Background to the Case

The case concerned the enforcement of a performance bond and an advance payment bond (the Bonds) issued by Santander in relation to a gas facility project in Mozambique. The Bonds secured TKK’s (the EPC Contractor) performance of obligations to CTT (the Project Employer) under the terms of an EPC Contract. The Bonds were issued in Madrid and provided that payment “shall be made to the account specified in the relevant demand.”

On 3 April 2025, TSK purported to terminate the EPC contract on force majeure grounds. CTT responded by making demands under both Bonds, nominating its ABSA Bank account in Mozambique. Payment by Santander became due on 11 April 2025. However, TSK applied to the Spanish Court of First Instance No 5 de Móstoles for an ex parte interim injunction restraining Santander from fulfilling any request for payment of either or both of the Bonds – which the Spanish Court granted on 10 April 2025. TSK subsequently commenced international arbitration proceedings in May 2025 against CTT, seated in London, which are ongoing. CTT applied to discharge the Spanish Court’s injunction; that application was dismissed and CTT’s appeal is pending.

Santander suspended payment of the bonds in April 2025, on the alleged basis that it was enjoined from paying by reason of the Spanish injunction. In October 2025, CTT commenced Part 8 proceedings in the Commercial Court against Santander for immediate payment of US$ 90.8 million, plus interest, pursuant to its demands under the terms of the Bonds.

The Ralli Bros Rule

Santander accepted that payment under the Bonds had become due on 11 April 2025. However, Santander contended that payment would be unlawful under Spanish law, invoking the rule established in Ralli Brothers v Compania Naviera Sota y Aznar [1920] 2 KB 287.

Generally, illegality under foreign law does not relieve a party from performance of its obligations under an English law contract. The Ralli Bros rule is a limited exception, which excuses contractual performance if performance would necessarily involve doing an act which is unlawful at the required place of performance. When the Ralli Bros rule is engaged, it operates as a complete defence to a claim seeking contractual performance.

In his judgment, Calver J set out the requirements for invoking the Ralli Bros rule, by reference to relevant English case law. He emphasised that the confines of the doctrine are narrow. The burden of proof lies with the defendant, who must show:

• Contractual performance necessarily requires an act to be done in a place where it would be unlawful to carry it out;
• The illegality or unlawfulness relates to the performance itself;
• Reasonable steps have been taken to avoid the illegality/unlawfulness; and
• The defendant was not themselves at fault in the sense that it could have done something to bring about valid performance and failed to do so.

In this case, Calver J held that the illegality defence failed at the threshold stage because the place of contractual performance was Mozambique, not Spain. According to the terms of the Bonds, Santander’s sole obligation was to pay into the nominated account. Given that payment in Mozambique remained lawful, the Ralli Bros rule was not engaged.

In this respect, Calver J declined to follow Bright J’s obiter view in LLC EuroChem North-West-2 v Société Générale [2025] EWHC 1938 (Comm) that receipt of and response to demands form part of performance. Rather, Calver J followed the Court of Appeal’s approach in Credit Agricole Indosuez v Chailease Finance [2000] 1 All ER (Comm) 399. That case similarly concerned an autonomous financial instrument which provided for payment as per Chailease’s instructions. The Court of Appeal rejected the argument that the place of performance was ‘floating’, since it was dependent on the subsequent conduct of the party seeking to enforce the obligation in question, and held that the place of performance was the place of payment.

Although unnecessary to the result, Calver J went on to address the remaining issues which arose in relation to the Ralli Bros principle – namely, (i) whether a court order engaged the principle at all, (ii) Santander had taken reasonable steps to avoid the illegality, and (iii) Santander was not itself at fault for failing to bring about valid performance.

As to (i): the English High Court has previously held that the Ralli Bros rule does not apply where the alleged unlawfulness derives from the breach of a court order, as opposed to “acts unlawful by reason of legislation or regulation in force" in the foreign jurisdiction, per Louise Hutton KC’s judgment in Litasco v Banque El Amana SA [2025] EWHC 312 (Comm), [2025] 1 Lloyd's Rep 285, with which Simon Colton KC agreed (obiter) in Beneathco DMCC v RJ O'Brien Ltd [2025] EWHC 3079 (Comm). Calver J found Litasco to be wrongly decided on this point. He emphasised the rationale behind Ralli Bros is international comity and it is “arbitrary and unprincipled” to distinguish court orders from legislative acts, referencing the Supreme Court’s discussion on territorial sovereignty in Deutsche Bank AG London Branch v Receivers Appointed by the Court [2021] UKSC 57, [2023] AC 156.  In principle, Calver J found that if Santander’s defence had not failed at the threshold stage, the Ralli Bros rule could, therefore, have been engaged by the Spanish injunction.

As to (ii) and (iii): the burden lies on the party invoking the defence to show it was not at fault and took reasonable steps to avoid the illegality. Calver J found that Santander was not at fault for failing to pay prior to 10 April 2025 (when Santander was notified of the injunction), given payment only became due on 11 April 2025. However, it would have been reasonable for Santander to try to challenge the injunction in the Spanish Courts and Santander could not evidence that, if it had challenged the injunction, it would have made no difference to the outcome. Santander’s foreign illegality defence would therefore also have failed on this point (even if Spain had been the place of performance).

Comment

The judgment reinforces the strict criteria which must be met by a defendant seeking to rely on the Ralli Bros exception. As a threshold matter, a party must demonstrate that performance is unlawful at the place of performance of the contract. The imposition of sanctions or exchange controls prohibiting payment in an obligor’s home jurisdiction will not provide a basis for invoking the foreign illegality defence, if the place of contractual performance is elsewhere. For parties facing payment demands, the relevant analysis will turn on where the instrument in question requires payment to be made.

The judgment is also significant because of Calver J’s conclusion that the Ralli Bros rule may be engaged by foreign court orders – contrary to the current legal position, established in Litasco. While his reasoning on the point is obiter and, for now, Litasco remains good law, this judgment opens the door to future appellate guidance on the issue. If CTT v Santander is followed, it would constitute a potential widening of the scope of the foreign illegality defence to include, for example, orders for interim measures.

The judgment also serves as a reminder to parties of the need to take reasonable steps and avoid fault, in order to rely on a foreign illegality defence. Where the Ralli Bros rule is engaged, a party cannot passively rely on the relevant supervening legislation; it should be prepared to challenge it (or to evidence why a challenge would be futile) and take any other reasonable steps to avoid the illegality and bring about valid performance.