The Ralli Brothers Rule in an Age of Sanctions

Introduction

The increasing deployment of sanctions has given rise to a greater number of cases where banks and other financial institutions receive demands to make payment to entities sanctioned under foreign law. Typically, a financial institution would wish to refrain from making such a payment so as to avoid breaching foreign law. Yet in some cases, the relevant contract may not include a sanctions clause entitling the financial institution to withhold payment. In such circumstances, the rule in Ralli Brothers v Compañia Naviera Sota y Aznar [1920] 2 KB 287 (“Ralli Brothers Rule“) has been invoked to justify the withholding of payment.

This article discusses two recent decisions of the English Commercial Court that shed light on the application of the Ralli Brothers Rule in this context. It focuses on the key issue of what is the place of performance of the relevant contractual obligation.

The Ralli Brothers Rule

Broadly, the Ralli Brothers Rule provides that contractual performance will be discharged (or suspended, in the case of a payment obligation), if such performance requires an act to be done in a place where it would be unlawful to carry it out.

Central to the application of the Ralli Brothers Rule is the identification of the place(s) of performance of the relevant contractual obligation. Two recent decisions of the English Commercial Court illustrate the approach to this issue.

The Eurochem Decision

In LLC Eurochem North-West-2 and another company v Societe Generale S.A. and other companies [2025] EWHC 1938 (Comm) (“Eurochem“), a Russian company (“Eurochem“) and its indirect owner sued two banks for payment on six on-demand bonds. The banks had declined to make payment, on the basis that the EU had imposed sanctions on the owner of the Eurochem group.

The banks relied on the Ralli Brothers Rule, arguing that they were not obliged to make payment as to do so would be illegal under the law of the place of performance. In this regard, the banks argued that the place of performance of five of the bonds (“SocGen Bonds“) was Paris, while the place of performance of the other bond (“ING Bond“) was Milan, as those were the places where the demands and payment on the SocGen and ING Bonds were to be made respectively.

The claimants countered that the place of performance was Russia, as they had instructed that payment be made to a bank account in Russia. They argued that the making of a demand on the bond, and the bank’s response to the demand, was merely a step preparatory to contractual performance (payment), and was not part of such performance.

The Commercial Court found that the place of payment in respect of the SocGen bonds was Paris, while the place of payment in respect of the ING bond was Milan:

1. In respect of the SocGen bonds, the bonds provided that the demands were to be made in Paris. The Court reasoned that payment was to be made in the same place, as payment was the direct and immediate consequence of a demand on the bond.
2. In respect of the ING bond, the place of payment was Milan as that was provided for under the terms of the bond.
3. It was irrelevant that the claimants had instructed payment to a bank account in Russia. The paying banks were not obliged to accede to those instructions, as the relevant contracts provided for payment to be made in Paris and Milan respectively.

Further, the Court rejected the claimants’ argument that the making of a demand on the bond, and the bank’s response to the demand, were merely steps preparatory to contractual performance. The Court opined that those steps would be part of performance of the payment obligation as they were essential to the making of payment. Thus, even if payment was to be made in Russia, aspects of contractual performance – the making of a demand and the response to the demand – would have taken place in France and Italy.

As payment on the bonds was illegal under the laws of France and Italy, the Court concluded that the Ralli Brothers Rule was engaged.

The Beneathco Decision

In Beneathco DMCC v R.J. O’Brien Limited [2025] EWHC 3079 (Comm) (“Beneathco“), the claimant (“Beneathco“), which had been sanctioned by the US Office of Foreign Assets Control, sued its broker for payment of a sum held by the defendant on trust for Beneathco in a client account. Under the contract, payment was to be made in Dubai.

The Commercial Court dismissed Beneathco’s claim on the basis that the defendant was not obliged to accede to Beneathco’s demands for payment, as those demands did not comply with the terms of the contract. Beneathco had demanded payment in Emirati dirhams, and that payment be made to a third party, whereas under the contract, Beneathco was only entitled to demand that payment be made in US dollars, to Beneathco. The Court nevertheless proceeded to consider whether the payment obligation would have been suspended under the Ralli Brothers Rule, if a valid demand had been made.

The Commercial Court found that the Ralli Brothers Rule was engaged. In this regard, the Court found that one of the places of performance of the payment obligation would have been the US, as payment would necessarily have involved acts in the US. The Court reasoned as follows:

1. The concept of performance was narrow. It only covered acts which were contractually required, and not acts which, as a matter of fact, were likely, or even inevitable.
2. The contractual obligation would have been to pay over the specific monies held on trust for Beneathco. On the facts, the Court found that this would necessarily have involved acts in the US as the payment would have had to be routed through a US correspondent bank. The Court contrasted the obligation in Beneathco with a “freestanding” debt obligation to pay a sum in US dollars. The performance of such an obligation would not require use of the US banking system as payment may be made via several methods, including in cash. Thus, insofar as the debtor in respect of a “freestanding” debt would choose to make payment by wire transfer, and this would involve routing the payment through a US correspondent bank, that would not be part of performance of the contractual obligation.

As it would have been illegal under US law for a US correspondent bank to process the payment to Beneathco, the Court found that the Ralli Brothers Rule would have applied.

Key Takeaways

In determining whether the Ralli Brothers Rule applies, it is critical to first identify what is the contractually required performance. Contractual performance includes only acts that are essential or necessarily required in carrying out the obligation in question.

For the purpose of the Ralli Brothers Rule, there can be more than one place of performance of a contractual obligation. That would be the case if performance necessarily requires acts in more than one jurisdiction (including clearing a payment through the clearing system of the country of the currency in question).

The exercise of identifying the place(s) of performance of a contractual obligation can be involved and nuanced. The need to rely on the Ralli Brothers Rule may possibly be avoided if an appropriate sanctions clause, which is carefully drafted by reference to the relevant facts, is included in the applicable contractual documents. If such a clause is included, caution should be exercised in invoking it in view of the approach to the interpretation of such clauses adopted by the Singapore Court of Appeal in Kuvera Resources Pte Ltd v JPMorgan Chase Bank, NA [2023] SGCA 28.

Our lawyers in the Banking and Financial Disputes practice are well placed to advise banks and financial institutions on whether the Ralli Brothers Rule may apply, as well as on whether and how a sanction clause, if present, should properly be construed and interpreted, to entitle reliance on it. Please feel free to contact our team on this page with any queries.

For regional disputes matters, please see Rajah & Tann Asia’s Dispute Resolution Practice for more information.

Contribution Note:

This article was written by Tan Ee Kuan (Partner, Banking & Financial Disputes).