In an earlier article, we covered the impact of American sanctions on payments under letters of credit outside of the US. In this Part 2, we cover lessons from recent court battles in UK on the impact of American sanctions on the performance of contracts, which will be of interest to participants in international trade, including traders, charterers, ship owners and financing banks. Singapore does not implement US sanctions as local law, so, a breach of US sanctions is not immediately unlawful as a matter of Singapore law. That said, American sanctions have led parties to contest performance of their contractual obligations outside of the US as well, which has created fertile ground for litigation. We cover some lessons from cases which have considered interplay of American sanctions with payment obligations under contracts generally and loans in particular, and the redemption of security in financing arrangements.
Contractual payments
Parties outside the US may try to avoid their payment obligations when dealing with counterparties subject to sanctions, particularly where the contractual currency is USD. Whether such attempts can be justified would depend on the precise facts, in particular, the applicable sanctions and the contents of any sanctions clause in the contract. For instance, some secondary US sanctions prevent a party from giving “material assistance” to a sanctioned entity, and a significant contractual payment may constitute such material assistance. The case we will cover next did not raise such concerns, but considered a narrow question of whether payment in an alternate currency could overcome a state of affairs posed by sanctions, such that the force majeure (“FM”) clause in the contract could not be invoked.
In MUR Shipping BV v RTI Ltd [2022] EWCA Civ 1406, the English Court of Appeal found that a shipowner could not invoke an FM clause in the charterparty where the charterers’ parent company became subject to US sanctions even though payment in USD (the contractual currency) had become impossible. The shipowners had served an FM notice, asserting that it would be a breach of US sanctions to continue with the charterparty. The charterers however took the position that the sanctions did not interfere with the cargo operations, and offered to make payment in euros and absorb any exchange rate losses from conversion to USD.
The FM clause in the contract defined a force majeure event as an “[event or state of affairs that] cannot be overcome by reasonable endeavours from the Party affected”. The English Court of Appeal noted that each FM clause had to be considered on its own terms, and not by reference to some general principles of law. On a proper interpretation of the particular clause in question, the Court found that the Charterers’ proposal overcame entirely the state of affairs, without any exertion on the part of shipowners. The court acknowledged that while the contract provided for payment in USD, the purpose of the payment provision was to provide shipowners with the right quantity of USD in its bank account at the right time. Charterers’ proposal achieved that objective with no detriment to shipowners. As such, the FM clause could not be invoked.
Redeeming security
Fortenova Grupa D.D. v LLC Shushary Holding & Ors [2023] EWHC 1165 (Ch) is a decision of the English High Court which would be of interest to financial institutions or issuers of notes and financial instruments to entities which may end up being sanctioned. Fortenova issued notes with a face value of € 400m to Shushary (a subsidiary of VTB Bank, which has been sanctioned in US, EU and UK). The notes were secured against the assets of Fortenova. The subscription agreement for the notes was governed by English law and subject to the jurisdiction of English courts. Fortenova wished to redeem the notes in order to refinance them. It was however unable to do so because it could not make payments in respect of the notes to Shushary into the designated accounts because of sanctions. This led Fortenova to make an application to the court for an order to pay the monies into court to enable the notes and security thereunder to be deemed. It also sought a declaration that it was not liable for default interest on the notes because it was unable to pay interest while the sanctions remained in place.
The English High Court granted both the orders. The court noted that payment into court alone was not sufficient protection for Fortenova; it also had to obtain licenses from the relevant authorities administering sanctions in the US, EU and UK. Fortenova obtained the relevant licenses, and the court applied well-established principles of equity in favour of redemption of security, and found that payment into court to redeem the notes was a “perfectly proper and sensible route”. The possibility of Shushary being unable to receive funds for a potentially long period of time was not a reason to refuse redemption. Rather, that weighed in favour of redemption, so as to not have Fortenova and its restructuring exercise being held in limbo. The court also found that Fortenova was not liable to pay default interest. The relevant clause in the subscription agreement for the notes provided for default interest if an obligor “failed” to pay by a due date. The court found that the clause was not engaged since this was not a case of Fortenova failing to pay, but a case where it was not permitted to pay.
Loan repayments by sanctioned entities
The final case we consider in this update concerns loan repayments by sanctioned entities. In Banco San Juan Internacional Inc v Petroleos De Venezuela SA [2020] EWHC 2937 (Comm), PDVSA (Venezuelan state-owned oil and gas company) resisted payments under two credit agreements with Banco San Juan Internacional. The credit agreements were governed by English law. Among other things, PDVSA argued that the sanctions clause in the credit agreements suspended repayments; and that the payments into the stipulated bank accounts in the US were illegal. The court rejected both these arguments and granted summary judgment in favour of the bank.
The sanctions clause in the credit agreements provided that PDVSA will not repay the loans with the proceeds of business activities that were or became subject to US sanctions. PDVSA argued that this covered all its funds. The issue before the court was whether the sanctions clause operated as a condition precedent (such that if it was triggered, it would suspend payment obligations) or whether it was a negative covenant for the bank’s benefit, but did not affect PDVSA’s payment obligations. The court found that it was a negative covenant, since (among other things) the clause did not mention non-payment or suspension in the case of sanctions; and it appeared in a different section of the credit agreements from payment obligations. As to PDSVA’s argument about being unable to pay into the stipulated bank account in the US, the court found that PDVSA could have applied for a license to make the necessary payment. The burden for obtaining the license rested to PDVSA and it had failed to discharge the obligation to apply or show that if it had applied, the application would have failed.
Conclusion
Just because sanctions may appear to relate to some aspect of performance under a contract will not justify non-performance. In each case, the application of the relevant sanctions needs to be carefully considered. Even if sanctions apply, performance may not be excused if it entails no illegality in the place of performance, or where an alternative legal mode of performance is available.