UK court holds US sanctions are rarely an excuse for contractual non-performance

Can US sanctions excuse contractual non-performance by a non-US party? A recent High Court decision, Beneathco DMCC v R.J. O’Brien Limited [2025] EWHC 3079 (Comm), affirms that the answer to this question continues to be grounded in the rule in Ralli Bros (i.e. whether sanctions would render performance unlawful) – and may turn on an extraordinarily detailed scrutiny of the facts. The practical takeaway for non-US parties that wish to comply with US sanctions is that expressly including US sanctions compliance in contractual terms can be a straighter path to a defence.

 

Key takeaways

• US sanctions will excuse non-US parties from contractual non-performance under English law only in narrow and fact-specific circumstances.
• The Ralli Bros principle provides that an English law contract is unenforceable only if its performance “necessarily requires an act to be done in a place where it would be unlawful to carry it out”. This principle will only excuse a non-US party from performance for reason of US sanctions compliance if performance requires an act in the US or by a US person. However, the act in question need not be an act by the party seeking to justify non-performance by reference to US sanctions – it can be an act of a third party.
• Non-US parties seeking to comply with US sanctions while avoiding the lengthy and fact-specific scrutiny applied in Beneathco should ensure that their contracts make explicit that US sanctions may provide a basis for non-performance.

 

What happened?

The dispute arose out of a trading relationship between Beneathco DMCC (Beneathco), a UAE-based petroleum trader, and R. J. O’Brien Limited (RJOL), a UK futures brokerage.

The parties began trading in 2019, but did not enter into a written contract to govern their relationship. Instead, the High Court found, their agreement was defined by account opening documentation, which was to be interpreted in its commercial and regulatory context.

In January 2020, Beneathco was designated by the US Office of Foreign Assets Control (OFAC) for providing support to the National Iranian Oil Company. Under US law, this required Beneathco’s property and interests in property within the possession or control of US persons to be blocked.

Shortly after the designation, Beneathco’s largest trading position with RJOL was liquidated, and USD16.5 million was credited to its account with RJOL. Beneathco instructed RJOL to convert the funds into AED and transfer them to Dubai. RJOL refused, citing US sanctions, arguing that an OFAC licence would be required. A further instruction from Beneathco was later issued to pay the funds in AED to a third party, Future Plus Goods Wholesalers LLC, which RJOL also declined to follow.

Nearly eighteen months later, and with the funds still unmoved, Beneathco commenced proceedings against RJOL in England, alleging breach of contract and breach of fiduciary duty.

 

The High Court’s decision and why it matters

The High Court dismissed Beneathco’s claim that RJOL was in breach of contract, holding that RJOL was not contractually obliged to comply with either payment instruction and that, in any event, US sanctions would have excused RJOL from performance on the particular facts.

No obligation to follow the instructions given

The Court rejected the argument that RJOL was subject to an implied obligation to comply with any instruction given by Beneathco. Any implied term had to be limited to what was obvious and necessary to give business efficacy to the contract, taking into account commercial common sense and the known facts.

On that basis, the Court held that:

• RJOL’s obligation was to pay Beneathco only in the currency it held for Beneathco, which was US dollars.
• There was no implied obligation to pay in a different currency, such as AED.
• RJOL was not obliged to pay a third party nominated by Beneathco, given the potential legal, regulatory, and commercial concerns that could arise.

As Beneathco’s instructions sought payment in AED and/or payment to a third party, no valid contractual demand had been made.

US sanctions and the Ralli Bros principle

The Court nevertheless went on to consider whether RJOL would have been obliged to perform had a valid instruction been issued, for payment in USD. It concluded that – on the particular facts of the case – RJOL would still have been excused from performance under the principle in Ralli Bros, which renders an English law contract unenforceable where performance necessarily requires an unlawful act in another country in which the act is to be performed.

A critical factual finding underpinned this conclusion. The Court held that RJOL did not owe Beneathco a simple debt. Instead, RJOL held a specific sum of USD16.5 million on trust for Beneathco. The contractual obligation was therefore to pay those particular funds.

The Court went on to hold that, as a matter of fact, payment of those trust funds (denominated in USD) would necessarily have required a US correspondent bank to act in breach of US sanctions. Performance by RJOL therefore would have required an unlawful act in the United States, and Ralli Bros applied.

The Court drew a sharp distinction between this scenario and one involving a debt obligation. If RJOL had merely owed Beneathco a debt, difficulties in sourcing or transferring funds would have related to how RJOL equipped itself to perform, not to the contractual performance itself. In that situation, US sanctions would not have excused performance.

Significantly, the Court also held that Ralli Bros can apply where the unlawful act would be committed by a third party, not just the contracting party itself. Enforcing such a contract would show the same lack of respect for a foreign state’s right to legislate within its territory.

The UK Blocking Regulation

The Court also rejected, obiter, Beneathco’s reliance on the Protecting Against the Effects of Extraterritorial Application of Third Country Legislation (Amendment) (EU Exit) Regulations 2020 (the UK Blocking Regulation), which criminalises compliance with specified U.S. sanctions, and which Beneathco had claimed precluded RJOL from invoking Ralli Bros in the context of U.S. sanctions targeting Iran. It held that the Regulation does not criminalise compliance with US sanctions within the United States, but only compliance with their extra-territorial effect. Moreover, it held that the Regulation does not criminalise compliance with all extra-territorial US sanctions targeting Iran, but only those specifically identified as within the Regulation’s scope.

The Court’s comments on the Blocking Regulation provided welcome judicial interpretation of the “deep and largely uncharted waters” of the law in this area, which has not previously been the subject of published High Court discussion.

 

Practical implications for businesses

The judgment provides important guidance for non-US companies wishing to operate in compliance with US sanctions.

US sanctions will excuse contractual performance under English law only where the contract itself requires performance of an act that would constitute a breach of US sanctions in the United States. It will not excuse contractual performance if that performance is merely made more difficult by US sanctions (such as might be the case, for example, for a USD payment to an SDN).

Non-US parties that wish to comply with US sanctions as a matter of policy should address this expressly in their contracts. Where no such provision exists, the party seeking to excuse itself from performance risks facing the substantial and unattractive task of attempting to prove that performance would, as a matter of fact, require conduct that amounts to a breach of US sanctions in the United States.

 

Conclusion

Beneathco is a careful but consequential decision that defines the narrow circumstances in which US sanctions will excuse contractual non-performance by a non-US party under English law.

For businesses that wish to comply with US sanctions as a matter of policy, the message is clear: build this into the contract. Absent clear drafting, parties may find that English law leaves them with little room to manoeuvre.