Sanctioned: "in order to comply with any mandatory provision of law"

Lamesa, acting as lender, was a Cypriot company wholly owned by a group company registered in the British Virgin Islands. The group company’s owner was added to a list of “Specially Designated Nationals” by the U.S. Department of The Treasury Office for Foreign Assets Control, more commonly known as OFAC. As a result, Lamesa became a “blocked person” under a U.S. federal law, exposing Cynergy, the borrower, to secondary sanctions if it made interest payments to Lamesa. This would have been "ruinous" to Cynergy’s business given its activities in the U.S..

Cynergy therefore refused to make payments, relying on a clause in the facility agreement stating that it would not be in breach if “sums were not paid in order to comply with any mandatory provision of law, regulation, or order of any court of competent jurisdictions.”

The court rejected Lamesa’s contention that “provision of law” meant “a law applying to a UK party, acting in the UK, that has agreed to make a sterling payment pursuant to a contract governed by English law”, finding that:

• in the absence of any express territorial qualification, “mandatory provision of law” could not be confined to English law;
• “mandatory provision of law” meant a provision of law that the parties could not vary or disapply (drawing from the use of that phrase in the Rome Convention and the Rome I Regulation); and
• “in order to comply” – where the real interpretation issue arose – as well as meaning compliance where the law expressly prohibited payment and compliance to avoid a penalty imposed by law, also covered compliance so as to avoid the possible imposition of a penalty by law given that the parties were aware that Lamesa may become subject to U.S. sanctions at the time the contract was executed.

Cynergy was accordingly justified in refusing to make interest payments to Lamesa.

Update July 2020

This decision was upheld on appeal, but the reasoning was slightly different:

• The relevant clause was a standard term in common usage. This meant a more literal and less context specific approach should be taken to interpretation. Moreover, the clause was concerned with more than just U.S. sanctions. Finally, the provision was about the timing of payments not whether any payment would be made at all. 
• “Mandatory provision of law” simply meant compulsory or required (was not confined to the Rome I meaning).
• Once the U.S. legislation is seen, as it must be, as an effective prohibition, Cynergy’s reason for non-payment is indeed to comply with it.