Developments in contract: Foreign illegality

Principles

• The fact that performance of a contract is illegal under a foreign law does not prevent the contract from being binding under English law.
• However, there is an exception to this if performance would be illegal in a country where the parties have to perform their obligations.
• While this exception pre-dates it, this position is now embodied in Article 9(3) of the Rome I Regulation, which states “Effect may be given to the overriding mandatory provisions of the law of the country where the obligations arising out of the contract have to be or have been performed, in so far as those overriding mandatory provisions render the performance of the contract unlawful”

Recent developments

• In Lamesa Investments Ltd v Cynergy Bank Ltd the Court of Appeal considered the position where the parties had included in a facility agreement a standard clause that the borrower would not be in breach of its repayment obligation “if sums were not paid in order to comply with any mandatory provision of law, regulation or order of any court of competent jurisdiction”.
• Lamesa, the lender, was made a “blocked person” by US Executive Order, meaning that Cynergy would be in breach of secondary US sanctions if it repaid the money. The parties had been aware that this was a possibility when they entered into the agreement. It was common ground that the clause did not excuse repayment, but meant failure to pay on time did not trigger a default by Cynergy.
• The court held that the parties had agreed a wider right to relief from default than would have been the case at common law or under the Rome I Regulation. The definition of “regulation” in the agreement was wide and caught the Executive Order. Cynergy’s refusal to pay was necessary in order “to comply” with that.

What this means

• This was not a case where performance of the obligation had to take place in the jurisdiction in which it was illegal. As such, it did not fall within the usual exception established in English law and the Rome I Regulation.
• The case shows that parties can contractually extend the exception to other circumstances. Foreign sanctions would not normally be allowed to prevent performance of an English law contract. Their increased use in an international trading atmosphere of discord and unilateralism have the potential to make the effect of clauses like this, which the court accepted was a standard clause in common usage, far reaching.