Stephenson Harwood LLP - Finance litigation update - December 2020

FINANCE LITIGATION UPDATE – DECEMBER 2020 24 Where a defaulting party seeks to rely on sanctions, the non-defaulting party should consider whether authorisation can be sought to permit performance and whose responsibility it is to obtain any such authorisation, whether under statute, contract or the common law. PDVSA no doubt had its own reasons for not having sought a licence from the US authorities. However, a defaulting party relying on sanctions should be aware of the risk of summary judgment in the absence of evidence that no authorisation would be granted. In this case, BSJI had originally taken issue with the question of whether the US Sanctions made the payment illegal. As this was an application for summary judgment proceeding without evidence of foreign law, BSJI focussed at the hearing on the issue of licences, which was determinative. However, the court did comment obiter that PDVSA's case on illegality was " beset with difficulties ". In particular, it doubted that it was illegal for BSJI to receive payment or for PDVSA to make it, or that it was factually impossible for PDVSA to make payment on its own evidence. Whether such an argument can succeed will depend on the particular sanctions in question. The recent decisions regarding the impact of sanctions on commercial transactions make clear that these cases are fact-specific and careful consideration should be given to the interpretation of the sanctions and the relevant contract. However, it is not surprising that the court has been slow to find an obligation released or even suspended as a result of sanctions. Given the prevalence of sanctions (and potential for divergence, which will no doubt only increase following Brexit), it is crucial that parties consider carefully their potential impact when negotiating contracts, especially when the governing law and the place of performance are not the same. Lenders should seek to include clear wording on how to preserve payment obligations, when obligations are and are not suspended and whose responsibility it is to seek licences if sanctions may otherwise prevent payment, while borrowers may wish to include mechanisms to minimise the impact in the event that relevant sanctions are imposed. As a final point, it is interesting to see that the court gave short shrift to PDVSA's reliance on a recent US decision dismissing an application for summary judgment against PDVSA on the basis that Executive Order 13850 created an " impossibility of payment " to the US-based creditor applicant. The argument initially appears quite powerful. However, the English court disregarded it because it was concerned with domestic illegality and the US court was applying a different test. The relevant US decision has also been criticised for its apparent failure to take into account the availability of licences, and – as in Holbud and Shere Shipping – that was a hurdle that the defaulting party could not get over in this case.