Would a clause that permits non-payment under a facility agreement in order to “comply with any mandatory provision of law, regulation or order of any court of competent jurisdiction” cover payments that trigger US extraterritorial sanctions?
A recent High Court decision ruled in favour of a UK-based borrower (Borrower) who refused to pay interest on a loan and held that non-payment was permitted. Borrower’s Cypriot-based lender (Lender) had an ultimate beneficial owner (UBO) that became targeted by US extraterritorial sanctions after conclusion of the loan agreement. Following the US extraterritorial sanctions designation, even non-US persons could violate US sanctions if they facilitate significant transactions with that UBO.
At the heart of the dispute was the question whether extraterritorial sanctions could constitute a mandatory provision of law under the Facility Agreement: The Facility Agreement between the parties contained a non-payment clause, pursuant to which the Borrower would not be in default if payment was withheld in order to comply with any “mandatory provision of law”. The Borrower contended that the effect of US extraterritorial sanctions was to impose an implied obligation under the facility agreement not to knowingly facilitate financial transactions on behalf of the Lender or its UBO.
Contrastingly, the Lender argued that the non-payment clause would only extend to provisions of US primary sanctions and that a broader interpretation of the non-payment clause should be rejected. Lender asserted that the narrower interpretation was more appropriate in the context of the Borrower (a UK incorporated entity) that borrowed in sterling (i.e. outside the US primary sanctions regime) under a contract governed by English law.
Basis of decision
The term “regulation” in the facility agreement was defined to cover everything other than primary legislation or general provisions of English law. The non-payment clause referred to both: (1) “mandatory provisions of law” and (2) “regulation”. Given the distinct use of both terms, the High Court emphasised that “mandatory provision of law” and “regulation” must have different meanings. It followed that the meaning of “mandatory provision of law” should capture all primary legislation not covered by the term “regulation” and could extend to non-English law instruments, including US extraterritorial sanctions.
Further, at the time of signing, both parties were aware that the Lender could become subject to US sanctions in which case the Borrower’s repayments would be in breach of US extraterritorial sanctions. In light of this fact, the High Court concluded that the parties must have intended the clause to protect the Borrower from the US extraterritorial sanctions risks that it faced.
Four key takeaways from the decision
- The High Court was focused on interpreting the facility agreement and did not otherwise consider matters of UK foreign policy, including the UK’s long standing policy of “not giving extraterritorial effect to US foreign policy as enacted through its extraterritorial sanctions programmes”. This is of crucial importance as the validity of US extraterritorial sanctions for non-US businesses is disputed under public international law. Scholars, practitioners and courts outside the US question the legitimacy, binding effect and enforceability of US extraterritorial sanctions outside the US. A general recognition of US extraterritorial sanctions as binding law for non-US companies would trigger a high risk of conflicts of laws. It could also have far-reaching consequences on financing agreements and beyond even in cases without any US nexus.
- The High Court’s approach was relatively conventional and placed greater emphasis on the ordinary meaning of the non-payment clause rather than the broader public international law question of whether US extraterritorial sanctions are “mandatory provisions of law”. While the judgment is not binding on other European courts, it should be closely monitored if other European Courts adopt a different approach and place greater emphasis on the widespread EU law reluctance towards US extraterritorial sanctions.
- The High Court noted that the only existing mandatory provision of English law that could prohibit parties to include a contractual provision that takes into account US extraterritorial sanctions is the EU Blocking Regulation which restricts compliance for EU companies with certain US extraterritorial sanctions on Cuba and Iran. However, since the Blocking Regulation does not apply to US extraterritorial sanctions against Russia, the parties were free to include contractual provisions on extraterritorial sanctions risk. Consequently, the court decision may have been different if US extraterritorial sanctions against Russia were covered by the EU Blocking Regulation.
- The High Court decision is of general relevance to several similar types of common contractual provisions that refer to ‘provisions of law’. For example, a common representation provided by a Seller/Target in an SPA context is that the Target has ‘complied with all material laws’. If parties wish to ensure that such clauses extend to or carve out particular legal provisions – especially US extraterritorial sanctions – it is important to make an express reference in the contract.