, relying on wording in the facility agreement which stated that this was the case where "such sums were not paid in order to comply with any mandatory provision of law, regulation or order of any court of competent jurisdiction", on the basis that LIL's beneficial owner had become subject to US sanctions. The Court agreed that the wording used in the facility agreement included the risk of being subject to restrictive measures under US secondary sanctions. While the Court gave particular regard to the "relevant documentary, factual and commercial context" of the facility agreement, this judgment serves as a helpful reminder to non-US financial institutions that sanctions clauses in facility agreements and other financing documentation should be drafted in a clear, unequivocal manner. This Legal Update: (i) sets out the background to the case; (ii) considers the approach adopted by the Court; and (iii) considers the key takeaways for financial institutions.

1. Background to the case

   On 19 December 2017, the Claimant, a Cypriot company beneficially owned by a Russian-Ukrainian citizen named Viktor Vekselberg, loaned £30 million to the Defendant, a UK retail bank, pursuant to a facility agreement under which CBL was contractually obliged to make interest payments on a bi-annual basis throughout the term of the loan.

   Under a non-payment clause in the facility agreement, LIL had a contractual right to issue a written notice requiring CBL to make good any non-payment of principal or interest that was due and owing and had not been paid within 14 days unless "such sums were not paid in order to comply with any mandatory provision of law, regulation or order of any court of competent jurisdiction".

   On 6 April 2018, Mr Vekselberg was placed on the US list of Specially Designated Nationals (SDN List) by the US Office of Foreign Assets Control, rendering Mr Vekselberg and any entities he owned or controlled Specially Designated Nationals (SDNs) or "Blocked Persons". As a result, LIL became a Blocked Person under US sanctions. This had implications from both a primary and secondary sanctions perspective. From a primary sanctions perspective, it became prohibited for (i) US Persons (broadly, US nationals and green card holders, US companies and persons located in the United States), and (ii) non-US persons where there is an applicable "US nexus"...