A U.K. bank is not required to pay interest on a 2017 loan from a company owned by U.S.-sanctioned Russian billionaire Viktor Vekselberg, a court ruled.
Lamesa Investments Limited, a company owned by Vekselberg, lent UK-domiciled Cynergy Bank Limited (CBL) GBP 30 million in December 2017. The bank said paying interest on the loan would violate U.S. sanctions and could result in a “secondary sanctions” designation. CBL owed GBP 3.6 million in interest to Lamesa Investments as of the time of the litigation. These funds are “ring-fenced” and available to be paid if required, according to the attorney for CBL.
CBL is not required to pay interest on the loan for as long as Vekselberg remains sanctioned and he controls Lamesa Investments, a judge on the England and Wales High Court ruled on Sept. 12, 2019.
The risk of secondary sanctions “effectively relieves a foreign borrower from liability for non-payment to a sanctioned person,” according to an analysis of the ruling in Russian media. This case creates an important precedent for the enforcement of sanctions even when a U.S. institution is not directly involved, said George Voloshin, director of the French branch of Aperio Intelligence, a U.K. consultancy.
The imposition of secondary sanctions would be “obviously ruinous” to the bank, CBL had said, due to the fact that it had a U.S. dollar correspondent account through JPMorgan Chase & Co., and a significant part of its business was conducted in dollars.
Secondary sanctions allow the U.S. to designate a foreign person found facilitating transactions for an individual or entity already under sanctions. Vekselberg and his company Renova Group were sanctioned on April 6, 2018, by the U.S. Treasury Department. Despite CBL's argument in the case that it would face secondary sanctions risk if it processed the interest payment to Lamesa Investments, Vekselberg and Renova Group are not subject to secondary sanctions, according to the Treasury’s designation listing.
The definition of the term “mandatory provision of law” was the center of the dispute, according to the ruling. The loan agreement contained a provision stipulating that CBL is not required to pay interest on the loan if “such sums were not paid in order to comply with any mandatory provision of law.”
The decision hinged in large part on the language used in the loan agreement, but it also raises important points for companies amid the rise of sanctions as an instrument for governments when implementing their foreign policy, according to a client alert by law firm White & Case LLP. When entering contracts under English law with potential sanctions exposure, parties should carefully consider the terms used as a way to manage the risk, the alert said.
“Parties can account for the risk of intervening sanctions by the use of wide terms in their contracts,” the client alert said. The ruling shows that “the English courts will be supportive of parties' attempts to manage their sanctions risk, in spite of the traditional tendency of the courts to uphold English law contractual obligations where foreign law conflicts with them,” according to the client alert.