Complex sanctions regimes are now a feature of international
trade transactions concluded across multiple jurisdictions. It has
become important, now more than ever, to conduct proper due
diligence to ensure compliance with any international
sanctions.
However, despite best endeavours, situations may arise where
commercial parties find themselves unable to perform under a
contract due to a potential breach of sanctions law. In such
circumstances, parties may be left with little alternative but to
attempt to avoid the contract, perhaps by invoking Force Majeure
(FM).
Case study: MUR Shipping BV v RTI[2022] EWCA Civ
1406
A recent UK Court of Appeal judgment in MUR Shipping BV v
RTI [2022] EWCA Civ 1406 (MUR v RTI)
illustrates issues surrounding the enforceability of contracts, in
this case a charterparty, in the context of sanctions.
The underlying facts were:
MUR entered into a contract of affreightment with RTI, a
company with Russian connections through its parent company
due to US sanctions, RTI could not make payments in US dollars,
so they offered to pay MUR the equivalent amount in Euros
(expressly stipulating that MUR would be no worse off, and RTI
would still technically be performing under the contract).
MUR terminated the contract in reliance on the FM clause in the
contract, citing the sanctions as the FM event
RTI challenged the termination. The FM clause contained the
following clause:
“36.3 A Force Majeure Event is
an event or state of affairs which meets all of the following
criteria; .. (d) It cannot be overcome by reasonable endeavours
from the Party affected.”
the parties accepted that MUR was affected by RTI’s
inability to comply strictly with the contract through payment in
US dollars, but RTI submitted that MUR could overcome the event or
state of affairs by accepting Euros, and it was reasonable that it
do so.
At first instance, an arbitration tribunal agreed with RTI. On
appeal, the High Court agreed with MUR. The matter was then taken
to the Court of Appeal, who, by a bare majority agreed with RTI
(and the Tribunal).
According to Marles LJ, the question was whether the relevant
event or state of affairs could be overcome by reasonable
endeavours from MUR as the party affected, i.e. the question was
whether accepting payment in euros would overcome the state of
affairs resulting from the imposition of sanctions on RTI’s
parent company.
In reaching the decision, the reasoning of Marles LJ sheds some
important light on the operation of FM clauses against the backdrop
of sanctions, as Marles LJ looked at the precise wording of the FM
clause and considered whether, on the terms of the clause the
“endeavours” (payment in Euros) would have been
successful in overcoming the “event” or “state of
affairs.” He concluded that:
“[t]erms such as ‘state of
affairs’ and ‘overcome’ are broad and non-technical
terms and clause 36 should be applied in a common sense way which
achieves the purpose underlying the parties’ obligations-in
this case, concerned with payment obligations, that MUR should
receive the right quantity of US dollars in its bank account at the
right time. I see no reason why a solution which ensured the
achievement of this purpose should not be regarded as overcoming
the state of affairs resulting from the imposition of sanctions. It
is an ordinary and acceptable use of language to say that a problem
or state of affairs is overcome if its adverse consequences are
completely avoided.”
The approach of the majority accords with a pragmatic solution
to a tricky situation often faced by parties in the transport
industry. In this case, receipt of payment in an alternate currency
was effective in overcoming a potential breach of sanctions with no
detriment to MUR. However, this may not always be the case.
For instance, Australia imposes a number of independent and
autonomous sanctions, which cannot be circumvented by the methods
used by the parties in MUR v RTI. This is explained in
further detail below, but first, a brief overview of the Australian
sanctions regime will help put things into perspective.
Australia’s sanctions regime
Sanctions in Australia are implemented principally by the
Charter of the United Nations Act 1945 (COTUNA),
the Autonomous Sanctions Act 2011 (ASA) and the
Customs Act 1901, as well as through regulations made under these
Acts. Australian sanctions laws apply broadly and include
activities:
carried out in Australia
carried out by Australian citizens anywhere in the world
carried out by companies incorporated overseas that are owned
or controlled by Australians or persons in Australia; and/or
carried out on board Australian-flagged vessels and
aircraft.
Australia implements United Nations Security Council
(UNSC) sanctions regimes and Australian autonomous
sanctions regimes (AASR). Sanctions law offences
under the COTUNA for an individual or body corporate generally
involve dealing with freezable assets, giving an asset to a
sanctioned person, and contravening a UN sanctions enforcement
law.
In addition, the Australian Government has decided to implement
AASR as a matter of independent Australian foreign policy. The AASR
may supplement UNSC sanctions regimes or be separate from them.
AASR is intended to achieve three objectives:
to limit the adverse consequences of a situation of
international concern (for example, by denying access to military
or paramilitary goods, or to goods, technologies or funding that
enable the pursuit of programs of proliferation concern)
to seek to influence those responsible for giving rise to a
situation of international concern to modify their behaviour to
remove the concern (by motivating them to adopt different
policies)
to penalise those responsible (for example, by denying access
to international travel or the international financial
system).
The COTUNA, the ASA and their regulations provide for a wide
range of prescribed general prohibitions on:
making a ‘sanctioned supply’ of ‘export sanctioned
goods’
making a ‘sanctioned import’ of ‘import sanctioned
goods’
providing a ‘sanctioned service’
engaging in a ‘sanctioned commercial activity’
dealing with a ‘designated person or entity’
using or dealing with a ‘controlled asset’; or
the entry into or transit through Australia of a
‘designated person’ or a ‘declared person’.
Sanctions implemented in Australia generally involve the
prohibition of:
the unauthorised supply of export sanctioned goods, such as
arms and related matériel, and, in specific instances,
dual-use goods which could contribute to weapons of mass
destruction programs
the unauthorised provision of sanctioned services, such as
technical training, advice, services or assistance related to the
supply, manufacture, maintenance or use of specific goods, which
are usually services that are related to export sanctioned
goods
certain financial transactions, including making an asset
available to, or dealing with an asset of, a person or entity
subject to targeted financial sanctions
travel for certain persons identified by the legislation.
In regard to the above general prohibitions, Australia’s
sanctions regulations make it clear that dealing with a designated
person or entity includes making assets available, either directly
or indirectly, to, or for the benefit of the designated person or
entity. This would include through subsidiaries of the designated
person or entity.
Contraventions of Australian sanctions laws can result in severe
criminal offences. An individual or body corporate can be charged
with an offence if they engage in conduct that contravenes a
condition of a licence, permission, consent, authorisation or
approval (however described) under a UN sanction enforcement law.
Under Australian sanctions laws, “engage in conduct” is
defined as performing an act or omitting to perform an act. The law
does not set a minimum threshold for an offence. If found guilty,
the punishment for violating Australian sanctions laws
includes:
a fine the greater of 2,500 penalty units ($450,000 as of 31
July 2015) or three times the value of the transaction and/or up to
10 years in prison, for individuals
a fine the greater of 10,000 penalty units ($1.8 million as of
31 July 2015) or three times the value of the transaction, for
bodies corporate.
These offences are strict liability offences for bodies
corporate, meaning that it is not necessary to prove any fault
element (intent, knowledge, recklessness or negligence) for a body
corporate to be found guilty. It is, however, a defence for bodies
corporate to demonstrate they took reasonable precautions and
exercised due diligence to prevent or avoid any contravention from
occurring. Australian sanctions laws do not expand upon what
constitutes ‘reasonable precautions’ and ‘due
diligence’, which will depend on the individual circumstances
in any given case.
Key takeaways
Australia’s sanctions regimes are very broad and
far-reaching, meaning that it is unlikely that one will be capable
of circumventing Australian sanctions laws through the use of
‘reasonable endeavours’, such as payment from a subsidiary
company in a foreign currency. Indeed, if an Australian body
corporate or individual is involved in a contract which includes a
designated person or body corporate, either directly or indirectly,
Australian sanctions laws make it clear that financial
transactions, including making an asset available to, or dealing
with an asset of, a person or entity subject to targeted financial
sanctions, constitutes a breach.
This means that even though parties may be capable of using
‘reasonable endeavours’ to circumvent a FM clause
pertaining to sanctions within a contract, the underlying contract
and transaction with a designated person or entity, including any
of their subsidiaries, will still be subject to Australian
sanctions laws.
If MUR v RTI had involved an Australian individual,
even an employee of the company who was involved in the matter, or
a corporation owned or controlled by Australians or people in
Australia, then the sanctions imposed on RTI’s parent company
would not have been capable of being circumvented. Moreover,
depending on the nature and structure of the contract, it may have
constituted a breach of Australian sanctions laws even if the
subsidiary made payment in a foreign currency.
Therefore, Australian entities and individuals seeking to enter
into contracts with foreign entities who may have links to
sanctioned individuals or body corporates should ensure that proper
due diligence and reasonable precautions are taken to vet them
prior to entering into any contracts, as an FM clause may do little
to save you from a potential breach of Australian sanctions laws
which could incur serious consequences.
This publication does not deal with every important topic or
change in law and is not intended to be relied upon as a substitute
for legal or other advice that may be relevant to the reader’s
specific circumstances. If you have found this publication of
interest and would like to know more or wish to obtain legal advice
relevant to your circumstances please contact one of the named
individuals listed.