Introduction
When Russia invaded Ukraine in February 2022, the UK government responded with unprecedented financial sanctions. The Russia (Sanctions) (EU Exit) Regulation 2019 was amended repeatedly, creating lending prohibitions and asset freezes that reached deep into syndicated loan markets.1
The implications were not confined to public law or compliance teams. Banking and finance, structured lending, capital markets, restructuring and litigation practices were immediately engaged. In 2023 alone, UK arranged syndicated lending exceeded US$400 billion in aggregate volume, with London remaining one of the world’s principal centres for cross border loan origination.2
For a market of that scale, sanctions risk is not peripheral. It is capable of disrupting committed liquidity across multiple sectors, from energy and infrastructure to leveraged acquisitions. Banks therefore faced an acute dilemma. Committed facilities promise liquidity on demand. Fund the wrong borrower and risk criminal prosecution under regulation 78, carrying a maximum sentence of seven years.3
Refuse funding and face damages for breach of contract. The asymmetry between criminal exposure and contractual liability placed immediate pressure on documentation and risk allocation within syndicated structures.
English contract law, however, was not designed for rapidly shifting geopolitical prohibitions. Traditional illegality doctrine requires actual legal prohibition rather than anticipated regulatory risk. That insistence on certainty sits uneasily with sanctions regimes designed to operate through speed, opacity and deterrence.
This article examines how English law allocates sanctions risk in loan documentation. It considers whether anticipated sanctions risk discharges contractual obligations, whether US secondary sanctions affect English law facilities, and how modern drafting attempts to reconcile doctrinal rigidity with commercial reality.
The Sanctions Framework
The Sanctions and Anti-Money Laundering Act 2018 confers broad powers on Ministers to impose sanctions for foreign policy and national security purposes.4
Under that framework, the Russia Regulations prohibit UK persons from making loans to designated persons and from providing financial services to specified Russian state entities. The prohibitions apply globally to UK persons and territorially to persons acting within the United Kingdom. The extraterritorial reach materially widens exposure for internationally active lenders.
Designation may occur between signing and funding. A facility lawful at execution can become prohibited at drawdown. In revolving or multi tranche structures, that risk persists throughout the life of the agreement. The temporal volatility of sanctions therefore transforms compliance from a static assessment into a continuing transactional risk.
Criminal liability does not require intent. Knowledge or reasonable cause to suspect suffices.3
OFSI may also impose civil monetary penalties on a strict liability basis. The Financial Conduct Authority’s September 2023 review concluded that many firms exhibited “material weaknesses” in sanctions screening and governance, including over reliance on overseas group policies.5
Regulatory scrutiny of that intensity increases the litigation risk of funding decisions taken in marginal cases.
The result is structurally asymmetric exposure. Fund and risk prosecution. Refuse and risk damages. The statutory framework therefore exerts acute pressure on contractual allocation of sanctions risk within facility agreements.
When Does Illegality Discharge a Contract?
English law distinguishes between contracts illegal from inception and contracts rendered illegal by supervening events. In the latter case, frustration may discharge future obligations where performance becomes legally impossible. The threshold, however, is high. The law must prohibit what the contract requires, not merely render performance commercially unattractive.6
That doctrinal insistence on actual prohibition creates tension in a sanctions regime that frequently operates through anticipated or indirect exposure. Regulatory anxiety alone does not suffice.
Foreign illegality introduces further complexity. In Ralli Bros v Compania Naviera Sota y Aznar the Court of Appeal recognised that a contract may be unenforceable where performance would require an act unlawful at the place of performance.7
Yet the principle is narrow. English courts have consistently emphasised that preparatory or incidental difficulties in one jurisdiction do not necessarily render ultimate performance illegal.
The Court of Appeal’s decision in Celestial Aviation Services Ltd v UniCredit Bank AG illustrates this approach.8
Where sanctions impeded particular payment channels, the court emphasised that parties may define the mechanics and place of performance in their contract. If one route is blocked, alternatives may need to be explored. The practical consequence is uncertainty for lenders operating through multi jurisdictional correspondent banking chains.
The case law therefore offers limited comfort where compliance risk is anticipatory rather than absolute. That doctrinal gap has encouraged market participants to rely more heavily on express drafting than on frustration principles.
How Modern Loan Agreements Respond
Pre 2022 documentation typically contained orthodox illegality provisions, often based on Loan Market Association precedents. The burden lay on the invoking lender to demonstrate actual legal prohibition. That allocation mirrored traditional doctrine.9
Post 2022 drafting has hardened. Expanded sanctions representations require borrowers to confirm that they are not designated persons and are compliant with applicable sanctions laws. Ongoing covenants prohibit becoming designated or engaging in sanctionable transactions. These provisions transform sanctions compliance into a continuing condition of performance rather than a one off representation.
Enhanced illegality clauses distinguish between lender side and borrower side illegality. Where performance becomes unlawful for a particular lender, its commitment may be cancelled. Where the borrower becomes designated, acceleration of the entire facility may follow. This asymmetry reflects syndicate dynamics and bargaining power.10
Many facilities now require sanctions certificates as a condition precedent to utilisation and embed screening within drawdown mechanics. Documentation is therefore performing risk allocation work that traditional doctrine was never designed to undertake.
Three Unresolved Questions
First, does anticipated risk constitute illegality? In Seadrill Ghana Operations Ltd v Tullow Ghana Ltd the Commercial Court emphasised that illegality clauses require strict construction absent clear drafting.10
Absent express language, actual prohibition must be established. That approach preserves doctrinal coherence but leaves lenders exposed to binary risk.
Secondly, do US secondary sanctions affect English law facilities? Executive Order 14024 authorises designation of non US actors transacting with specified Russian sectors.11
As a matter of English private law, such measures do not automatically render performance illegal. They create exposure to potential future consequences rather than direct prohibition. Parties have responded with deemed illegality clauses that contractually recharacterise geopolitical risk as discharge.
Thirdly, can lenders refuse at will? In Lamesa Investments Ltd v Cynergy Bank Ltd the Court of Appeal confirmed that contractual discretions must be exercised honestly and consistently with commercial purpose.12
Discretion mitigates risk but remains subject to judicial supervision. Reflexive refusal without investigation may still attract liability.
Practical Implications
For lenders, precision drafting and contemporaneous documentation are essential. Clauses should address anticipated as well as actual illegality, and internal processes must generate an evidential record capable of withstanding scrutiny.
For borrowers, negotiation focuses on calibrating discretion. Knowledge qualifiers, objective standards for drawstop provisions and procedural safeguards around acceleration assume heightened importance in investment grade facilities.
The broader transformation is structural. Committed lending was historically concerned with credit allocation. In the contemporary sanctions environment it also functions as a mechanism for distributing regulatory risk across a syndicate.
Conclusion
The post 2022 sanctions landscape has tested the limits of orthodox contract doctrine. Supervening illegality principles developed in comparatively stable regulatory settings now operate within rapidly evolving, multi jurisdictional sanctions architectures.
Market participants have responded through expanded representations, ongoing covenants, enhanced illegality clauses and structured discretions. These innovations reallocate regulatory exposure contractually, but they do not eliminate uncertainty.
Committed lending is no longer merely a question of credit exposure. It is a mechanism for allocating regulatory risk in an era of sustained geopolitical intervention. Until appellate authority squarely addresses anticipated illegality in the sanctions context, documentation will continue to carry analytical weight that doctrine has not yet fully internalised.
Footnotes
1 Russia (Sanctions) (EU Exit) Regulations 2019 (SI 2019/855).
2 Refinitiv LPC, Global Syndicated Loans Review 2023 (January 2024).
3 Russia (Sanctions) (EU Exit) Regulations 2019, reg 78.
4 Sanctions and Anti-Money Laundering Act 2018.
5 Financial Conduct Authority, Assessment of UK Financial Services Firms’ Sanctions Systems and Controls (September 2023).
6 Davis Contractors Ltd v Fareham UDC [1956] AC 696 (HL).
7 Ralli Bros v Compania Naviera Sota y Aznar [1920] 2 KB 287 (CA).
8 Celestial Aviation Services Ltd v UniCredit Bank AG [2024] EWCA Civ 628.
9 Loan Market Association, Recommended Forms of Primary Documents (2023).
10 Seadrill Ghana Operations Ltd v Tullow Ghana Ltd [2018] EWHC 1640 (Comm).
11 Executive Order 14024 (15 April 2021, as amended 22 December 2023).
12 Lamesa Investments Ltd v Cynergy Bank Ltd [2020] EWCA Civ 821.
