Court decision reshapes sanctions risk assessment for shipowners
In a long-awaited decision, the English High Court has found that a Shipowner’s decision to refuse their Charterers' orders to load a cargo, on the basis that doing so would expose them to sanctions, was not a decision that a reasonable shipowner could reasonably have come to.
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As such, the Shipowner's claim for repudiatory breach of the voyage charterparty failed and the Court held that the Charterers' counterclaim succeeded.
The decision is sure to send shockwaves through the shipping industry; not just for shipowners but also their insurers. A team from Wikborg Rein (Matt Illingworth, Marcus Sharpe and Matt Alker) instructing Emmet Coldrick from Quadrant Chambers act for the Shipowner in this matter. Permission to appeal has been granted by the trial judge.
The facts
In November 2021, prior to Russia's invasion of Ukraine, the "CATALAN SEA" (the "Vessel") was let to the Charterers for a voyage from a port in the Ust Luga to Primorsk range to the Mediterranean.
The Vessel arrived at the nominated load port of Primorsk and gave Notice of Readiness. The Shipowner was made aware that the shipper of the intended cargo was Neftisa. The Shipowner's sanction checks, which included use of the specialist compliance database "Refinitiv/World-Check", revealed that Neftisa was associated with a Mr Gutseriev. Mr Gutseriev was sanctioned by the UK and EU under sanctions laws relating to Belarus. The reports from Refinitiv/World-Check on Mr Gutseriev and Neftisa suggested to the Shipowner that Mr Gutseriev may have been in control of Neftisa.
Accordingly, the Shipowner refused to load the cargo and called on the Charterers to provide alternative orders in accordance with the charterparty's sanctions clause. The Charterers did not provide alternative orders and instead sought to convince the Shipowner that there was no risk of the Shipowner being exposed to sanctions. To do so, the Charterers provided the Shipowner with:
a letter dated 16 November 2021, on Neftisa headed paper, indicating that Mr Gutseriev was not a member of the Board of Directors of Neftisa and “[i]n accordance with the legislation of the Russian Federation is not the controlling person of “Neftisa”; and
- 3 legal opinions from the Moscow offices of Herbert Smith Freehills and Baker McKenzie to the effect that, if various factual assumptions were made, Neftisa was not owned or controlled by Mr Gutseriev and so was not subject to EU or UK sanctions.
The letter from Neftisa gave no information on what information was provided to the “Deputy Director General on corporate issues” who signed the letter. No instrument of resignation from the Board, or any other document, signed by Mr Gutseriev (or indeed any other director of Neftisa) was provided. No Companies House or equivalent official form of any sort was provided. Views were expressed about the extent of Mr Gutseriev’s ownership and control, but they were said to be “in accordance with the legislation of the Russian Federation”.
As for the legal opinions, 2 out of 3 of these opinions were drafted in July 2021 i.e. 4 months prior to the ongoing event and proceeded on the basis of factual assumptions. The Herbert Smith Freehills opinions made clear that they expressed no view on the facts, had reached conclusions based solely on information provided to them and had not verified that information and that their stated assumptions had not been verified or investigated. The Baker McKenzie opinion stated “[s]hould any of the below assumptions be incorrect (or subsequently change), this may impact upon our legal analysis and may potentially expose Neftisa to EU sanctions compliance risks”.
The Shipowner was not convinced. The Charterers sent an email to the Shipowner purporting to cancel the charterparty due to the Claimant’s refusal to load the cargo. The Shipowner replied on the same day terminating the charterparty for repudiatory breach on the basis that the Charterers' message was a renunciation of the charterparty.
In September 2023, the European Court of Justice delivered a decision that held Mr Gutseriev remained in control of Neftisa after his alleged divestment in June 2021; although the judgment does not specifically mention the position in November 2021.
In December 2024, the Charterers were themselves sanctioned by the UK and have since also been sanctioned by the EU; albeit under a different sanctions regime.
The sanctions clause
On the interpretation of the sanctions clause, the Judge held that:
as the sanctions clause limited the Charterers' key right to provide orders to the Vessel, the sanctions clause must be interpreted contra proferentem i.e. in the case of ambiguity, it should be interpreted against the Shipowner;
the Shipowner bore the burden of proof in establishing that its decision was a decision that a reasonable shipowner could reasonably have come to in the circumstances;
the use of the wording "exposure to sanctions" did not mean that the shipowner had to show that any of the parties would be in breach of sanctions;
"exposure to sanctions" meant the risk of sanctions or being open to the danger of sanctions; and
- where a shipowner makes a judgment that compliance with an order will give rise to an exposure to sanctions, and there is a prima facie objectively reasonable basis for that judgment, the evidential burden shifts to the charterer to prove otherwise.
Ultimately, the Judge concluded that the Shipowner's decision was not one that a reasonable shipowner could reasonably have come to in the circumstances. The Judge seems to have approached the matter by seeking positive evidence that Mr Gutseriev still controlled Neftisa in November 2021 and concluded that whether or not he (still) controlled Neftisa was speculation. As such, according to the Judge, the Shipowner had no objectively reasonable basis for their refusal to load the cargo. Therefore, the burden of proof did not shift to Charterers to prove that their orders would not expose the Shipowner to sanctions.
The Shipowner was therefore not entitled to refuse the Charterers' orders and their claim failed.
Impact
The shipowners in this case had reports from commonly used compliance tools that highlighted a sanctions risk. They then received dated, heavily caveated legal opinions based on factual assumptions, and a letter from Neftisa that provided no supporting corporate documentation. Whilst not part of their decision making at the time, the Shipowner’s decision was arguably found to be justified by the fact that the European Court of Justice ultimately found that Mr Gutseriev did in fact retain control of Neftisa.
That the Court found that no reasonable shipowner could reasonably have come to the decision that there was a risk of exposure to sanctions is likely to cause concern to shipowners who, as a result of Russia's invasion of Ukraine, increasingly find themselves in similar situations where they have to make quick decisions on sanctions related issues.
The judgment's effect appears to be that if a shipowner wishes to rely on a sanctions clause like the one in this case, they cannot rely on evidence that only suggests there is a risk/danger that a sanctioned individual retains de facto control. Instead they must have positive evidence that a sanctioned individual has de facto control before their counterparties are required to provide evidence to the contrary. It is hard to imagine a situation in which that evidence will be readily available to a shipowner.
It will be for the Court of Appeal to determine whether the Judge’s approach in this matter was correct. With respect, it is the authors’ opinion that the Judge’s approach was clearly erroneous. Instead of seeking positive evidence of Mr Gutseriev de facto control of Neftisa, the Judge should have simply asked whether a reasonable shipowner could reasonably have concluded that there was a risk or danger that Mr Gutseriev had retained ownership or control of Neftisa.
Whilst waiting for the Court of Appeal’s judgment, shipowners with similar sanctions clauses are in an unenviable position. If they take a cautious approach which is very much in line with current industry practice, they risk being in breach of their charters and the financial consequences that come with that. If they wish to avoid that and take a less cautious approach – which they are arguably encouraged to do by this judgement – they risk being in breach of sanctions and exposing themselves to the very serious consequences that brings.
Tonzip Maritime Ltd v 2Rivers PTE Ltd [2025] EWHC 2036 (Comm)