The Interpretation of Contracts – Yet again

July 3, 2020

By Simon Whitfield

Lamesa Investments Limited v Cynergy Bank Limited [2020] EWCA Civ 821

In April 2020, I looked at Teeside Gas Transportation Ltd v CATS North Sea Ltd & Ors. [2020] EWCA Civ 503 (see here).

In that case, the Court of Appeal stressed the Supreme Court authorities on the interpretation of contracts have settled the question of the proper approach to be adopted.  In particular, it referred to and relied upon Arnold v Britton in 2015 and Wood v Capita in 2017.

Therefore, the five factor test in Arnold may still be cited alongside the longer narrative discussion of the Supreme Court in Wood.  The “unitary” exercise of construction involves considering:

• The language of the disputed clause.
• Other relevant provisions of the contract.
• The overall structure of the contract’s payment provisions.
• The background circumstances known to the parties at the time of the contract.
• Commercial common sense.

In Lamesa, the Defendant bank (“Cynergy”) borrowed £30m repayable over 10 years from the Claimant (“Lamesa”), an investment vehicle ultimately owned by a Russian national, Mr Vekselberg. Clause 9.1 of the Facility Agreement dated 19 December 2017 under which the money was borrowed stated that Cynergy would not be in default

“…during the 14 days after [Lamesa’s notice requiring payment] it satisfies [Lamesa] that such sums were not paid in order to comply with any mandatory provision of law, regulation or order of any court of competent jurisdiction.”

In March 2018, the US Government designated Mr Vekselberg as a Specially Designated National, so that in turn Lamesa became a “blocked person”.  Consequently, any person dealing with Lamesa (including Cynergy) became subject to the provisions of US secondary sanctions legislation.

Cynergy refused to pay Lamesa sums due under the Facility Agreement, saying that it was obliged to comply with a “mandatory provision of law” – in this case section 5(b) of the US Ukraine Freedom Support Act 2014 (“UFSA”) – which requires the President of the US to impose sanctions on a foreign financial institution if it has facilitated a financial transaction on behalf of a blocked person.

At first instance, HHJ Pelling QC held that Cynergy’s non-payment was “in order to comply with any mandatory provision of law…” within the meaning of clause 9.1.  He held that the words meant “a provision of law that the parties cannot vary or dis-apply.”  English lawyers would, at the time the agreement was entered into, have “understood a mandatory law to be one that could not be derogated from”.  He rejected Lamesa’s submission that a distinction should be drawn between a statute that required or prohibited something on the one hand, and one that created the risk of a penalty or sanction on the other.  It was unlikely, he said, that the parties would have intended to limit the meaning of the words “in order to comply” to an express statutory prohibition.

On appeal, Lamesa contended that the judge was wrong essentially because section 5(b) UFSA contained no express legal prohibition on payment.  Therefore, Cynergy could not say that it refused to pay “in order to comply with [a] mandatory provision of law” when section 5(b) UFSA did not even purport to bind Cynergy to act in a particular way.  Furthermore, it would require clear wording in a loan contract to enable a debtor to escape its payment obligations, and the court should take account of the parties’ commercial interests in interpreting the contract.

In oral argument on appeal, Counsel for Cynergy said the judge had in fact been wrong to focus on whether the imposition of a penalty was a possible or automatic consequence of Cynergy’s conduct, because even where a statute prohibits conduct, there is always the question of whether it will be enforced.  Instead, the focus should be on the conduct of the individual, not the reaction of the authorities.

Giving the lead judgment, the Chancellor Sir Geoffrey Vos reviewed the authorities and noted that the judge may have overlooked certain factors relevant to the proper interpretation of clause 9.1.  In particular:

1. It was common ground that clause 9.1 was a standard term in common usage. That meant it was not context specific, and evidence of the particular factual background or matrix had a much more limited, if any, part to play.
2. Therefore, the focus was ultimately on the words used, which should be taken to have been chosen with particular care as standard form wording.
3. The judge had appeared to focus on the probabilities of what the parties may or may not have intended by the use of the words in clause 9.1. However, that should be against the background of two more general considerations – (i) that it would take clear words to abrogate a payment obligation and (ii) account must be taken of the commercial interests of both parties.  The judge had appeared to consider Cynergy’s interests more than Lamesa’s.

The Chancellor further observed that, whilst there was limited evidence of context in this case, it was important to note that clause 9.1 did not extinguish or abrogate the obligation to pay.  It merely said that, if engaged, Cynergy would not be in default with all the consequences that flowed from it.  In essence, clause 9.1 sought to strike a balance between the lender’s interest in being paid timeously and the borrower’s desire not to infringe mandatory provisions of law.

Both sides accepted that the words in the proviso to clause 9.1 were capable of more than one meaning, but did not agree as to what those meanings were.

Adopting the required unitary process of interpretation, the Chancellor said what mattered was Cynergy’s reason for non-payment, not whether Cynergy was certain or likely to be sanctioned if it made payment.  Lamesa argued that once it was accepted the proviso was ambiguous, it could not be regarded as clear enough to excuse non-payment.  The Chancellor noted that this wrongly assumed payment was abrogated by the clause rather than just delayed.  In undertaking the unitary exercise, Lamesa’s interpretation would badly dent the clause’s utility.

The Chancellor concluded that the drafter of clause 9.1 must have intended the borrower to be capable of obtaining relief from default if its reason for non-payment was to “comply” with a foreign statute that would otherwise be triggered.  Once the US legislation is seen, as it must be, as an effective prohibition, Cynergy’s reason for non-payment was indeed to comply with it.

Therefore, whilst not agreeing entirely with the judge’s reasons, his order was correct and the appeal must be dismissed.

As an indication of how finely balanced these discussions can be, Arnold LJ added his own comments to the Court of Appeal’s judgment.  He frankly stated “I have not found this case easy”.  He also observed that the case had been run as a Part 8 claim with an agreed statement of facts submitted by the parties.  In particular, it was agreed that the US Government could impose sanctions if Cynergy made payments.  In other words, there was a risk that it could do so.  In such circumstances, Lamesa argued that Cynergy was not declining to pay “in order to comply with” section 5 UFSA, but in order to avoid the risk of being sanctioned, and that clearer words would be required to excuse payment in such circumstances.

Nevertheless, Arnold LJ said, the Chancellor had concluded that it was sufficient for the purposes of the proviso in clause 9.1 that Cynergy’s reason for non-payment was in order to comply with section 5 UFSA.  Whilst he had doubts about this conclusion, he had decided in the end not to dissent.

It seems clear that, whilst the proper approach to the interpretation of contracts may have been settled, this does not mean that the outcome of any given interpretative exercise will be certain.