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Where a sanctions clause entitles owners to refuse orders which, in their reasonable judgment, would expose them to sanctions, owners need only establish that they reasonably considered there to be a real risk of sanctions exposure. They do not need to prove, on the balance of probabilities, that a sanctions breach would in fact occur. The reasonableness of the owners\u2019 assessment must be judged objectively by reference to the information available at the time. A sanctions risk may exist even where ownership or control by a sanctioned person cannot be positively proven.<\/p>\n
By voyage charterparty dated 5 November 2021, Charterers engaged the Catalan Sea<\/a> (the \u201cVessel\u201d), to carry a cargo of crude oil from Primorsk, Russia to the Mediterranean.<\/p>\n The proposed shipper was Neftisa, a Russian oil company historically associated with Mikhail Gutseriev. Mr Gutseriev became subject to EU and UK sanctions during 2021. Following the imposition of EU sanctions, it was reported that he had transferred his majority interest in Neftisa to his brother, Sait-Salam Gutseriev, while retaining a 7% shareholding.<\/p>\n When the Vessel arrived at Primorsk and tendered Notice of Readiness, the Owners became concerned that loading the cargo and issuing bills of lading<\/a> would involve entering into contractual relations with Neftisa. They therefore conducted sanctions screening checks. Those checks identified ongoing links between Neftisa and the sanctioned individual and raised questions as to whether Mr Gutseriev continued to exercise influence or control over Neftisa following the reported transfer of shares.<\/p>\n The Owners refused to load the cargo and requested alternative voyage orders pursuant to the charterparty\u2019s sanctions clause<\/a>, which provided:<\/p>\n \u201cThe owners shall not be obliged to comply with any orders for the employment of the vessel\u2026which in the reasonable judgement of the owners, is prohibited by sanctions or will expose the owners, the vessel or its managers, crew, the vessel\u2019s insurers or reinsurers to sanctions. In the event that such risk arises in relation to a voyage the vessel is performing, the owners shall be entitled to refuse further performance and the charterers shall be obliged to provide alternative voyage orders.\u201d<\/em><\/p>\n The Charterers sought to address those concerns by providing a letter from Neftisa and a number of legal opinions concluding that Neftisa was not owned or controlled by Mr Gutseriev. The legal opinions, however, were based upon factual assumptions supplied by Neftisa and expressly recognised that sanctions authorities could potentially reach a different conclusion.<\/p>\n The Owners remained concerned about sanctions exposure and maintained their refusal to load. The Charterers declined to provide alternative voyage orders and purported to cancel the charterparty. The Owners treated that cancellation as a repudiatory breach<\/a> and accepted the Charterers\u2019 repudiation.<\/p>\n The High Court held that the sanctions clause was engaged where owners reasonably judged that compliance with voyage orders would create a risk of sanctions exposure; it was not necessary to establish that a breach of sanctions was more likely than not.<\/p>\n However, the Judge conclude that the Owner\u2019s refusal was not objectively reasonable on the facts. In his view, there was no evidence establishing that Mr Gutseriev continued to control Neftisa and the Owners\u2019 concerns amounted to speculation. Accordingly, the Owners were not entitled to rely on the sanctions clause.<\/p>\n The Court of Appeal agreed with the High Court\u2019s interpretation of the sanctions clause but disagreed with its application to the facts.<\/p>\n The Court held that the correct question was not whether the Owners could reasonably conclude that Mr Gutseriev in fact continued to control Neftisa, but whether the Owners could reasonably conclude that there was a real risk that carrying the cargo would expose them to sanctions liability.<\/p>\n The Court emphasised that sanctions clauses of this nature require shipowners to make prospective commercial judgements, often under time pressure and with incomplete information. In that context, the phrase \u201cexpose to sanctions\u201d means exposure to a real sanctions risk rather than a probable or certain sanctions breach.<\/p>\n The Court found that several factors supported the Owners\u2019 assessment:<\/p>\n Taken together, those matters provided a reasonable basis for concluding that compliance with the Charterers\u2019 orders carried a real risk of sanctions exposure. The Court therefore held that the Owners were entitled to rely on the sanctions clause and refuse to load the cargo. The Owners\u2019 appeal was allowed and the Charterers cross-appeal dismissed.<\/p>\n The decision confirms that where a sanctions clause is triggered by the owners \u201creasonable judgement\u201d, the relevant test is:<\/p>\n Would a reasonable owner, on the information available at the time, have concluded that there was a real risk of sanctions exposure?<\/p>\n Owners are not required to prove that sanctions would actually be breached, nor that the underlying facts giving rise to the sanctions concern are established on the balance of probabilities. A reasonable assessment of a genuine sanctions risk is sufficient.<\/p>\n Whether you are a shipowner, charterer, trader or insurer, obtaining timely advice can be critical where sanctions risks impact ongoing operations. For practical guidance speak to our marine team<\/a> or fill out a contact form<\/a>.<\/p>\nHigh Court Decision<\/h2>\n
Court of Appeal Decision<\/h2>\n
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Key Takeaway for Shipowners and Charterers<\/h2>\n
How Lester Aldridge Can Help<\/h2>\n