Limitations to Ralli Bros rule on illegality at place of performance

In Litasco SA v Banque El Amana SA [2025] EWHC 312 (Comm) the High Court confirmed that the Ralli Bros Rule (see Ralli Brothers v Compania Naviera Sota y Aznar [1920] 2 KB 287) does not apply to foreign court orders. The Ralli Bros Rule states that an English law governed contract will not be enforceable if it is illegal in the place of performance. The Court held that foreign court orders do not fall within the Ralli Bros Rule; these should be dealt with using the rules on recognition and enforcement of judgments. The judgment also confirms that, for the purposes of the Ralli Bros Rule, only the place of contractual performance (here a payment in Switzerland) is relevant and not any other jurisdiction where preparatory steps are taken.

Background

In March 2019, the Mauritanian bank, Banque El Amana S.A. (BEA) issued a standby letter of credit (SBLC) for the benefit of Litasco S.A., an oil trading firm, for USD 1.8 million as security for a loan agreement between Litasco (as lender) and Société Kerkoub pour l’Investissement SA (SKI, as borrower). In December 2021, SKI defaulted and Litasco made a compliant presentation under the SBLC, requiring payment from BEA in January 2022. BEA did not make payment. Litasco applied to the High Court for summary judgment. BEA opposed the application and sought to stay proceedings pending resolution of proceedings in Mauritania (both civil and criminal). In the civil Mauritanian claim, BEA had received an order from the Mauritania Commercial Court, suspending performance of the SBLC (Stay Order). Furthermore, the SBLC was seized in the criminal claim for breach of trust (Attachment Order).

BEA argued it was unable to make the payment under the SBLC as the Stay Order and Attachment Order made it illegal to make the payment in Mauritania and therefore the Ralli Bros Rule applied. BEA explained that it had no branches or registered offices outside Mauritania and therefore preparatory actions would have to take place in Mauritania to implement the payment (which would be made through SWIFT and correspondent banks) and these preparatory actions would be unlawful under the Attachment Order.

Court’s decision - the Ralli Bros Rule and its application

There is a general principle that the enforceability of a contract governed by English law is determined without reference to illegality under a foreign law. The Ralli Bros Rule is a limited exception to this general principle – as explained above, an English law governed contract will not be enforceable if it is illegal in the place of performance. Here, the Court decided that the SBLC was governed by English law.

Litasco argued that the Ralli Bros Rule did not apply in this case for the following reasons:

1. previous case law made clear that the Ralli Bros Rule did not apply to foreign court orders which would need to be separately recognised (it only applied to foreign legislation or regulation).
2. it would not be a successful defence where the defendant is at fault (the alleged debt had been due for over two years before the civil and criminal proceedings were initiated).
3. the place of performance was Switzerland not Mauritania, as that is where the payment would be made.

The Court found in favour of Litasco on all three points. On the first, the Court held that the appropriate way to enforce a court order was through the separate regime dealing with the recognition and enforcement of foreign judgments.  Accordingly, the Ralli Bros Rule did not apply to court orders.

The second point was considered in light of Celestial Aviation Services Ltd v UniCredit Bank AG [2024] EWCA Civ 628, where it was established that the party relying on the Ralli Bros Rule must attempt to perform its contractual duties in a timely fashion (see further detail on the decision in Celestial here). As BEA had not attempted timely performance it was unable to rely on the Ralli Bros Rule.

The final argument Litasco made was that the place of performance was the place of receipt. To counter this, BEA argued that Celestial and other judgments made reference to the performance of necessary acts taken in a foreign jurisdiction where those acts were illegal. However, the Court held that the Ralli Bros Rule only applied to illegality in the place of performance and not any other place where preparatory steps were taken.  The Court accepted that the place of performance could be varied by the terms of the contract, as in Celestial, where the bank accounts were contractually obliged to be in the foreign jurisdiction, but on the particular facts the place of performance was the place of receipt, ie Switzerland.  Notably, the Court did not address the interpretation of payment clauses such as payment at the counters of the bank, which is common in letters of credit.

Key takeaways

On the face of it, a court ordering one party to make a payment where this would involve committing an illegal act appears harsh. However, the decision involved a foreign court order that had not been recognised in England in accordance with the usual regime dealing with the recognition and enforcement of foreign judgments. The Court held that the Ralli Bros Rule cannot be used to circumvent this regime.  Further, the only jurisdiction relevant for the Ralli Bros Rule is that of the place of contractual performance. The Ralli Bros Rule does not apply where the contract requires, as part of its performance, an act which would be illegal in the place where it is carried out but where this is not the place of performance of the contract.  Even though, since Celestial, the English courts take a more nuanced approach to determining the place of contractual performance of a payment obligation, so that it is not necessarily only the place of receipt, this does not extend the Ralli Bros Rule to other jurisdictions where acts preparatory to contractual performance take place.

This case demonstrates the importance of not relying solely on the Ralli Bros Rule but also including express contractual references to the effect of illegality in other selected jurisdictions. It is likely that as a result of a change in market practice over the course of the last few years, current letters of credit (in addition to most financing documents, such as loan agreements) will have express contractual provisions covering the effect of illegality and sanctions. Counterparties should ensure that they obtain legal advice to protect themselves  against scenarios similar to that BEA found itself in. Such contractual protections provide a more certain defence, and this decision shows the value in a well drafted illegality clause. Nevertheless, there still remain uncertainties: formulations common for letters of credit such as payment at the counters of the bank are yet to be considered and provisions restricting payment for sanctions have been narrowly interpreted.  Further clarification by the Courts would be welcome.

With thanks to Sara Abraham for her assistance in preparing this post