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You are here: BAILII >> Databases >> England and Wales High Court (Commercial Court) Decisions >> Banco San Juan Internacional Inc v Petroleos De Venezuela SA [2020] EWHC 2937 (Comm) (04 November 2020) URL: https://www.bailii.org/ew/cases/EWHC/Comm/2020/2937.html Cite as: [2020] EWHC 2937 (Comm) |
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OF ENGLAND AND WALES
COMMERCIAL COURT
QUEEN'S BENCH DIVISION
Rolls Building Fetter Lane, London, EC4A 1NL |
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B e f o r e :
____________________
BANCO SAN JUAN INTERNACIONAL INC | Claimant |
|
- and – |
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| PETRÓLEOS DE VENEZUELA S.A. |
Defendant |
____________________
Ali Malek QC and William Day (instructed by Gresham Legal) for the Defendant
Hearing date: 17 October 2020
Draft Judgment Sent to Parties: 29 October 2020
Judgment Approved
____________________
Crown Copyright ©
Mrs Justice Cockerill:
Introduction
incorporated
in Puerto Rico, against PDVSA, the Venezuelan state-owned oil and gas company. The first claim ("the 2016 Claim") is for roughly US$48 million
including
interest and is made pursuant to a credit agreement between BSJI as Lender and PDSVA as Borrower dated 23 March 2016 ("the 2016 Credit Agreement").
Sanctions,
which it said rendered such payment illegal in the place of performance.
sanctions:
"It appears to be, based upon what I have heard, that any argument by PDVSA that there is a US
sanctions
defence is extremely difficult as a matter of law, and extremely difficult as a matter of fact". However given the very recent instruction of a legal team for PDVSA and the lack of time available to them to prepare for a substantial hearing he was persuaded to adjourn the matter, saying: "The case is to be re-fixed with a half day estimate, because if there is anything in that executive order argument, as to which I have indicated I have the gravest doubts, it will either get off the ground and onto its legs in half a day or not at all".
Sanctions.
i) First, the terms of the relevant loan agreements, properly construed, have suspended its payment obligations on the imposition of relevant US
sanctions.
ii) Second, and alternatively, by reason of the rule in Ralli Bros, English law governed contracts are unenforceable where performance is prohibited in the place of performance, which in this case is the US.
iii) Third, and in the further alternative, Article 9(3) of Regulation No 593/2008/EC (the "Rome I Regulation") confers a discretion on the Court to apply mandatory overriding provisions of the law of the place of performance (here, US law) to a contract governed by another law (English law) and that this discretion should be exercised in this case.
The Background
sanctions
were thus a real prospect by the time that these contracts were concluded.
sanctions
upon PDVSA. The liability is accordingly an admitted liability of which part payment was made, post the crystallisation of a dispute, reducing the principal amount to that now claimed.
incurred
costs up to and
including
17 May 2020, the day before the date of issue, plus interest and costs to which I shall come in due course. The claim arises from the overdue principal amount of $39,548,555 drawn pursuant to the term loans and revolving credit facility agreed under the 2016 Credit Agreement. These drawings were made in 2016 and 2017. There were partial payments to reduce an indebtedness of in total some US$170 million to this level. These were made between 2016 and 2018; some before and some after an event of default was declared.
incurred
costs up to and
including
17 May 2020, the day before the date of issue, plus interest and costs. The claim arises from the amount of $519,383,594 drawn under the 2017 Credit Agreement, pursuant to utilisation requests under two terms loans provided for by the 2017 Credit Agreement. The amount drawn was paid by BSJI into certain trust accounts in July 2017 to fund certain of PDVSA's projects.
increasingly
more stringent
sanctions
against Venezuelan interests,
including
PDVSA. PDVSA contends that these were intended to be crippling and to bring about regime change. Before me they were described as a facet of "economic warfare directed not just against the Venezuelan government but also against PDVSA".
sanctions
relied on in PDVSA's Defence (the "US
Sanctions")
comprise the executive orders exhibited to the Defence (the "Executive Orders"), as regulated and administered by the Venezuela
Sanctions
Regulations, 31 CFR Part 591 (the "VSR"). The main events relied on are:
i) Executive Order 13692 was expanded to target numerous other Venezuelan individuals. The first extension was to cover members of the Venezuelan Supreme Court, on 18 May 2017, shortly after the conclusion of the 2017 Credit Agreement.
ii) On 24 August 2017, President Trump issued Executive Order 13808. Among other things, this prohibited US persons from dealing in Venezuelan sovereign debt, providing new funds to PDVSA and having anything to do with dividend payments or distributions of profit from Venezuelan state-owned companies (like PDVSA) directed to the Venezuelan government.
iii) On 20 September 2017, the US Treasury issued advice strongly discouraging US financial institutions from providing banking services to PDVSA and other Venezuelan interests.
iv) On 19 March 2018, President Trump issued Executive Order 13827. This targeted Venezuelan sovereign digital currencies, digital coins and digital tokens.
v) On 21 May 2018, President Trump issued Executive Order 13835. This further targeted the secondary market in Venezuelan sovereign debt.
vi) On 1 November 2018, President Trump issued Executive Order 13850. This Executive Order is one of the two principally relied on. It implemented blocking
sanctions
against persons operating in the gold sector of the Venezuelan economy, and created an executive power for further sectors of the Venezuelan economy also to be blocked in due course.
vii) On 23 January 2019, President Trump issued a statement recognising Mr Guaidó as interim president of Venezuela in the place of Mr Maduro. Thereafter, further and significantly tougher
sanctions
were quickly issued against PDVSA and other Venezuela interests, as set out below.
viii) On 25 January 2019, President Trump issued Executive Order 13857. Among other things, this amended the definition of Government of Venezuela to
include
PDVSA. As a result, PDVSA's issued debt became subject to the same restrictions as the Venezuelan government itself.
ix) On 28 January 2019, the US Treasury Secretary widened the scope of Executive Order 13850 to
include
the Venezuelan oil sector,
including
PDVSA. Subsequent designations were made under Executive Order 13850 also to cover the Venezuelan financial sector on 22 March 2019 and defence and security sector on 9 May 2019.
x) On 3 May 2019, the US Treasury issued further advice strongly discouraging US financial institutions from providing banking services to PDVSA and other Venezuelan interests.
xi) On 5 August 2019, President Trump issued Executive Order 13884. This is the second enactment primarily relied upon. It is a general blocking
sanction
freezing all property held by the Venezuelan government,
including
PDVSA.
sanctions.
PDVSA's US$ accounts within Venezuela are held at
Banco
Bandes, which is also
sanctioned.
Banco
Bandes cannot make any transfer to the Stipulated Account. Substantial funds outside of Venezuela have been frozen.
i) In Portugal, $1.3 billion is held, frozen, at Novo
Banco
in accounts held by PDVSA and related companies. Previously the Novo
Banco
accounts were used in order to service repayments under the Credit Agreements into the Stipulated Account, but never by way of direct payment; they relied on a correspondent bank in New York: previously Novo
Banco's
New York branch and latterly JP Morgan. Those correspondent banks will no longer act.
ii) In Russia, PDVSA has accounts at Gazprombank and Evrofinance Mosnarbank. There is no evidence that either bank would be able to make a payment directly to the Stipulated Account rather than relying on correspondent banks in the US; indeed, Evrofinance Mosnarbank itself is a
sanctioned
entity.
iii) PDVSA has an account with Zuma Bank in Dominica. This relies on UK correspondent banks.
The principles
including
US law – is a question of fact in English courts and a dispute as to the content of applicable foreign law is quintessentially a matter for trial not interlocutory applications. It quotes Professor Fentiman: Foreign Law in English Courts: Pleading, Proof and Choice of Law (1998) p 185:
"the abbreviated nature of the proceedings might make it inappropriate to determine foreign law at all. The default rule [assuming foreign law to be the same as English law] has not been applied where summary judgment was sought, the proper course in such cases being to allow a defendant to contest the point at trial".
The relevant parts of the US
Sanctions
i) Executive Order 13850 is dated 1 November 2018. Its relevant text is reproduced as an appendix to this judgment. It originally applied to the gold sector but was extended to "the oil sector of the Venezuelan economy" on 28 January 2019. The oil sector of Venezuela is, for all intents and purposes, PDVSA. PDVSA contends that the US government announcements which accompanied this sectoral determination made clear that PDVSA was the express target of this extension of Executive Order 13850.
ii) It blocks "All property and interests in property that are in the United States, that hereafter come within the United States, or that are or hereafter come within the possession or control of any United States person" of a person determined to operate in the oil sector of the Venezuelan economy.
iii) It also covers receipt of funds from any such person.
iv) Executive Order 13884 came into force on 5 August 2019. It was expressed to apply to the Government of Venezuela which is defined at section 6(d) to
include
PDVSA.
v) It covers receipt of funds in the US from PDVSA from 5 August 2019.
vi) In both a United States person is defined as "any United States citizen, permanent resident alien, entity organised under the laws of the United States or any jurisdiction within the United States (
including
foreign branches), or any person within the United States".
vii) Property is defined to
include
money.
"a) Any transaction that evades or avoids, has the purpose of evading or avoiding, causes a violation of, or attempts to violate any of the prohibitions set forth in this order is prohibited.
(b) Any conspiracy formed to violate any of the prohibitions set forth in this order is prohibited."
including
BSJI, the New York Federal Reserve Bank, and any correspondent bank
incorporated
and operating in the US) processing instructions from or on behalf of PDVSA directing payment to BSJI.
sanctions
make it impracticable or impossible to pay) was a different one to the one which I have to apply. I conclude that I need not concern myself with it further.
Section 7.03
"Sanctions.
[PDVSA] will not repay Loans with the proceeds of
(a) business activities that are or which become subject tosanctions,
restrictions or embargoes imposed by the Office of Foreign Asset Control of the U.S. Treasury Department, the United Nations Security Council and the U.S. Department of Commerce, the U.S. Department of State [sic] (collectively, '
Sanctions');
or
(b) business activities in/with a country or territory that is the subject ofSanctions
(
including,
without limitation, Cuba, Iran, North Korea, Sudan and Syria) ('
Sanctioned
Country')".
sanctions
(
Sanctioned
Business); and (ii) business activities in or with a country subject to US
sanctions
(
Sanctioned
Country). PDVSA's case is that (i) all of PDVSA's business activities are
sanctioned;
and (ii) all of PDVSA's proceeds are ultimately derived from its business in a
Sanctioned
Country, namely Venezuela.
include
amounts of which a demand can be made under Section 3.04(c). These payment obligations are expressly defined. No implied obligation is required, and none is permitted contrary to those express terms.
sanctions
described above.
included
for convenience of reference only and shall not affect the interpretation" of the Credit Agreements: see Section 1.02(c). That should be respected as a matter of party autonomy: Gregory Projects (Halifax) Ltd v Tenpin (Halifax) Ltd [2009] EWHC 2639 (Ch) [28] (Lewison J).
sanctions
clause in that case was in an insurance policy, and was triggered by US Iranian
sanctions.
Teare J held that the clause meant that "the insurer is not liable to pay a claim where payment would be prohibited under one of the named systems of law and thus 'would expose' the [underwriters] to a
sanction"
(at [50]). Teare J held that this suspended the payment obligation (rather than extinguishing it, as the underwriters contended). He dismissed the objection from the underwriters that this was uncommercial (at [78]):
"I see no difficulty in staying the claim (during the period when liability to pay is suspended) and then lifting the stay (when thesanctions
are relaxed) so as to permit the claim to be paid. It is said that this is both undesirable and uncommercial. I disagree. In my view, it would be a sensible way of managing the claim, where payment is, for the time being, prohibited."
sanctions".
Discussion: Clause 7.03
i) The Mamanchochet case was one concerning a clause in a marine insurance policy which expressly provided that a reinsurer should not be liable to pay a claim "to the extent that …payment of such claim …would expose that insurer to any
sanction,
prohibition or restriction under …the trade or economic
sanctions,
laws, or regulations…". That is plainly entirely different – the non-liability to pay is express. It was also a question about whether the insurers effectively went off risk or there was a suspension, so there was no issue about a liability to pay at that point.
ii) Lamesa similarly concerned a case where the clause expressly provided for non-payment. There Clause 9.1 "provided that [Cynergy] shall not be in default if during the 14 days after [Lamesa's] notice it satisfies [Lamesa] that such sums were not paid in order to comply with any mandatory provision of law, regulation or order of any court of competent jurisdiction." So there was an express exception to the default provision. That is obviously very unlike the present case - in particular the wording is expressly part of the payment obligation. Further one can see in the judgment that there were good reasons, as the Court of Appeal found, for that provision in circumstances where the drafters of the contract knew that the Blocking Regulation regarded US secondary
sanctions
legislation as imposing a "requirement or prohibition" with which EU parties were otherwise required to "comply".
sanctions.
These authorities are simply decisions on their (very different) facts. PDVSA therefore fails to establish a key building block in its argument.
sanctioned
activities.
including
under the indemnities under the Credit Agreement) if the covenant is breached.
inconsistent
with the factual matrix. Under Section 6 ("Affirmative Covenants") the contract puts on PDVSA the obligation to maintain in full force all approvals, consents and Licences for performance of obligations under the loan documents. This is another indication, consistent with that taken from Clause 3.02, that the parties did not solve the problem of impending US
Sanctions
by giving PDVSA a suspension mechanism. On the contrary, the obligation to obtain all licences necessary for its performance (when there was no licence needed at the time of the contract) indicates that the obligation to pay was envisaged to continue and to put PDVSA under an obligation to do what it could to get approvals or licences. Like the acceleration provision, this points in entirely the opposite direction to PDVSA's argument.
sanctioned
"business activities". Also it would be problematic if it applied to some but not all business activities. There are in addition issues about what would happen regarding pre-
sanction
proceeds leading to questions as to how it would be triggered.
Sanctions
activate Section 7.03 at all. I do not have to decide this point. However it seems to me that there are considerable doubts as to whether they do, for three reasons:
i) First, the US
sanctions
against Venezuela were not country-wide at the time the Credit Agreements were executed or even today (as in the case of Cuba, Iran, North Korea, Sudan and Syria at the time the agreements were entered into) so as to activate Section 7.03(b);
ii) Secondly, under Section 7.03(a) the "business activities" must be the subject of
sanctions,
which is very arguably not the case in respect of the US
Sanctions
on which PDVSA relies;
iii) Thirdly, PDVSA has historical assets derived from its activities before the PDVSA-related
sanctions
came into effect,
including
the amount of $1.3 billion held in Portugal. As such, even if Section 7.03(a) were engaged, it is hard to see how it would apply to historical assets.
Ralli Bros
"…the Court will not enforce a contract if the performance of that contract necessarily requires an act in a friendly foreign state which would be unlawful by the law of that state. The rule does not require the parties to intend the illegality or even to be aware of the fact that what they have bargained for will involve an act unlawful by the place of performance. It simply requires it to be established that their bargain necessarily involves such an act."
sanctions
against Libya. No similar UK
sanctions
existed. The claimant sought to withdraw $131 million from its dollar account with the defendant bank in London. The defendant refused, citing the US
sanctions.
Staughton J held that, for the most part, the defendant was not excused by the US
sanctions
from making payment. The claimant had only made a demand for performance in London, and the contract governing the London account was governed by English law. Payment to the claimant in cash or some forms of bank transfer in London did not necessarily involve any performance in New York, since those means of withdrawal could be effected without any part of the transaction taking place in the US. Staughton J indicated that the exception was the bank's obligation to effect a withdrawal by bankers' draft. That would necessarily have required clearing in New York, and therefore fell within the scope of Ralli Bros.
"Payments Generally. … Each payment by the Borrower shall be made in immediately available funds not later than 11.00 a.m. (San
![]()
Juan
Puerto Rico time) on the date specified herein in Dollars in immediately available funds pursuant to the wire transfer instructions attached hereto as Exhibit C".
"Lender's Wire Transfer Instructions
Name:Banco
![]()
San
![]()
Juan
International,
Inc
![]()
Address: 165 Avenida Ponce de Leon,San
![]()
Juan,
Puerto Rico 00917
ABA/Routing No: 0215-0228-6
Credit to account 10001014."
sanctions
made the payment illegal, arguing that it is wrong on the face of the US
Sanctions
to say that PDVSA cannot pay and BSJI cannot receive in the Stipulated Account: PDVSA is not a US person, and so it is not prohibited from initiating a payment so long as it is clear to the US bank (intermediary and recipient) that PDVSA is the remitter, and BSJI is not prohibited from receipt provided the receipt is held in a blocked account. It also took issue with the relevance of the question of the correspondent bank on the basis that difficulties that arise other than under the law of the contract or the law of the place of its performance are irrelevant as a matter of law.
sanctions
are qualified. In particular, each Executive Order provides that the prohibitions set out therein "apply except to the extent provided by statutes, or in regulations, orders, directives, or licenses that may be issued pursuant to this order". General and specific licences are available from OFAC.
Sanctions
-
including
in relation to bonds issued by PDVSA. BSJI also adduces evidence that OFAC has granted licences for transfers from a blocked account with one bank to a blocked account with a different bank.
Discussion
Ralli Bros and its limits
"the English law of conflicts excuses performance of an obligation where performance would be illegal by the law of the country where the obligation is to be performed but does not excuse performance where, although performance of the obligation is not illegal in the country where performance is to take place, steps necessary to enable a party to perform its obligation would be illegal in the country where such steps would be taken."
"The Turkish buyers might have had money anywhere in the world which they could use to open a letter of credit with a United States or West European bank. In fact it would seem that they only had money in Turkey, or at any rate needed to comply with Turkish exchange control regulations if they were to use any money they may have had outside Turkey. But that was no defence, as money or a permit was only needed to equip themselves for performance, and not for performance itself."
Licences and "equipping to perform"
Sanctions
– and that it has done so in relation to bonds issued by PDVSA. I was taken to one example. PDVSA had issued an 8.5% bond. By "General Licence 5D" dated 15 July 2020 the US Treasury stated:
"Except as provided in paragraph (b) of this general license, on or after October 20, 2020, all transactions related to, the provision of financing for, and other dealings in the Petróleos de Venezuela, S.A. 2020 8.5 Percent Bond that would be prohibited by Subsection l(a)(iii) of Executive Order (E.O.) 13835 of May 21, 2018, as amended by E.O. 13857 of January 25, 2019, andincorporated
into the Venezuela
Sanctions
Regulations, 31 C.F.R. part 591 (the VSR), are authorized."
sanctions
being imposed, to be paid by the Venezuelan entities with which they had contracted.
Sanctions
orders, lawful performance under US law is therefore possible. This too seems to be common ground. The real issue between the parties is whose responsibility it was to gain such a licence, with PDVSA contending that it would be worse than useless for them to make such an application.
"It is conceded that they could not deal in the goods without a licence. What, then, was their duty? Their duty was to take the steps necessary to enable them to perform the contract … namely to apply for a licence."
incidence
of the duty in sale of goods cases has been discussed in a number of cases, and apparently may turn on questions such as the particular qualifications necessary to make the application (Peter Cassidy Seed Co v Osuustukkukauppa [1957] 1 WLR 273, where the application could only be made by a member of the Finnish Ant Egg Exporters Association) or the possession of particular knowledge needed to make the application (AV Pound v MW Hardy [1956] AC 588). Those cases seem to offer no very great assistance, and indeed I was not actually referred to them by either side.
sanctions
regime in place as making payment illegal and there arose an argument as to which party should have applied for a licence under the domestic regulations. Article 12 of those regulations stated that no claims would be satisfied if made by the LIA, and in Article 12(2) placed on the LIA the burden of showing that the claim was not prohibited. At [25], Moore-Bick LJ said:
"If a person has promised to perform a certain obligation, whether it be to pay money or deliver goods, and fails to do so, the burden is on him to show that he was prevented from doing so by some cause for which he is not responsible. In this case, therefore, but for article 12(2), it would have been for Mr. Maud to show that the imposition ofsanctions
prevented him from performing his obligation and in order to do so he would have had to show that he could not have obtained the necessary licence from the Treasury. That was not a burden that he ever attempted to discharge".
sanctions
regime (which had been given effect to as English law by UK regulations) reversed the contractual onus, specifically requiring the creditor to apply for a licence and prohibiting a demand by the creditor absent a licence to make that demand. But the judgment of Moore-Bick LJ, is clear that "but for" that specific statutory reversal of the contractual onus, the debtor's duty would be to apply for a licence. Had it not been for Article 12(2) Mr Maud would have been unable to assert that his payment obligation under the guarantee was suspended on the ground of impossibility because having failed to apply for a licence, he could not say he was bound to be refused a licence. Moreover Moore-Bick LJ states that this is the position as a matter of general principle.
Sanctions
prevent it from performing its payment obligations.
i) Section 6.05 of each Credit Agreement is an affirmative covenant which obliges PDVSA to maintain and, a fortiori apply, for any licence from a "Governmental Authority which may be necessary…for the performance of its obligations under the Loan Documents".
ii) The Credit Agreements define "Governmental Authority" as "any federal, state or local court or governmental agency, ministry, authority, instrumentality or regulatory body of any jurisdiction or territory".
sanctions,
not its targets" lacks any substance. What PDVSA would need is a contractual or statutory reversal of the burden; it has no such reversal to offer.
Sanctions
would, absent a licence, mean that payment was illegal at the place of performance. BSJI is entitled to run alternative cases, and PDVSA, which positively asserts the illegality at the place of performance, cannot say that absence of illegality excused it from seeking a licence.
sanctions
prima facie rendered the performance of PDVSA's payment obligations necessarily illegal at the place of performance, PDVSA cannot avail itself of the defence because it has failed to show that had it discharged its obligation to apply for a licence, that application would have failed.
Parenthesis: Ralli Bros and prohibition
sanctions
for PDVSA (a non-US entity based outside the US) to make payment, in the sense of taking the steps it would need to take to make the payment to BSJI in the Stipulated Account (or any other account). Mr Malek tried to persuade me that if it was illegal for BSJI to receive the payment it must be illegal for PDVSA to make it ("If receipt is prohibited, the necessary corollary is that payment is prohibited"), but that seems to be an argument entirely lacking in basis.
"All property and interests in property that are in the United States, that hereafter come within the United States, or that are or hereafter come within the possession or control of any United States person of [PDVSA] are blocked and may not be transferred, paid, exported, withdrawn or otherwise dealt in."
i) PDVSA's evidence is that it has a current banking relationship with Zuma Bank, a non-US bank, which has correspondent banking relationships with Lloyds Bank plc and Dinosaur Merchant Bank Limited, two UK banks, who have previously made payments to FRBNY instructed by PDVSA for BSJI.
ii) There seems to be no reason why it is legally impossible, under either English or US law, for PDVSA to agree a new mandate with any bank anywhere in the world capable of initiating a transfer to FRBNY.
iii) It was common ground that PDVSA is a going concern and now, transacting primarily in euros. Thus there would appear to be scope for PDVSA to sell euros to fund a purchase of dollars from a non-US financial institution to fund the required transfer to BSJI.
Article (9)(3) of Rome I
"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. In considering whether to give effect to those provisions, regard shall be had to their nature and purpose and to the consequences of their application or non-application".
sanctions
ought to be regarded as part of the order public of US law. They are a central component of US foreign policy and its political and economic aims as regards Venezuela. The terms of the Executive Orders themselves make clear that they are reactions to perceived political and human rights injustices in Venezuela and describe this as "an unusual and extraordinary threat to the national security and foreign policy of the United States": see e.g. Executive Order 13692.
Discussion
2017 Claim: The alleged Penalty
"Compensation for Losses. Upon demand of Lender from time to time, Borrower shall promptly compensate Lender for and hold Lender harmless from any loss, cost or expenseincurred
by it as a result of:
(a) any payment or prepayment of a Loan on a day other than in accordance with Section 2.04 (whether voluntary, mandatory, automatic, by reason of acceleration or otherwise)…
(c) the loss of anticipated profits equal to the Present Value of all fees and interest payable to [BSJI] through the Final Maturity Date of each Loan".
i) "Final Maturity Date" means "in the case of either Loan, the date on which the final payment of principal and interest is due thereunder, which shall be the date which is forty-eight (48) months after the date on which Disbursement of such Loan occurs"; and
ii) "Present Value" means "on any date of determination, the present value as determined in a commercially reasonable manner by [BSJI] as of such date of determination of the future cash flows referenced in the calculation, discounted using the rate equal to the one year U.S. Treasury Bill rate".
including
the Final Maturity Date (the "Demand Letter").
including
Cooden Engineering Co Ltd v Stanford [1953] 1 QB 86 (CA), Bridge v Campbell Discount Co Ltd [1962] AC 600 (HL) and Financings Ltd v Baldock [1963] 2 QB 104 (CA) have ruled that a provision entitling the creditor to a sum of two-thirds minimum of all future payments due under a contract on contractual termination was a penalty and says that those are undisturbed by the decision in Makdessi.
Discussion
"[There is] no reason in principle why a contractual provision the effect of which was toincrease
the consideration payable under an executory contract upon the happening of a default should be struck down as a penalty if the
increase
could in the circumstances be explained as commercially justifiable, provided always that its dominant purpose was not to deter the other party from breach."
"The true test is whether the impugned provision is a secondary obligation which imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation."
"What is necessary in each case is to consider, first, whether any (and if so what) legitimate business interest is served and protected by the clause, and, second, whether, assuming such an interest to exist, the provision made for the interest is nevertheless in the circumstances extravagant, exorbitant or unconscionable. In judging what is extravagant, exorbitant or unconscionable, I consider (despite contrary expressions of view) that the extent to which the parties were negotiating at arm's length on the basis of legal advice and had every opportunity to appreciate what they were agreeing must at least be a relevant factor."
"[T]he correct test for a penalty is whether the sum or remedy stipulated as a consequence of a breach of contract is exorbitant or unconscionable when regard is had to the innocent party's interest in the performance of the contract."
included
in a contract agreed to by sophisticated commercial parties after much negotiation and legal advice. This is exactly the kind of case where the conclusion that a provision is in its nature penal will be reached with more caution. As Lords Neuberger and Sumption said at [35]:
"In a negotiated contract between properly advised parties of comparable bargaining power, the strong initial presumption must be that the parties themselves are the best judges of what is legitimate in a provision dealing with the consequences of breach."
"Modern contracts contain a very great variety of contingent obligations. Many of them are contingent on the way that the parties choose to perform the contract. There are provisions for termination on insolvency, contractual payments due on the exercise of an option to terminate, break-fees chargeable on the early repayment of a loan or the closing out of futures contracts in the financial or commodity markets, …, to take only some of the more familiar types of clause. The potential assimilation of all of these to clauses imposing penal remedies for breach of contract would represent the expansion of the courts' supervisory jurisdiction into a new territory of uncertain boundaries, which has hitherto been treated as wholly governed by mutual agreement."
"Clearly a clause which provided that in the event of any breach of contract a long term loan would immediately become repayable and that interest thereon for the full term would not only be still payable but would be payable at once would constitute a penalty as being a payment of money stipulated as in terrorem of the offending party'"
income
on the two Term Loans. So assessed, the purpose of the Liquidated Damages Clause is plainly not to put PDVSA in terrorem of default. BSJI plainly has a legitimate interest in lost loan
income,
and the effect of Section 3.04(c) is plainly not disproportionate to that interest.
Costs
"The Borrower shall pay…(ii) all reasonable out of pocket expensesincurred
by [the] Lender and its Affiliates (
including
the reasonable and documented fees, charges and disbursements of any counsel for [the] Lender and its Affiliates) in connection with the enforcement or protection of its rights (A) in connection with this Agreement".
incurred
in the enforcement of a contractual right, there is a presumption that the costs
incurred
are reasonable.
incurred
and confirms that all such fees are at standard market rates. The amounts claimed are summarised in the table below. BSJI says that they are all are proportionate to the sums claimed in the substantive action:
2016 2017 Allen & Overy LLP $303,867 $303,867 DLA Piper LLP $70,403 $70,404 Holland and Knight LLP $32,100 $32,101 Maples $21,926 $43,852 Servulo & Associados $17,976 $17,976 Shutts & Bowen LLP $293,101 $250,208 Winston & Strawn LLP $116,496 $116,496
Discussion
inconceivable
that, even on the indemnity basis, there might be an element of unreasonableness which would fall outside of the ambit of the contractual entitlement. A costs judge will be best equipped to deal with the question of the level of detail which is appropriate, bearing in mind the question of privilege.
SANCTIONS
(1) In Executive Order 13692 of President Barack Obama, dated 8 March 2015:
"I, BARACK OBAMA, President of the United States of America, find that the situation in Venezuela,…constitutes an unusual and extraordinary threat to the national security and foreign policy of the United States, and I hereby declare a national emergency to deal with that threat. I hereby order:
Section 1. (a) All property and interests in property that are in the United States, that hereafter come within the United States, or that are or hereafter come within the possession or control of any United States person of the following persons are blocked and may not be transferred, paid, exported, withdrawn or otherwise dealt in…
(i) …the persons listed in the Annex to this order [which persons did notincluded
PDVSA]
…
(c) The prohibitions in subsection (a) of this section apply except to the extent provided by statutes, or in regulations, orders, directives, or licenses that may be issued pursuant to this order, and notwithstanding any contract entered into or any license or permit granted prior to the effective date of this order…
…
Sec. 4. The prohibitions in section 1 of this order
include
but are not limited to:
…
(b) the receipt of…funds from any such person…
…
Sec. 6. For the purposes of this order:
…
(c) …"United States person" means any United States citizen, permanent resident alien, entity organised under the laws of the United States or any jurisdiction within the United States (
including
foreign branches), or any person in the United States;
(d)… "Government of Venezuela" means the Government of Venezuela, any political subdivision, agency, or instrumentality thereof,
including
the Central Bank of Venezuela, and any person owned or controlled by, or acting for or on behalf of, the Government of Venezuela.
…
Sec. 13. This order is effective at 12:01 am eastern daylight time on March 9, 2015."
(2) In Executive Order 13808 of President Donald J Trump, dated 24 August 2017:
"I, DONALD J. TRUMP, President of the United States of America, in order to take additional steps with respect to the national emergency declared in Executive Order 13692 of March 8, 2015,…hereby order as follows:
Section 1. (a) All transactions related to, provision of financing for, and other dealings in the following by a United States person or within the United State are prohibited:
(i) new debt with a maturity greater than 90 days of Petroleos de Venezuela S.A. (PdVSA);
(ii) new debt with a maturity greater than 30 days, or new equity, of the Government of Venezuela, other than debt of PdVSA covered by subsection (a)(i) of this section;
(iii) bonds issued by the Government of Venezuela prior to the effective date of this order; or
(iv) dividend payments or other distributions of profits to the Government of Venezuela from any entity owned or controlled, directly or indirectly, by the Government of Venezuela.
(b) The purchase, directly or indirectly, by a United States person or within the United States, of securities from the Government of Venezuela, other than securities qualifying as new debt with a maturity of less than or equal to 90 or 30 days as covered by subsections (a)(i) or (a)(ii) of this section, respectively, is prohibited.
(c) The prohibitions in subsections (a) and (b) apply except to the extent provided by statutes, or in regulations, orders, directives, or licenses that may be issued pursuant to this order, and notwithstanding any contract entered into or any license granted before the effective date of this order.
…
Sec 3. For the purposes of this order:
…
(c) …"United States person" means any United States citizen, permanent resident alien, entity organised under the laws of the United States or any jurisdiction within the United States (
including
foreign branches), or any person in the United States; and
(d)… "Government of Venezuela" means the Government of Venezuela, any political subdivision, agency, or instrumentality thereof,
including
the Central Bank of Venezuela and PdVSA, and any person owned or controlled by, or acting for or on behalf of, the Government of Venezuela.
…
Sec. 7. This order is effective at 12:01am eastern daylight time on August 25, 2017."
(3) In Executive Order 13827 of President Trump, dated 19 March 2018:
"I, DONALD J. TRUMP, President of the United States of America, in order to take additional steps with respect to the national emergency declared in Executive Order 13692 of March 8, 2015, and relied upon for additional steps taken in Executive Order 13808 of August 24, 2017…hereby order as follows:
Section 1. (a) All transactions related to, provision of financing for, and other dealings in, by a United States person or within the United States, any digital currency, digital coin, or digital token, that was issued by, for, or on behalf of the Government of Venezuela on or after January 9, 2018 are prohibited as of the effective date of this order.
(b) The prohibitions in subsection (a) of this section apply except to the extent provided by statutes, or in regulations, orders, directives, or licenses that may be issued pursuant to this order, and notwithstanding ay contract entered into or any license or permit granted before the effective date of this order.
…
Sec. 3. For the purposes of this order:
…
(c) …"United States person" means any United States citizen, permanent resident alien, entity organised under the laws of the United States or any jurisdiction within the United States (
including
foreign branches of such entities), or any person in the United States; and
(d)… "Government of Venezuela" means the Government of Venezuela, any political subdivision, agency, or instrumentality thereof,
including
the Central Bank of Venezuela and Petroleos de Venezuela, S.A. (PdVSA), and any person owned or controlled by, or acting for or on behalf of, the Government of Venezuela.
…
Sec. 7. This order is effective at 12:15 p.m. eastern daylight time on March 19, 2018."
(4) In Executive Order 13835 of President Trump, dated 21 May 2018:
"I, DONALD J. TRUMP, President of the United States of America, in order to take additional steps with respect to the national emergency declared in Executive Order 13692 of March 8, 2015, and relied upon for additional steps taken in Executive Order 13808 of August 24, 2017 and Executive Order 13827 of March 19, 2018,.…hereby order as follows:
Section. 1. (a) All transactions related to, provision of financing for, and other dealings in the following by a United States person or within the United States are prohibited:
(i) the purchase of any debt owed to the Government of Venezuela,including
accounts receivable;
(ii) any debt owed to the Government of Venezuela that is pledged as collateral after the effective date of this order,including
accounts receivable; and
(iii) the sale, transfer, assignment, or pledging as collateral by the Government of Venezuela of any equity interest in any entity in which the Government of Venezuela has a 50 percent or greater ownership interest.
(b) The prohibitions in subsection (a) of this section apply except to the extent provided by statutes, or in regulations, orders, directives or licenses that may be issued pursuant to this order, and notwithstanding any contract entered into or any license or permit granted before the effective date of this order.
…
Sec. 3. For the purposes of this order:
…
(c) …"United States person" means any United States citizen, permanent resident alien, entity organised under the laws of the United States or any jurisdiction within the United States (
including
foreign branches of such entities), or any person within the United States; and
(d)… "Government of Venezuela" means the Government of Venezuela, any political subdivision, agency, or instrumentality thereof,
including
the Central Bank of Venezuela and Petroleos de Venezuela, S.A. (PdVSA), and any person owned or controlled by, or acting for or on behalf of, the Government of Venezuela.
…
Sec. 6. This order is effective at 12:30pm eastern daylight time on May 21, 2018."
(5) In Executive Order 13850 of President Trump, dated 1 November 2018:
"I, DONALD J. TRUMP, President of the United States of America, in order to take additional steps with respect to the national emergency declared in Executive Order 13692 of March 8, 2015, and relied upon for additional steps taken in Executive Order 13808 of August 24, 2017, Executive Order 13827 of March 19, 2018, and Executive Order 13835 of May 21, 2018,.…hereby order as follows:
Section 1. (a) All property and interests in property that are in the United States, that hereafter come within the United States, or that are or hereafter come within the possession or control of any United States person of the following persons are blocked and may not be transferred, paid, exported, withdrawn or otherwise dealt in: any person determined by the Secretary of the Treasury, in consultation with the Secretary of State:
(i) to operate in the gold sector of the Venezuelan economy or in any other sector of the Venezuelan economy as may be determined by the Secretary of the Treasury, in consultation with the Secretary of State…
…
(b) The prohibitions in subsection (a) of this section apply except to the extent provided by statutes, or in regulations, orders, directives or licenses that may be issued pursuant to this order, and notwithstanding any contract entered into or any license or permit granted prior to the date of this order.
…
Sec. 6. For the purposes of this order:
…
(c) …"United States person" means any United States citizen, permanent resident alien, entity organised under the laws of the United States or any jurisdiction within the United States (
including
foreign branches), or any person within the United States;
(d)… "Government of Venezuela" means the Government of Venezuela, any political subdivision, agency, or instrumentality thereof,
including
the Central Bank of Venezuela, and any person owned or controlled by, or acting for or on behalf of, the Government of Venezuela."
(6) In Executive Order 13857 of President Trump, dated 25 January 2019:
" I, DONALD J. TRUMP, President of the United States of America, in order to take additional steps with respect to the national emergency declared in Executive Order 13692 of March 8, 2015, and relied upon for additional steps taken in Executive Order 13808 of August 24, 2017, Executive Order 13827 of March 19, 2018, Executive Order 13835 of May 21, 2018, and Executive Order 13850 of November 1, 2018,.…hereby order:
Section 1. (a) Subsection (d) of Section 6 of Executive Order 13692, subsection (d) of section 3 of Executive Order 13808, subsection (d) of section 3 of Executive Order 13827, subsection (d) of section 3 of Executive Order 13835, and subsection (d) of section 6 of Executive Order 13850, are hereby amended to read as follows:
"(d) the term "Government of Venezuela"
includes
… the Central Bank of Venezuela and Petroleos de Venezuela S.A. (PDVSA)…"."
(7) In the Determination of US Secretary of the Treasury, Steven T. Mnuchin, dated 28 January 2019 (the "Sectoral Determination"):
"To further address the extraordinary threat to the national security and foreign policy of the United States described in E.O. 13850, and in consultation with the Secretary of State, I hereby determine that section 1(a)(i) shall apply to the oil sector of the Venezuelan economy."
(8) In Executive Order 13884 of President Trump, dated 5 August 2019:
"I, DONALD J. TRUMP, President of the United States of America, in order to take additional steps with respect to the national emergency declared in Executive Order 13692 of March 8, 2015,…hereby order:
Section 1. (a) All property and interests in property of the Government of Venezuela that are in the United States, that hereafter come within the United States, or that are or hereafter come within the possession or control of any United States person are blocked and may not be transferred, paid, exported, withdrawn, or otherwise dealt in…
…
(c) The prohibitions in subsections (a)-(b) of this section apply except to the extent provided by statutes, or in regulations, orders, directives, or licenses that may be issued pursuant to this order, and notwithstanding any contract entered into or any license or permit granted prior to the effective date of this order.
…
Sec. 3. The prohibitions in section 1 of this order
include:
…
(b) the receipt of…funds from any such person…
…
Sec. 4. (a) Any transaction that evades or avoids, has the purpose of evading or avoiding, causes a violation of, or attempts to violate any of the prohibitions set forth in this order is prohibited.
(b) Any conspiracy formed to violate any of the prohibitions set forth in this order is prohibited.
…
Sec. 6. For the purposes of this order:
…
(c) …"United States person" means any United States citizen, permanent resident alien, entity organised under the laws of the United States or any jurisdiction within the United States (
including
foreign branches), or any person within the United States; and
(d)…"Government of Venezuela"
includes
the state and Government of Venezuela, any political subdivision, agency, or instrumentality thereof,
including
the Central Bank of Venezuela and Petroleos de Venezuela, S.A. (PdVSA),…
Sec.10. This order is effective at 9:00am eastern daylight time on August 5, 2019."
(1) §591.201 provides:
"All transactions prohibited pursuant to Executive Order 13692 of March 8, 2015, or any further Executive orders issued pursuant to the national emergency declared in Executive Order 13692, are prohibited pursuant to this part."
(2) §591.202, inter alia, states:
"(a) Any transfer after the effective date that is in violation of any provision of this part or of any regulation, order, directive, ruling, instruction, or license issued pursuant to this part, and that involves any property or interest in property blocked pursuant to §591.20, is null and void…
…
(c) Unless otherwise provided, a license or other authorisation issued by OFAC before, during, or after a transfer shall validate such transfer or make it enforceable to the same extent that it would be valid or enforceable but for the provisions of this part and any regulation, order, directive, ruling, instruction, or license issued pursuant to this part…
…
(e) Unless licensed pursuant to this part, any attachment, judgment, decree, lien, execution, garnishment, or other judicial process, is null and void with respect to any property and interests in property blocked pursuant to §591.201"
(3) §591.203, amongst other things, provides:
"(a) Except as provided in paragraphs (e) or (f) of this section, or as otherwise directed by OFAC, any U.S. person holding funds, such as currency, bank deposits, or liquidated financial obligations, subject to §591.201 shall hold or place such funds in a blocked interest-bearing account located in the United States…"
(4) The following definitional provisions apply:
(a) §591.301, which defines the terms "blocked account" and "blocked property" as:
"…any account or property subject to the prohibitions in §591.201 held in the name of a person whose property and interests in property are blocked pursuant to §591.201, or in which such person has an interest, and with respect to which payments, transfers, exportations, withdrawals, or other dealings may not be made or effected except pursuant to a license or other authorization from OFAC expressly authorizing such action."
(b) §591.306(a), which states the "the term license means any license or authorization contained in or issued pursuant to this part."
(c) §591.307, which defines "OFAC" as "the Department of the Treasury's Office of Foreign Assets Control."
(d) §591.310, which defines "transfer" as "any actual or purported act or transaction, whether or not evidenced in writing, and whether or not done or performed within the United States…".
(e) §591.311, which defines "United States" as "the United States, its territories and possessions, and all areas under the jurisdiction or authority thereof."
(f) §591.312, which defines "United States person or US person" as:
"…any United States citizen, permanent resident alien, entity organised under the laws of the United States or any jurisdiction within the United States (including
foreign branches), or any person in the United States;…"
(g) §591.313, which defines "US financial institution" as:
"…any US entity (including
its foreign branches) that is engaged in the business of accepting deposits, making, granting, transferring, holding, or brokering loans or credits, or purchasing or selling foreign exchange, securities, or commodity futures or options, or procuring purchasers and sellers thereof, as principal or agent. It
includes
depository institutions, banks, savings banks…"
(5) §591.403, inter alia, provides that:
"(a) Whenever a transaction licensed or authorized by or pursuant to this part results in the transfer of property (including any property interest) away from a person whose property and interests in property are blocked pursuant to §591.201, such property shall no longer be deemed to be property blocked pursuant to §591.201, unless there exists in the property another interest that is blocked pursuant to §591.201, the transfer of which has not been effected pursuant to licence or other authorization…"
(6) §591.407 states:
"Notwithstanding the existence of any general licence issued under this part or issued under an Executive order issued pursuant to the national emergency declared in E.O. 13692, the entry into a settlement agreement or the enforcement of any lien, judgment, arbitral award, decree, or other order through execution, garnishment, or other judicial process purporting to transfer or otherwise alter or affect property or interests in property blocked pursuant to §591.201, as referenced in §591.506(c), is prohibited unless authorised pursuant to a specific licence issued by OFAC pursuant to this part."
(7) §591.504, inter alia, provides:
"Any payment of funds or transfer of credit in which a person whose property and interests in property are blocked pursuant to §591.201 has any interest that comes within the possession or control of a US financial institution must be blocked in an account on the books of that financial institution. A transfer of funds or credits by a US financial institution between blocked accounts in its branches or offices is authorized, provided that no transfer is made from an account within the United States to an account held outside the United States, and further provided that a transfer from a blocked account may be made only to another blocked account held in the same name."