Suspension, not discharge
The starting point is that English law will not order a party to do something unlawful. Where a sanction prohibits performance, the obligation is generally suspended for the period of the prohibition rather than extinguished, so that it revives if and when the sanction is lifted or a licence is obtained. That was the analysis in Mamancochet Mining Ltd v Aegis Managing Agency Ltd [2018] EWHC 2643 (Comm), where Teare J held that a clause excusing the insurer to the extent payment would 'expose' it to a sanction required that payment was actually prohibited, not merely risky, and that the effect was to suspend rather than discharge the liability.
This default - suspension - has real commercial consequences. The contract does not simply disappear; the parties remain bound and the obligation can return, sometimes after a long delay. That is why sanctions clauses should say expressly what happens during suspension and when, if ever, a party may walk away.
Frustration is hard to establish
Parties often hope that a sanction frustrates the contract, discharging both sides automatically. The courts are reluctant. In Melli Bank plc v Holbud Ltd [2013] EWHC 1506 (Comm), the argument that sanctions had frustrated the contract failed, because the affected party could have applied for a licence from HM Treasury and had not done so - the supervening event did not make performance impossible, only conditional on a licence.
The wider lesson is consistent with general frustration doctrine: a contract is not frustrated merely because performance has become illegal for a time or more difficult, if a lawful route (such as a licence) remains open. A party that wants to rely on sanctions usually has to show it pursued the available licence and was refused, not merely that the sanction existed.
Reading the sanctions clause
Where the contract contains an express sanctions clause, its wording controls. In Lamesa Investments Ltd v Cynergy Bank Ltd [2020] EWCA Civ 821, a loan agreement excused the borrower from paying where to do so would breach a 'mandatory provision of law', and the Court of Appeal held that US secondary sanctions could fall within that phrase, so that the borrower's payment obligation was suspended while the sanctions risk persisted. The case shows that a carefully-drafted clause can allocate sanctions risk effectively - and that the precise words matter.
Mamancochet, by contrast, shows the cost of imprecision: arguing about whether an insurer was 'exposed' to a sanction turned on whether 'expose' meant actual prohibition or mere risk. Drafters should define the trigger precisely - actual prohibition, the reasonable view of the party, or risk - because each produces a different allocation of risk.
The dollar-clearing trap and the broad reach of sanctions
A recurring trap is the US-dollar nexus. Even a contract between two non-US parties, governed by English law, can be caught by US sanctions if payment is in US dollars and clears through a US correspondent bank, because that clearing gives OFAC a jurisdictional hook. Parties who assume an English-law contract is beyond US reach are often wrong, and the safe course is to consider the currency of payment as part of the sanctions analysis.
The reach of sanctions over pre-existing obligations was confirmed at the highest level in Celestial Aviation Services Ltd v UniCredit Bank GmbH [2026] UKSC 10 (upholding the decision below at [2024] EWCA Civ 628). The Supreme Court held that the UK's Russia sanctions prohibited a confirming bank from paying under standby letters of credit, even though both the leases and the letters of credit predated the sanctions and the leases had been terminated before payment fell due - underscoring how broadly the prohibitions reach. The Court also confirmed that section 44 of the Sanctions and Anti-Money Laundering Act 2018 protects a party who does not pay in the reasonable belief that payment would breach sanctions, against later claims for the debt, interest and costs.
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Practical checklist
- Assume a sanction suspends rather than ends the obligation - and say expressly what happens during suspension.
- Do not rely on frustration; pursue any available licence and document the application and outcome (Melli Bank).
- Define the sanctions trigger precisely - actual prohibition, reasonable belief, or risk (contrast Lamesa and Mamancochet).
- Treat the currency of payment as part of the analysis - USD clearing can create a US nexus.
- Remember that sanctions can catch obligations under instruments agreed before the sanctions (Celestial [2026] UKSC 10).
- For UK-law debts, consider the section 44 SAMLA protection for a reasonable-belief non-payment.
This guide is informational only and is not legal advice. It does not replace advice from licensed counsel on the facts of a specific transaction.
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