High Court rules that payment under a guarantee would breach EU Libya sanctions regime, and considers contractual exemption provisions

In a recent judgment, the English High Court has considered some of the exemption language commonly found in EU sanctions regimes which is applicable to contractual performance. The case of Glenn Maud v The Libyan Investment Authority [2015] EWHC 1625 concerned an application to set aside a statutory demand for payment under a guarantee. The court found that payment of the guarantee was prohibited by the sanctions regime, and granted the application to set aside.

The judgment principally concerns the scope of the obligations and prohibitions relating to the freezing and the making available of funds and economic resources to designated persons, particularly in the context of the specific provisions of the EU - Libya sanctions regime. However, it also considered two key questions relevant to the impact of sanctions on contracts, namely (i) the extent of the general exemption for claims under contracts, the performance of which has been affected by sanctions; and (ii) whether there is an obligation to seek a licence from the competent authority before it is possible to rely upon a sanctions prohibition as defeating a contractual obligation. In so doing, helpful guidance was provided on the scope of these provisions which have not frequently been considered by the courts.

Background

The case concerned an application by a debtor, Mr Maud, to set aside a statutory demand for payment under a guarantee. The guarantee was owed to the Libyan Investment Authority ("LIA"), the Respondent in the proceedings. On 14 April 2011, the LIA was made a designated entity under Annex II of Council Regulation (EU) No 204/2011, as amended (the "EU Regulation"), imposing sanctions against Libya. This imposed financial sanctions on the LIA, including an obligation to freeze all of its funds and economic resources, and a prohibition on making funds and economic resources available to it.

Following the fall of the Qadhafi regime in autumn 2011, some of the sanctions measures were relaxed. The LIA was removed from Annex II on 29 September 2011, although a new provision required that funds and economic resources belonging to, owned, held or controlled on 16 September 2011 by the LIA (among other entities) and located outside Libya on that date remained frozen (Article 5(4)).

The LIA served a statutory demand on Mr Maud for the sum owed to it under the guarantee in February 2014. Mr Maud applied to have the statutory demand set aside on the grounds that payment of the amount due would breach the sanctions regime.

Application of the sanctions regime to the guarantee

Mr Maud's case was that the guarantee was caught by the definition in the Regulation of "all funds and economic resources" (which expressly includes guarantees) and was therefore frozen, and that he would breach the prohibition under Article 5(4) if he paid the debt under the guarantee.

In addition, Mr Maud claimed that payment of the guarantee was prohibited under Article 12 of the Regulation, which provides that no claims in connection with any contract the performance of which has been affected by sanctions, including, in particular, a claim under a guarantee, shall be satisfied if made by any Libyan person, entity or body. He submitted that the service of the statutory demand was a claim for these purposes, and that the claim under the guarantee was clearly affected by the sanctions measures.

The LIA’s case, on the other hand, was that the guarantee was not caught by the prohibition under Article 5(4). It argued that the language used in Article 5(4), when read in conjunction with other provisions, gave rise to a “conundrum”, meaning that the prohibitions applicable to financial transactions with the LIA should be understood differently from those applicable to other designated entities. In this way, the prohibitions should not be read as applying to the payment under the guarantee.

Further, the LIA argued that Article 12 of the Regulation did not apply on the basis that: (i) as the guarantee was not “frozen” by Article 5(4), it was also not affected by the sanctions for the purposes of Article 12; and (ii) the term “claim” as used in Article 12 did not cover the service of a statutory demand - Article 12 was directed at judgments following court proceedings.

The LIA also argued that Mr Maud should have sought a licence from HM Treasury (the relevant UK competent authority), to enable him to make the payment. As he had not even attempted to do so, he should not be permitted to rely on the relevant exemptions under the sanctions regime.

Decision

The judge found that the payment by Mr Maud of the sums due under the guarantee was prohibited by Article 5(4) of the EU Regulation. In particular:

• The LIA’s proposed construction of the EU Regulation was not tenable. The term “funds and economic resources” must mean the same thing each time it is used in Article 5: there was no indication that it should be read more narrowly in Article 5(4) than elsewhere in the Regulation.
• As regards Article 12, the court also rejected the submissions of the LIA. A statutory demand was an essential step in most UK bankruptcy proceedings. Service of the statutory demand was covered by the reference to a “claim under a guarantee”, and a refusal to set aside that statutory demand on the debtor’s application amounted to a satisfaction of that claim for the purposes of Article 12. The prohibition in Article 12 was not limited to judgments following court proceedings. Accordingly, Article 12 was a further reason why the court was required to set aside the statutory demand.
• Finally, the judge found that there was no requirement for a licensing application to have been made by Mr Maud. The question of who is required to apply for a licence to permit an otherwise prohibited transaction is answered by looking at the terms of the sanctions and the licensing regime itself. It was clear in this case that anyone affected by the sanctions can apply for a licence, and the LIA itself could have applied. Indeed, whether the money was going to be used for a purpose envisaged by the EU Regulation was exclusively in the knowledge of the LIA and it did not make sense for the burden of applying for a licence to lie on Mr Maud. Moreover, there was no reason to conclude that a licence would be forthcoming. The LIA had not explained what it intended to do with the payment and it would be wrong for the court to make an assumption about the likely use to which it would be put, or the likelihood of a licence being granted.

Comment

The judgment is most interesting for the rare judicial consideration of the interpretation of Article 12, and the question of the requirement to seek a licence. The Respondent’s main argument, regarding the proper construction of Article 5(4), was ultimately dismissed by the judge as “straightforward”, and she declined to refer the question to the EU Court of Justice as the Respondent had requested.

The judgment provides welcome clarification of the scope of Article 12 – a provision that appears in most modern EU sanctions regimes, but which is not particularly clearly drafted. In particular, it confirms that this provision will be available to defeat a claim asserting an obligation to perform a contract in circumstances where that performance has been affected by sanctions – in this case performance would have required the applicant to carry out an unlawful payment in breach of the sanctions.

The conclusion that there was no requirement for Mr Maud to seek a licence from HM Treasury before relying on the presence of sanctions to defeat a contractual obligation is also of interest. It contrasts with the decision in the case of Melli Bank plc v Holbud Limited [2013] EWHC 1506, which was not cited in the judgment, although that case concerned different factual circumstances (and a different legal claim - for contractual frustration - see our post on this decision here). The court appears to have been influenced in this case by the possibility for the LIA itself to have sought the licence, and by the uncertain prospects of success of any such application.

For further information, please contact Andrew Cannon, Partner, Anna-Maria Leonard, Associate, or your usual Herbert Smith Freehills contact.