Between a dock and a hard place: sanctions clauses

The question of whether compliance will expose you to sanctions is not the same as whether compliance is prohibited by sanctions, according to the Court of Appeal which has recently looked at a sanctions clause that relieved one party from compliance in certain circumstances.

Cargo with complications

Tonzip chartered its vessel to 2 Rivers. The sanctions clause provided that Tonzip need not comply with any order given by 2 Rivers which, in Tonzip’s “reasonable judgment”, was “prohibited by sanctions” or would “expose the owners… to sanctions”.

2 Rivers ordered Tonzip to load a cargo of crude oil shipped by Neftisa, a Russian oil company in which Mikhail Gutseriev had held a majority stake. Gutseriev was sanctioned by the EU and UK in 2021 and purportedly transferred his interest to his brother shortly thereafter. Tonzip refused to load, based on sanctions screening checks and the sanctions clause. 2 Rivers provided legal opinions indicating there should be no concern. Tonzip stuck to its position and 2 Rivers cancelled the charterparty. Tonzip treated that cancellation as repudiatory and terminated.

What the sanctions clause required

The High Court found that it was a matter of speculation whether Gutseriev had, and continued to have, the requisite ownership control and accordingly this was insufficient for Tonzip to arrive at an objectively reasonable decision that Gutseriev had de facto control.

The Court of Appeal disagreed. As a matter of interpretation, it held that “expose… to sanctions” means something different from “prohibited by sanctions”. The clause itself referred to “such risk”, strongly supporting a reading of “exposure” as “being put at risk”. Tonzip was not required, in the exercise of reasonable judgment, to be satisfied that, on the balance of probabilities, sanctions were more likely than not to be contravened if 2 Rivers’ orders were complied with; it sufficed that Tonzip made an objectively reasonable judgment that compliance gave rise to a real risk of exposure to a breach of sanctions. The commercial context reinforced this lower threshold: owners must often act quickly, on incomplete information, where ownership structures are opaque. 

Relevant standard met

The court concluded it was objectively reasonable for Tonzip to judge there was a real risk of sanctions exposure, given that Gutseriev may have remained involved with Neftisa. The transfer of a majority stake to a family member and long-time business partner, shortly after sanctions were imposed, with no disclosed consideration, was a sufficient red flag. The legal opinions provided by 2 Rivers were premised, as is usual, on unverified factual assumptions originating from Neftisa itself and did not extinguish that risk. 

Sanctions clauses employing the concept of “exposure” therefore set a lower bar than many may assume – a reasonable apprehension of risk will do. 

Judgment: Tonzip v 2 Rivers