Banco San Juan Internacional Inc v Petroleos De Venezuela SA

A sanctions covenant framed as a negative covenant does not suspend accrued repayment obligations unless the contract clearly provides for suspension. Foreign illegality is generally irrelevant to an English-law contract. The narrow Ralli Bros exception applies only where performance necessarily requires an unlawful act at the required place of performance. A party is not excused where lawful performance remains possible through a licence which it has failed to seek. A contractual obligation to pay the present value of future interest may be a primary obligation, rather than a penalty, where it protects a legitimate commercial interest and is not disproportionate. Article 9(3) of the Rome I Regulation adds no wider defence in those circumstances.

BSJI brought two debt claims against PDVSA under English-law credit agreements. PDVSA admitted the payment defaults but argued that US sanctions suspended its obligations, rendered performance illegal under the Ralli Bros rule, or justified relief under Article 9(3) of the Rome I Regulation. In the 2017 Claim, PDVSA also argued that a clause requiring payment of the present value of future fees and interest was an unenforceable penalty. The applications had previously been adjourned following Foxton J’s decision on service and the preliminary sanctions argument, reported at [2020] EWHC 2145 (Comm). The issues were whether the sanctions arguments disclosed a real prospect of defending the claims and whether the compensation clause was penal.

Judgment was given for BSJI on both claims. The court also directed that the contractual costs claims be assessed on the indemnity basis.

1. Section 7.03. Section 7.03 was a negative covenant, separate from the repayment provisions. It was not expressed as a condition precedent or subsequent and contained no suspension mechanism. The agreement’s separate suspension and acceleration provisions, together with the obligation to maintain licences for performance, pointed against any implied suspension term. The sanctions provisions in Mamancochet Mining Limited v Aegis Managing Agency Limited [2018] EWHC 2643 (Comm) and Lamesa Investments Ltd v Cynergy Bank Ltd [2020] EWCA Civ 821 were materially different because they expressly addressed non-payment. BSJI could also waive a covenant for its sole benefit.
2. Foreign illegality. The general rule is that foreign illegality does not affect an English-law contract. The exception in Ralli Bros v Compania Naviera Sota y Aznar [1920] 2 KB 287 is narrow. It requires performance itself, at the required place, necessarily to involve an unlawful act. Illegality in steps taken elsewhere to equip a party for performance is insufficient.
3. Licences. Lawful performance under the US sanctions remained possible through an OFAC licence. The burden lay on PDVSA, as the party bound to pay, to apply for the necessary licence and show that it would have been refused. PDVSA had not done so. Its illegality defence therefore failed even on the assumption that payment was prima facie prohibited.
4. Rome I. Article 9(3) gave the court a discretion concerning overriding mandatory provisions of the law of the place of performance. The discretion added nothing where the Ralli Bros principles and the licence analysis already defeated the defence.
5. Penalty. Clause 3.04(c) was not triggered by breach. It applied to voluntary and optional repayment and to specified non-breach events. It was therefore a primary obligation. The present-value calculation represented BSJI’s expected contractual return and protected a legitimate commercial interest. It was not disproportionate. The contrasting cases relied upon by PDVSA involved undiscounted or materially different clauses and were distinguishable.
6. Costs. The court considered that the significant contractual costs claims should be assessed by a costs judge on the indemnity basis, who could determine reasonableness and the appropriate level of detail consistently with privilege.

The applications had previously been adjourned following an earlier hearing before Foxton J, reported at [2020] EWHC 2145 (Comm) . No appeal history is stated.