Managing Sanctions Risks Through Express Contract Provisions
Managing Sanctions Risks Through Express Contract Provisions
The Singapore High Court recently ruled that a party to a Singapore law governed contract was justified in relying on a sanctions clause in the contract to refuse payment to the counterparty in an effort to avoid breaching U.S. sanctions. Resembling the approach taken by English courts in Lamesa Investments Limited v. Cynergy Bank Limited,  EWCA Civ 821 and Mamancochet Mining Limited v. Aegis Managing Agency Limited and others,  EWHC 2643 (Comm), the Singapore High Court acknowledged that parties can rely on contractual provisions to mitigate sanctions risks. Although local decisions, the Singapore and English cases provide helpful guidance to companies on how to manage U.S. sanctions risks in jurisdictions that do not implement U.S. sanctions as a matter of local law.
Neither Singapore nor the UK implements U.S. sanctions as local law. Both jurisdictions implement and enforce sanctions imposed by the United Nations. In addition, Singapore enforces targeted financial measures that it has imposed in response to Russia’s invasion of Ukraine, and the UK enforces sanctions imposed pursuant to its autonomous sanctions regimes, as well as some EU sanctions retained in UK law after Brexit. Breaching U.S. sanctions, whether primary or secondary, therefore, is not unlawful as a matter of either Singapore or English law.
Given the general common law position that only illegality under the law of the contract and the law of the place of performance can relieve a party from its contractual obligations, businesses defaulting on contractual obligations in order to comply with U.S. sanctions or avoid secondary sanctions face an uphill battle in raising illegality as a defense in Singapore or English law-governed contract actions. Businesses therefore sometimes rely on contractual provisions as a shield from liability for default, but this is fraught with difficulties.
In this recent case, the Singapore High Court set out the Singapore position on the validity of sanctions clauses in contracts as a means of mitigating foreign sanctions risks. The defendant discovered during its sanctions screening process that paying Kuvera would likely breach U.S. primary sanctions on Syria, relied on the sanctions clause in its contract with the plaintiff, and resisted payment. The full sanctions clause provided as follows:
[The defendant] must comply with all sanctions, embargo and other laws and regulations of the U.S. and of other applicable jurisdictions to the extent they do not conflict with such U.S. laws and regulations (“applicable restrictions”). Should documents be presented involving any country, entity, vessel or individual listed in or otherwise subject to any applicable restriction, we shall not be liable for any delay or failure to pay, process or return such documents or for any related disclosure of information.
The Singapore High Court ruled that the defendant was entitled to rely on the sanctions clause to refuse payment. The court found that the purpose of the sanctions clause was to “mitigate or eliminate the regulatory, reputational and financial risk that bank faces if it breaches U.S. sanctions laws and regulation or is found by OFAC to have breached U.S. sanctions laws and regulation.” The phrase “all sanctions . . . law and regulations of the U.S.,” therefore, should be read to include the “entire regulatory superstructure and infrastructure of the U.S. sanctions laws and regulations,” i.e., the executive order that set out the sanctions and OFAC’s compliance guidance and enforcement approach. After finding that OFAC would have considered the defendant to be in breach of the Syria-related primary sanctions had it paid the plaintiff, the court held that the defendant was justified in relying on the sanctions clause to refuse payment.
English courts have also taken the position that express contract provisions can excuse a party from its contractual obligations if default was intended to comply with or avoid being subject to foreign sanctions. In Lamesa Investments Limited v. Cynergy Bank Limited, the Court of Appeal ruled that the defendant bank did not breach the contract when it refused to pay the plaintiff in order to avoid U.S. secondary sanctions. The relevant contractual provision provided that the defendant would not be in default if it did not pay the plaintiff “in order to comply with any mandatory provision of law, regulation or order of any court of competent jurisdiction.” The Court of Appeal found that U.S. secondary sanctions are an “effective prohibition” and constitute a “mandatory provision of law” within the meaning of the clause. Therefore, because the reason behind the defendant’s refusal of payment was to avoid U.S. secondary sanctions, the court decided that the defendant did not breach the contract.
Mamancochet Mining Limited v. Aegis Managing Agency Limited and others, meanwhile, illustrates the significance of drafting contractual provisions in allocating sanctions risks. In Mamancochet, the defendants resisted payment on the ground that paying the plaintiff would have violated U.S. primary sanctions on Iran. The sanctions clause in the parties’ contract provided that the defendants were not liable to make any payment to the extent that such payment would “expose [the defendants] to any sanction.” The English High Court, in interpreting the sanctions clause at issue, distinguished between “exposure to any sanction” and “exposure to the risk of being sanctioned.” The court found that to prove “exposure to the risk of being sanctioned,” the claiming party only needs to show that “there [is] a risk that the agency in question might conclude that there was prohibited conduct (when in law there was not or may not be).” To prove “exposure to any sanction,” however, a claiming party must prove that the conduct is actually “prohibited by the applicable laws or regulations.” Because the parties adopted the “exposure to any sanction” standard in their contract and, the court found, as a matter of fact, U.S. sanctions did not prohibit payment to the plaintiff at the time the payment should have been made, the court ruled that the defendants could not rely on the sanctions clause.
Singapore and English courts’ recognition of party autonomy in managing U.S. sanctions risks through express contractual provisions is significant, especially considering that under both Singapore and English law, the common law defense of illegality may not always be available if the defense is based on illegality under foreign laws. Companies concerned about managing U.S. sanctions risks in non-U.S. operations should, therefore, consider including sanctions clauses in their agreements as a means of limiting liability where contractual default is with a view to complying with U.S. sanctions or avoiding secondary sanctions.
When drafting the sanctions clause, companies should take note that the courts’ analyses in all three decisions that we discuss here were highly fact-dependent. In each of these decisions, the judges interpreted the parties’ intended risk allocation from the specific wording of the contractual provisions at issue. Businesses should therefore give due consideration to the appropriate drafting of contract clauses intended to mitigate sanctions risks, taking into account both the variety and the severity of potential sanctions. If you need assistance tailoring a sanctions clause to your needs, please feel free to contact us.
 Kuvera Resources Pte Ltd v. JPMorgan Chase Bank, NA,  SGHC 213, Kuvera Resources is appealing the decision.
 See Canary Wharf (BP4) T1 Ltd v. European Medicines Agency,  EWHC 335 (Ch); Ralli Bros v. Compania Naviera Sota y Aznar  2 KB 287.
 See, e.g., Banco San Juan Internacional Inc v. Petroleos De Venezuela SA,  EWHC 2937 (Comm).