In Banco San Juan Internacional Inc v Petróleos De Venezuela SA [2020] EWHC 2937 (Comm), the English High Court determined that PDVSA, a Venezuelan state-owned oil and gas company, could not rely on US sanctions to avoid paying US$86 million to a Puerto Rican bank. This judgment is an early win for the lender and offers welcome judicial discussion as to the principles underpinning when payment obligations may, or may not, be suspended or rendered impossible as a result of sanctions.

BSJI sought summary judgment in respect of two debt claims. The bank, an entity incorporated in Puerto Rico, applied for summary judgment in relation to two substantial debt claims brought against PDVSA in 2016 and 2017 pursuant to certain credit agreements. PDVSA put forward three alternative arguments as to why US sanctions suspended payment or made payment impossible. Each argument was rejected and summary judgment was granted.

PDVSA argued that the payment obligations were suspended under the terms of the credit agreements. Under the credit agreements, a clause provided that PDVSA would not repay the relevant loans with the proceeds of (i) US-sanctioned business activities, and (ii) business activities in or with a US-sanctioned country. PDVSA argued that all of its business activities were US-sanctioned, and all of its proceeds were ultimately derived from its business in a US-sanctioned country, namely Venezuela. Therefore, PDVSA considered that the effect of such terms (or their necessary implication) must be to suspend its payment obligations. Mrs Justice Cockerill DBE disagreed, determining that the clause was on its wording a negative covenant which gave the bank a right to refuse receipt and a right of recourse against PDVSA if breached, not a condition (precedent or subsequent) to any repayment obligation. The argument for PDVSA was also advanced as an implied term but Cockerill J did not accept this submission for several reasons, including that there was no basis for saying that such a reading of the term was normal and reasonable based on the authorities, and it would be in substance contrary to the express terms of the credit agreements. Cockerill J therefore concluded that the clause provided no basis for a suspension of the repayment obligations.

PDVSA argued that the agreements were unenforceable because performance was prohibited in the place of performance. PDVSA’s second argument relied on the rule in Ralli Bros v Compania Naviera Sota y Aznar [1], which provides that English law governed contracts are unenforceable where performance of that contract is prohibited by the law of the place of performance. PDVSA asserted that it could not perform in accordance with US law (the stipulated account for payment being with a bank in the US) because: (i) PDVSA could not pay into that account; (ii) the bank could not receive into that account; (iii) any payment by PDVSA would be blocked in the hands of a US correspondent bank; and (iv) PDVSA had no access to any correspondent bank, US or non-US, that might initiate the first stage of such a transfer. However, Cockerill J considered the line of authority put forward by the bank to be clear: only illegality at the place of performance can provide an excuse under the Ralli Bros doctrine, and the party relying on the doctrine will in general not be excused if they could have done something to bring about valid performance and failed to do so. Cockerill J noted that all the relevant US sanctions orders contained a dispensation provision which allowed disapplication if a licence were obtained by application to OFAC. It followed that lawful performance under US law was therefore possible and the real issue between the parties was whose responsibility it was to gain such a licence. Cockerill J determined that, in the absence of any provision to the contrary in the credit agreements, the burden was as a matter of law on PDVSA (as debtor and the party bound to perform) to obtain the necessary licence. There was also no statutory reversal of the contractual onus under the rule in Libyan Investment Authority v Maud [2], where the EU sanctions regime (given effect under UK regulations) specifically required the creditor to apply for a licence. Cockerill J added that, even if it were the case that the sanctions on their face rendered the performance of PDVSA’s repayment obligations illegal at the place of performance, PDVSA could not avail itself of that defence because it had failed to show that, had it discharged its obligation to apply for a licence, that application would have failed.    

PDVSA requested the Court exercise its discretion under Article 9(3) of the Rome I Regulation. PDVSA argued that the discretion under Article 9(3) of the Rome I Regulation [3], which 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, should be exercised in this case. Cockerill J determined that, given the Ralli Bros defence covers very similar ground and was prevented from applying given the position on the licence issue, it was not arguable that it would be appropriate to exercise the discretion in this case.

Irene Obahiagbon, Associate in London

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[1]    [1920] 2 KB 287 

[2]    [2016] EWCA Civ 788

[3]    Regulation No 593/2008/EC