Sanctions As a Contractual Shield?

When can a party avoid performance of a contract due to Russian sanctions laws? A Gibraltar perspective.

Peter Howitt

Managing Director

For those who missed it – the recent case of The European Union & Anor v The Syrian Arab Republic [2023] EWHC 1580 is helpful where a contracting party seeks to avoid performance by claiming difficulty with sanctions compliance in the place of performance.

This was a High Court case of England & Wales for summary judgment against the borrower relating to various loan agreements and guarantees, but the precedent is useful for cases involving wider non-performance of contracts where the party seeks to rely on general fears of a sanctions breach or difficulties due to sanctions law complexities.

The extraordinary scope of the Russian sanctions regimes (e.g. under the UK Russia (Sanctions) (EU Exit) Regulations 2019) means that there are many such cases likely to be currently in dispute.

In this case, the High Court found inter alia (and relying on previous case law) that where a sanctions regime includes a licence regime to permit otherwise prohibited activities then, in order to successfully defend against a breach of contract claim: (i) reasonable efforts to obtain a licence must be proved (even if a licence was unlikely to be granted) or (ii) the defendant must prove no such licence could have been granted.

Given the automatic recognition and enforcement of the UK, EU and UN sanctions regimes in Gibraltar (under the Gibraltar Sanctions Act 2019), this means that where a party claims difficulty with performance on grounds of illegality due to sanctions law applicable in Gibraltar, they would therefore need to show that:

(i) it was prohibited under relevant UK or international sanctions law (and therefore automatically prohibited in Gibraltar);
(ii) no licence regime existed in the international regimes / a licence application was refused / a licence would not have been granted if sought;
(or that a licence route existed in the international sanctions regimes but the wording of the licence did not cover the Gibraltar-related elements of performance (e.g. see the territorial limits of the UK legal services general licence INT/2023/3744968 which is limited to UK lawyers, counsel and firms)); and
(iii) they had made reasonable efforts to seek a licence in Gibraltar or they can prove a licence would not have been granted.

This case affirms a justifiably high evidential burden on defaulting parties so that specious grounds or claims of general difficulty in sanctions compliance cannot be used to avoid performance and payment. 

Gibraltar has a strong sanctions regime. This case reaffirms that parties cannot avoid their contractual obligations unless they are acting in good faith and have tried to comply with sanctions law.

Please contact Peter Howitt if you would like assistance on Russian sanctions in Gibraltar.

See also the useful summary by Herbert Smith Freehills LLP here: https://lnkd.in/e4GVYhBQ

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When is a Payment Account e-money?

When it is called e-money!

Peter Howitt

Managing Director When is a payment account also e-money? Judgment of the Court (Fifth Chamber) of 22 February 2024 – ABC Projektai UAB v Lietuvos bankas (Case C-661/22). The CJEU affirms the previous AG’s opinion that a payment account can have funds added to it for future payment transactions for an unspecified time without it thereby becoming ‘ e-money’. My summary
  • It is fundamental to the nature of regulated payment services that a person exchanges their money for a specific form of regulated IOU. The specific nature of the IOU depends on the status of the person giving it and the product they provide.
  • For non-bank payment accounts where no interest is granted, in effect customers are prepaying for the ability to make future payment transactions to third parties and themselves (via bank transfer or ATM).
  • Whilst a payment service provider that is not a bank holds such funds (whether under e-money permissions or payment permissions) they have many similar obligations, including related to ring-fencing those liabilities to customers and not lending or borrowing against them.
  • Therefore placing funds on a payment account to make payment transactions is not obviously different from doing the same under an e-money construct.
  • The framework contract with any payment account holder must therefore be clear whether the payment service provider considers the service to be the issuance of electronic money (assuming they have those permissions) or whether it is simply a payment account to be used for making payment transactions (including e.g. with a card).
  • The artificiality of ‘e-money’ in respect of payment accounts was considered in this case but not directly tackled. The court tried its best to make a distinction (in para 47):
“the issuance of electronic money is distinct from the mere entry in a payment account in that, inter alia, before being used for the purposes of such a payment, such money must be electronically ‘stored’, which implies that it has been issued beforehand..converted into a monetary asset separate from the funds received, and that its use as a means of payment is accepted by a natural or legal person other than the electronic money issuer.”
However, when you make a payment from a payment account it is against a regulated IOU of the bank, EMI or PI, that is to say your funds have already been converted from a legal perspective so, with respect, this is really a distinction without a difference.

Conclusion In summary this is however a good practical decision. The CJEU determined that a payment account does not become an e-money account simply because it is pre-funded for future expected payment transactions. The description of the regulated service, the regulatory status of the provider and the wording of the contract entered into is therefore strongly determinative of whether it is e-money or not (rather than the length of time value is held on the payment account).  

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