The "CATALAN SEA": Court of Appeal ruling on sanctions risk assessment for Shipowners

The decision is sure to be very welcome news for shipowners, their insurers and anyone assessing sanctions risks under similar clauses. 

Matt Illingworth, Marcus Sharpe and Matt Alker, instructing Nicholas Vineall KC (4 Pump Court) and Emmet Coldrick (Quadrant Chambers), acted for the Shipowner in this matter.

The facts

In November 2021, prior to Russia's invasion of Ukraine, the "CATALAN SEA" was let to the Charterers for a voyage from a port in Russia to the Mediterranean. 

The charterparty contained a sanctions clause that provided (amongst other things):

"The owners shall not be obliged to comply with any orders for the employment of the vessel in any carriage, trade, voyage, ship-to-ship transfer operation or other service which in the reasonable judgement of the owners, is prohibited by sanctions or will expose the owners, the vessel or its managers, crew, the vessel's 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"

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. By loading cargo and issuing Bills of Lading, the Shipowner would be entering into a contract of carriage with 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. If the UK and EU authorities concluded that Mr Gutseriev had control of Neftisa, the Shipowner – by contracting with Neftisa – would be in breach of the UK and EU sanctions. 

Mr Gutseriev had had a majority ownership stake in Neftisa but was alleged to have transferred his interest in Neftisa to his brother after being sanctioned. The reports from Refinitiv/World-Check on Mr Gutseriev and Neftisa were not clear and suggested to the Shipowner that Mr Gutseriev may still have been in control of Neftisa. 

Accordingly, the Shipowner 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: 

1. 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
2. 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 documentation 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. Similarly, there was no evidence of the consideration given by Mr Gutseriev's brother to Mr Gutserieve for the transfer of his interest in Neftisa, and no Companies House or equivalent documentation of any sort was provided. 

As for the legal opinions, 2 out of 3 of these opinions were drafted in July 2021 i.e. 4 months prior 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, they had not verified that information and that “if … Neftisa was owned or controlled by Mr M Gutseriev, the UK regulations would apply". 

The Baker McKenzie opinion similarly relied on wide factual assumptions and clearly stated that “the fact that [Mr Gutseriev] is the brother of the majority shareholder of Neftisa could suggest that [Mr Gutseriev] exercises de facto control over Neftisa” and that “the EU competent authorities could come to the conclusion that [Mr Gutseriev] has control over the voting rights indirectly held by [Mr Gutseriev's brother]” meaning that "the EU Member States' authorities might conclude that [Mr Gutseriev] has control over Neftisa". 

The Shipowner was not convinced that there was no exposure to sanctions. The Charterers ultimately sent an email to the Shipowner purporting to cancel the charterparty due to the Shipowner'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. 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 high court´s decision 

On the interpretation of the sanctions clause, the Judge held that: 

1. the Shipowner bore the burden of proof in establishing that its decision was a decision that a reasonable shipowner could have come to;
2. 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;
3. "exposure to sanctions" meant the risk of liability to sanctions or being open to the danger of sanctions; and
4. 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 at first instance concluded that the Shipowner's decision was not one which any reasonable shipowner could reach. The Judge approached the matter by asking whether the Shipowner had positive evidence that Mr Gutseriev still controlled Neftisa in November 2021. The judge concluded that the Shipowner did not and whether or not Mr Gutseriev (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. The judge therefore held that the Shipowner was not entitled to refuse the Charterers' orders and the Shipowner's claim failed. 

Court of Appeal’s decision

The Court of Appeal agreed with the High Court on the interpretation of the sanctions clause but held they could revisit the High Court's decision on the application of the sanctions clause because:

1. the judge at first instance misdirected himself in relying on the case of Litasco SA v Der Mond Oil and Gas Africa to support a conclusion that the Owners could not have formed a reasonable judgment of the existence of a risk of sanctions without having reached a positive conclusion that Mr Gutseriev’s control of Neftisa continued; and
2. the judge's analysis did not address the question of whether the Shipowner made an objectively reasonable judgment that there was an exposure to sanctions but instead addressed a different (and contractually irrelevant) question of whether the Shipowner had made a reasonable determination that Mr Gutseriev’s control of Neftisa continued.

Having regard to the fact that: 

1. Mr Gutseriev was said to have transferred his interest in Neftisa (which would be very substantial in monetary terms) to his brother after being sanctioned by the EU;
2. the purported transfer of an interest to a family member in such circumstances is potentially a red flag of a cosmetic transfer of control;
3. there was no information as to the consideration provided (if any) for the transfer;
4. news articles, that the Charterer relied on, regarding the transfer of Mr Gutseriev's interest to his brother mentioned that “it is not yet clear whether the EU will evaluate the Neftisa deal as an attempt to circumvent sanctions”;
5. the Refinitiv/World-Check report on Neftisa stated the company was “associated to sanctioned individual – reported 2021”;
6. the letter sent by Neftisa was "exactly the sort of letter which would have been sent had there been a cosmetic transfer of Mr Gutseriev’s interest for the purpose of seeking to avoid sanctions"; and
7. the legal opinions provided rested on wide assumptions and actually highlighted a risk of sanctions liability, 

the Court of Appeal held that these factors clearly flagged a real risk that sanctions authorities might conclude that Mr Gutseriev remained sufficiently involved in Neftisa for sanctions to be engaged. The judge at first instance was therefore wrong to say that no reasonable Shipowner would have concluded that complying with the Charterers’ voyage orders gave rise to a real risk of liability to sanctions. 

Impact

In our article on the first instance decision, we commented that the High Court's decision, that no reasonable shipowner could have decided that there was a risk of exposure to sanctions, was likely to cause concern to shipowners who increasingly find themselves in similar situations where they have to make quick decisions with limited information on sanctions related issues.

Shipowners, their insurers and compliance teams operating with the sanctions clause (or similar) in this case will welcome the judgment of the Court of Appeal. To make an objectively reasonable decision, they do not need to meet an impossible standard and somehow have positive evidence that a sanctioned individual retains control over an entity. Instead, they can rely on incomplete information, evidence (or the lack thereof) and speculation to come to a conclusion, which can still be objectively reasonable, that there is a real risk/danger that they may be exposed to liability to sanction.