Foreign Illegality under the Spotlight

Illustration of a torch, shining on a circle, polo shape.

In recent Yearbooks we have considered litigation arising from the expanding international sanctions regime since the Russian invasion of Ukraine in February 2022 and its impact in the UK.

An emerging theme, particularly over the past year, is that of growing divergence between the prevailing US, UK and EU regimes, particularly as the US increasingly charts its own course under President Trump's second administration.¹

Sanctions divergence creates uncertainty for parties in a myriad of ways, particularly in a globalised system of capital and supply chains where major stakeholders must balance competing political imperatives. This causes significant issues for parties in deciding whether or how to comply with their contractual obligations, as they will need to have regard to the governing law of the contract itself, as well as the law relevant to the place of performance of the contract (which is often multi-jurisdictional). Where performance is across a range of territories, they will need to be sensitive to potential differences in sanctions and export control regimes, as well as to the effects of any extra-territorial regimes on goods, technology, currency and both natural and legal persons.

Under English law, it is generally accepted² that there are two principal bases on which a party might argue that its contractual obligations are unenforceable due to foreign laws (such as a relevant foreign sanctions regime) which render that obligation unlawful:

under the so-called rule in Ralli Bros³, which holds that the Courts will not enforce performance of a contract if its performance is, or has become, illegal in the place of performance, even if there is no illegality under the law governing the contract; and
on a "public policy" basis, following the case of Foster v Driscoll (1929)⁴, where it was held that an "English contract should and will be held invalid on account of illegality if the real object and intention of the parties necessitates them joining in an endeavour to perform in a foreign and friendly country some act which is illegal by the law of that country notwithstanding the fact that there may be, in a certain event, alternative modes or places of performing which permit the contract to be performed legally" (emphasis added).

In both cases, a key underlying rationale for the doctrine lies in comity: that is, deference by the English Courts to the legislative authority of the foreign state to provide for the (un)lawfulness of conduct within its own territory.

Several sanctions-related cases which have come before the English Courts over the last 12 months have seen parties relying on foreign illegality – to varying degrees of success.

Perhaps more interestingly – for market participants and legal practitioners alike – has been, in the context of a Ralli Bros defence, the first reported case⁵ involving a discussion (albeit obiter) of the interplay between the Ralli Bros principle and the UK Blocking Regulation.⁶

The UK Blocking Regulation, which was transposed from EU law and implemented in the UK following Brexit, counteracts the extraterritorial effect of specified foreign sanctions⁷ by prohibiting UK persons from complying with those proscribed laws. In Beneathco, discussed in more detail below, it was argued (albeit unsuccessfully) by the defendant that the effect of the UK Blocking Regulation was to prevent the defendant from relying on a Ralli Bros defence.

Together, the three cases considered here show how challenging the sanctions landscape has become for parties whose business necessarily involves cross-border transactions. They also suggest that several key questions remain when it comes to understanding the four corners of a foreign illegality defence.

Paradigmatic illegality where sanctions regimes align | EuroChem NW2 v Société Générale & ING [2025] EWHC 1938 (Comm)

This claim related to six on-demand bonds (governed by English law) which Société Générale and ING had issued to EuroChem NW2 in connection with the construction of a fertilizer plant in Russia. When EuroChem NW2 made demands under the bonds, Société Générale and ING declined to pay on the basis that to do so would put them in breach of EU sanctions.

This was because (amongst other things) the EuroChem group was linked with (and, indeed, founded by) a certain Andrey Melnichenko, who (along with his wife) had been, since March 2022, on the EU sanctions list.⁸

The decision is notable for a number of reasons, including the Court's assessment of the complex group structure and the question of whether Mr Melnichenko could be considered the owner of trust property.

Having concluded that Mr Melnichenko was the owner of EuroChem NW2, the Court went on to find that the bonds were unenforceable under the Ralli Bros principle, because in the place of performance of the bonds (being the relevant EU member states where the bond demands had to be made⁹), that performance would contravene EU sanctions.

In that sense, this is a "classic" application of Ralli Bros.

Public policy as alternate basis

However, the case may prove to be more controversial for its application of a separate, public policy basis for finding the bonds to be unenforceable. Applying Ryder Industries Ltd v Chan Shui Woo¹⁰ (2015), the Court observed (at [469-470]) that the relevant regulations giving rise to the sanction offence:

"… are an important part of EU legislation and of French and Italian domestic law. They were enacted as part of an EU-wide strategy, at the behest of the heads of state and governments of all the member states. Their purpose is as grave as any imaginable. It is evident from the exchanges with the DGT and the CSF that the Regulations are applied and enforced with extreme care and strictness. The punishments available are severe. Moreover, I consider that the Banks are right to suggest that the fact that UK/English public policy on this point is precisely aligned with that of the EU is an important pointer to the very great significance that should be attached to comity, on the facts of this case.

Accordingly, if I had not been in the Banks’ favour on the application of the rule in Ralli Brothers, I would have found in their favour on this basis."¹¹

It is important to note that this was raised as an alternative argument by the claimants and was only given short-form analysis in judgment. However, the Court's analysis here raises several questions which may need to be settled by higher courts in due course.

First is a matter of the relevant basis for "public policy" unenforceability. The Court here endorses the view that public policy operates as an entirely separate basis on which a contract may be found to be unenforceable for breach of foreign law – outside of Ralli Bros. But if that is right, what is that basis? The Court does not cite Foster v Driscoll, but nevertheless appears from the cases it does cite¹² to be characterising this as illegality in the Foster v Driscoll mode.

If that is right: what has happened to the (not insignificant) matter of the "real object and intention" of the parties (c.f. the traditional formulation from Foster v Driscoll referred to above)? It is absent from the Court's analysis.

Second is the question of the weighting or significance of the factors identified by the Court in reaching its decision. Matters of public policy will always come down to comity considerations which are inevitably difficult to capture in prescriptive criteria. But within the Court's reasoning, there are a number of qualitative remarks which may be relied upon by parties in future cases and subject to further judicial scrutiny. What exactly constitutes "precise" alignment between sanctions regimes? How relevant is it that available punishments are severe? And what would a "severe" punishment amount to?

Failed Ralli Bros defence, sanctions regimes non-aligned | Alliance Petrochemical Investment (Singapore) Pte Ltd v Mazzagatti [2025] EWHC 2155 (Comm)

Mazzagatti is an unusual case. But it serves as a useful reminder of the limits of a defence in illegality, and also provides an instructive window into how parties may position themselves where sanctions regimes do not align.

A CEO and CFO had appropriated sums from the claimant company. That company brought proceedings to recover them. The defendants (perhaps opportunistically) raised in their defence (inter alia) that the claimant was barred from bringing their claim on the basis of ex turpi causa and/or illegality (in this case, of the Foster v Driscoll kind). This was because, on their case, the claimant entity had since 2005 engaged for the distribution of high-density polythene from a sanctioned Iranian-registered entity called Mehr Petrochemical Company ("MHPC") (MHPC having been sanctioned by US authorities since 9 March 2023). The claimant, being (again, on the defendants' case) controlled by a US citizen, was therefore in breach of US sanctions regulations.

The claimants applied successfully for the illegality defence to be struck out. The principal basis of the claimants' success lay in the territoriality of an illegality defence. That is: a foreign illegality defence is only available if the act in question is illegal either under the governing law of the claim, or under the law of the place where the act was performed. The claimants had nowhere pleaded that the contract between the claimant and MHPC was performed in any respect in the territory of the United States, and had provided no further evidence in responding to the strike out application.

Interestingly, the claimants had also sought the strike out on the grounds that the illegality defence was not available because UK public policy is opposed to US unilateral sanctions on Iran. In that regard, it is noteworthy that MHPC had been sanctioned neither by the EU nor by the UK.

In the event, the Court declined to resolve whether UK public policy is opposed to US unilateral sanctions on Iran, noting that "[d]eciding what public policy is in a novel area is likely to be difficult and controversial"¹³, and should be determined at trial if necessary (noting that it may not need to be resolved should the factual case advanced fail).

However, one can well see that, in an era where foreign policy agendas are increasingly volatile and diverge (or could at short notice diverge), the matter of public policy (being a central consideration when it comes to illegality either pursuant to Ralli Bros or Foster v Driscoll) will become an increasingly arguable point.

Ralli Bros and the UK Blocking Regulations | Beneathco DMCC v R.J. O’Brien Ltd [2025] EWHC 3079 (Comm)

The Claimant, Beneathco, a Dubai-based petroleum trader, had a derivatives trading account with R.J. O'Brien Limited ("RJOL"), an FCA-regulated broker and clearing firm which is indirectly owned by a Delaware-based holding company. Beneathco held a cash balance of around USD 16.5m in its account with RJOL when in 2020 it was designated under the US’ Iran sanctions programme (namely, President Trump's Executive Order 13846).

Shortly after its designation, Beneathco gave instructions to RJOL for payment of the cash balance. RJOL responded that, due to sanctions restrictions, it would require a license from the US Office of Foreign Assets Control before it could make any transfer. This license was ultimately rejected. However, in the meantime, Beneathco had issued proceedings in England, seeking transfer of the relevant sums.

There were several matters in issue between the parties, and the case was decided, in a primary analysis, on a technical interpretation of whether RJOL was obliged, as a matter of contract and by reference to Beneathco's specific instructions, to transfer any sums at all (the Court said it was not).

However, of greater interest in relation to sanctions is the Court's analysis of RJOL's Ralli Bros defence. Ultimately, the Court sided with RJOL, in particular because: i) the payment of the sum amounted to actual contractual performance (and not merely some preparatory step, where illegality does not excuse non-performance); and ii) in circumstances where a transfer of USD 16.5m from any of the banks used by RJOL would necessarily have involved the use of one of its US-based USD correspondent banks, there would have been a breach of US sanctions.

UK Blocking Regulation

The Court went on to consider the interaction between the Ralli Bros defence and the UK Blocking Regulation. As the judge remarked, these are "deep and largely uncharted waters".¹⁴ No English law authorities were produced concerning the interplay between the Ralli Bros principle and the UK Blocking Regulation; a single case¹⁵ was cited concerning the EU Blocking Regulation.

In the event, the Court decided that the UK Blocking Regulation was not engaged on this occasion. Two particular reasons are worth highlighting:

the UK Blocking Regulation is designed and intended to prevent compliance with extra-territorial legislation. In other words, it is applicable where US law makes contractual performance unlawful outside the US. By contrast, a Ralli Bros defence is available where contractual performance is unlawful by the law of the territory within which performance is contractually required (here, by virtue of the use of a US bank). Their application appears, accordingly, to be mutually exclusive; and
Executive Order 13846 was made pursuant to the International Emergency Economic Powers Act, which is not a piece of legislation targeted by the Blocking Regulation.

Interestingly, the Court raised in passing that, had RJOL (which, by way of reminder, was based in the UK) instructed that the transfer to Beneathco take place (even if the transfer itself would occur within the US), this may amount to an unlawful act as a matter of US law. In that case, the UK Blocking Regulation might be engaged (whilst the Ralli Bros principle would not). The Court did not need to decide this point. But it is a salutary indication of how different cases might play out in the future – where subtly different facts could give rise to fundamentally different outcomes.

Conclusion

It is not straightforward for parties to navigate the perilous tightrope of meeting one's contractual obligations on the one hand, whilst remaining in compliance with prevailing sanctions regimes.

As with any contractual dispute, any analysis must start with the documents and the obligations agreed between the parties. What exactly is the act required to meet those obligations? Where would the act take place? Are there alternative ways to perform? However, these questions must be contextualised by the question of which sanctions regime(s) might apply to the conduct and the parties and how these risks might be satisfactorily mitigated (which, given the current volatility of international sanctions, is often easier said than done).

Our team is experienced in navigating sanctions risk across the UK, EU and US regimes, as well as in understanding and dealing with the consequences for your contractual entitlements and commitments, and is on hand to assist should you need it.

Footnotes

1 For example, in recent months we have seen the US grant sanctions relief to parties buying certain Russian 'shadow fleet' oil and other petroleum products to counteract the increase in global energy prices following the war in Iran, which has been met by criticism in the EU and UK – neither of which has provided equivalent relief.

2 See Dicey, Morris & Collins, The Conflict of Laws, 16th ed., para 32-256.

3 Ralli Brothers v Compania Naviera Sota y Aznar [1920] 2 KB 287.

4 1 KB 470.

5 Beneathco DMCC v R.J. O’Brien Ltd [2025] EWHC 3079 (Comm).

6 Retained Council Regulation (EC) No 2271/96 of 22 November 1996 (as amended by The Protecting against the Effects of the Extraterritorial Application of Third Country Legislation (Amendment) (EU Exit) Regulations 2020).

7 being, currently, certain US sanctions in respect of Iran and Cuba.

8 Including designation by being listed under Annex I to Council Regulation (EU) No. 269/2014.

9 This was because, in the case of the ING bond, the bond instrument incorporated the ICC Uniform Rules for Demand Guarantees (the "URDG") – Article 20(c) of which provided that payment was to be made at ING’s branch in Milan, which was where the Bond was issued and was also where the demand had to be made. In the case of the SocGen bonds, the Court came to a similar conclusion, although the bonds did not incorporate the URDG and the Court therefore relied on the general proposition that, in relation to on-demand instruments, the place of performance should generally be where the demand must be made, which was (in this case) France.

10 (2015) 18 HKCFAR 544.

11 EuroChem NW2, at [469-470])

12 Including Haddad v Rostamani (2021) EWHC 1892.

13 Mazzagatti at [20].

14 Beneathco, at [120].

15 Bank Melli Iran v Telekom Deutschland GmbH (Case C-124/20).

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