Financial Sanctions – and drafting construction contracts

By resolutions of the UN Security Council, and by legislation in the EU, USA, UK and elsewhere, sanctions support foreign policy objectives and international law. Typically sanctions seek to address terrorist activity and funding, and may be applied against individuals linked to governments which themselves are subject to sanctions for international legal or human rights violations.

The Terrorist Asset Freezing Act 2010, operating in tandem with EC Regulations is used to freeze assets of anyone subject to sanctions.  Post-Brexit, increasing use may be made of the Sanctions and Anti-Money Laundering Act 2018, which gives the UK government powers to impose financial sanctions.

Barely a week goes by without the Office for Financial Sanctions Implementation (OFSI) issuing press releases updating its consolidated list of targets for financial sanctions. Click here to see ‘Who is subject to financial sanctions in the UK.

The consolidated list identifies those people and organisations that OFSI, part of UK Treasury, says are subject to financial sanctions.

However, as well as financial sanctions, governments impose export control sanctions. Not every entity subject to sanctions (for example, in Russian or Ukraine) is listed on the OFSI consolidated list. Export sanctions may restrict access to certain markets. Trade sanctions made under US and Japanese law also have implications for UK based entities.

Checking the consolidated list will not necessarily guarantee compliance, and the dynamism of the consolidated list itself poses a problem. Any of us could face financial penalties if, in dealing with the assets of a designated person, sanctions are violated. The cost of getting things wrong is high. Under the Police and Crime Act 2017 those convicted of breaching financial sanctions face up to 7 years in prison, and companies can face fines of up to £1 million.

Banks, insurers and professional services firms are particularly exposed. For many years, commercial and insurance contracts have been drafted to limit the risks involved in insuring, lending to or dealing with, even indirectly, any entity which is or might be subject to sanctions.

The High Court had a look at some of the issues around “sanctions drafting” in the judgment handed down on 12^th October 2018 by Mr Justice Teare in “Mamancochet Mining Limited  v Aegis Managing Agency Limited and others” [2018] EWHC 2643 (Comms); Case No: CL-2018-000335.

The “Mamacochet” case involved an insurance contract where claims had not been paid because sanctions were said to apply. One of the issues before the court was the meaning of the wording in the policy of insurance “No (re)insurer shall be deemed to provide cover and no (re)insurer shall be liable to pay any claim or provide any benefit hereunder to the extent that … payment of such claim … would expose that insurer to any sanction, prohibition or restriction under United Nations resolutions or the trade or economic sanctions, laws, or regulations of the European Union, United Kingdom or the United States of America“.

In this case, Mr Justice Teare found that, as drafted, the wording of the contract of insurance meant that for as long as payment of claims under the insurance policy would expose the insurer to sanction, the insurer would not be liable to pay. However, his judgment left open the possibility that (in this case) the effect of sanctions would have suspended performance of the insurer’s obligations and would not have extinguished them. Essentially, the insurer could have had an open ended liability, subject to the effect of limitation, to pay out under the policy if sanctions were ever lifted.

It’s a changing environment, and in domestic UK construction contracts, sanctions drafting seems to be cropping up, for example, in performance bonds. Inevitably, when it does, the “Guarantor” bank will require substantial discretion to refuse to pay out under a bond where there is any suspicion that trade or financial sanctions may be breached. Contractors, “beneficiaries” who may wish to call on a bond, and others affected by lenders’ requirements, need to reflect on how they deal with the risk involved.

For example, the sort of clause you might find in a performance bond could include something along the following lines:

“The Guarantor has no obligation to make any payment under, or otherwise to implement or process this Guarantee Bond if in the Guarantor’s reasonable opinion (i) in any transaction connected to or contemplated by the Building Contract there is any involvement by or connection with any person, entity, goods, services, country or government which is subject to any restrictions imposed by sanctions laws or regulations issued by the United States of America, European Union, United Nations, United Kingdom and / or (ii) to do so is likely to result in breach of applicable sanctions laws or regulations.”

Ultimately an “Employer” is likely to be left to deal with the risk and potential effect of sanctions drafting. Prior approval, by lenders and bondsman, of the parties involved in the project and the supply chain, might help in giving more certainty that claims under a bond would not be resisted.

And when considering the drafting of sanctions clauses, in view of “Mamacochet“, parties may also want to negotiate whether the application of sanctions would:

• extinguish contractual liability; or
• suspend contractual liability indefinitely subject to statutory limitation of claims; or
• suspend liability for claims to a longstop date, at which point all claims would be extinguished.

More generally, commercial organisations involved in international trade (for example, in the import of materials or services from abroad) should take stock of the implications of sanctions and the risk of mistakes. Anyone doing business abroad needs to ensure they have appropriate compliance systems in place to identify with whom they should and should not be doing business.

For further advice on sanctions law, challenging decisions, reporting and applying for exemptions and licences, please contact [email protected] and for construction legal advice please contact [email protected]