Lamesa Investments Ltd v Cynergy BankLtd

A standard-form loan provision excusing default for non-payment made in order to comply with a mandatory provision of law may encompass foreign secondary-sanctions legislation. In this context, “mandatory” means compulsory: a provision imposing a requirement or prohibition. It does not merely mean a provision from which contracting parties cannot derogate.

A statutory sanctions regime may amount to an effective prohibition even where sanctions depend on conditions, including an assessment of whether a payment is significant or a possible executive waiver. The relevant question is the borrower’s reason for non-payment. The court must construe the clause by a unitary exercise, giving particular weight to its text where it is a standard form, while testing rival constructions against the agreement’s commercial setting and consequences.

Lamesa lent £30 million to Cynergy under an English-law Tier 2 Capital facility agreement. Interest was payable half-yearly. Following United States sanctions against Lamesa’s ultimate owner, Lamesa became a blocked person for the purposes of United States secondary-sanctions legislation.

Cynergy withheld interest. It relied on the proviso to clause 9.1, which prevented default where payment was withheld in order to comply with a mandatory provision of law, regulation or court order. HHJ Pelling QC, sitting in the Commercial Court, held that Cynergy could rely on the clause while Lamesa remained a blocked entity.

Lamesa appealed. The central issue was whether Cynergy’s non-payment, to avoid the consequences of United States secondary sanctions, was made in order to comply with a mandatory provision of law within clause 9.1.

1. Appeal dismissed. The Commercial Court’s order was correct. Cynergy was entitled to rely on clause 9.1 and was not in default while Lamesa remained a blocked entity.

2. The Chancellor’s reasoning, with which Males LJ agreed, treated the facility as a standard-form agreement. Its construction required a unitary exercise. The court began with the words used, gave limited weight to the particular factual matrix, and tested the competing constructions against the agreement as a whole and its commercial consequences.

3. “Mandatory” in clause 9.1 meant compulsory or required. It governed each of law, regulation and court order. A mandatory provision was therefore one imposing a requirement or prohibition; it was not confined to a rule from which the parties could not derogate.

4. The proviso did not extinguish Lamesa’s entitlement to interest or capital. It excused Cynergy from default and delayed enforcement while the provision applied. The clause balanced the lender’s interest in timely payment against the borrower’s interest in avoiding conduct prohibited by laws affecting its ordinary international business.

5. Section 5 of the Ukraine Freedom Support Act 2014 was capable of operating as an effective prohibition. Although sanctions depended on whether a transaction was significant and could be waived, those contingencies did not alter Cynergy’s reason for withholding payment. The relevant enquiry was whether Cynergy withheld payment to comply with the statutory regime, not whether sanctions were certain to be imposed. The wording of article 5 of the EU Blocking Regulation strongly supported that conclusion.

6. Arnold LJ agreed in the result. He expressed reservations about treating avoidance of a significant risk of sanctions as compliance, but did not dissent.

• Court of Appeal (Civil Division) — in [2020] EWCA Civ 821, dismissed Lamesa’s appeal and upheld Cynergy’s entitlement to rely on clause 9.1.
• Commercial Court — HHJ Pelling QC, sitting as a deputy High Court judge, held that Cynergy could rely on clause 9.1 while Lamesa remained a blocked entity. The order was dated 30 September 2019; a citation was not stated in the judgment.