The old adage “if in doubt do nothing” is often good advice, particularly where one is being asked to do something that might be illegal. However, those who are party to existing contracts can’t sit on the fence forever. At some point a decision needs to be taken and the party taking the decision is often on a knife edge as to which way to go.
One such situation arose in the case of The Catalan Sea. This ship was fixed to load cargo at Primorsk in November 2021. The owners’ compliance team rightly raised a red flag, noting that the shipper of the proposed cargo had links to an individual who had recently been sanctioned.
The sanctions compliance process kicked in with the usual checks being made through Refinitiv and World Check, tools that many use when doing due diligence prior to signing contracts. In this case however the owners of Catalan Sea were already contractually bound to follow their charterers’ lawful orders. According to the sanctions clause in the contract, they could only refuse if, in their reasonable judgment, the lifting of the cargo was prohibited by sanctions or would expose them to the risk of sanctions. In other words, the ball was in their court: they needed to do what was necessary to prove that they had exercised reasonable judgment before they could call on the charterers to nominate another cargo.
The case came before the English court because no agreement could be reached. The owners took the view that it was reasonable to refuse to load due to the risk of sanctions. The charterers took the view that it was unreasonable to refuse on the basis that there was no evidence of the shipper being sanctioned and thus there was no risk at that particular time. Eventually the charter was terminated with claims for damages being pursued by each side.
Fast forward many years and the judge Andrew Hochhauser KC was asked to decide who was right and who was wrong.
Whilst the sanctions clause was bespoke, it did bear some similarity to the clause in the Triton Lark [2012] 1 Lloyds Rep 457 in that much turned on what was meant by “reasonable judgment” when it came to the risk of something happening (a pirate attack in that case). The judge agreed with Teare J’s reasoning in Triton Lark and came to the view that it was not necessary to prove that there would have been a breach of sanctions by loading the cargo. The test was whether a reasonable ship owner could reasonably have come to a view in the circumstances that owners were subject to the risk of sanctions or were open to the danger of sanctions.
Up to this point the decision appears to be sensible. However, when it came to the reasonableness of the decision taken in the circumstances, the judge held that the decision was based on speculation and was thus not objectively reasonable. In that regard, it seems he was influenced by Foxton J’s decision in Litasco v Der Mond Oil [2023] 1 All ER (Comm) 1044. The Litasco case was essentially about “control”, it being argued that Litasco was effectively controlled by one or more designated persons including President Putin. Foxton J decided on the evidence that there was no such evidence of control and he distinguished the Mints case (PJSC National Bank Trust and another v Mints and others [2023] EWCA Civ 1132) on the basis that, unlike National Bank Trust, Lukoil was not a state owned entity and there was no evidence (other than speculation) that President Putin in fact exercised control over Litasco. It was also held that the fact that President Putin might, if he so wished, be able to exercise control over Litasco was not enough to prove that a state of affairs existed in which there was actual control by a sanctioned person so as to make Litasco subject to sanctions.
The problem with Hochhauser’s decision is that having set out the position correctly, he then appears to ignore the evidence showing that there was a risk that the shipper was controlled by a sanctioned person. There was no positive evidence of a link between the shipper and the designated person at the relevant time, but there was evidence that a link had existed previously and no positive evidence that this link no longer existed at the time that the decision needed to be taken. It follows that there was on any basis a risk of exposure to sanctions. It seems however that the issue was whether that risk was sufficiently serious to enable a reasonably objective shipowner to refuse to load. The judge held that the absence of positive evidence was sufficient to diminish the risk so as to require the shipowners to load the nominated cargo, even though that may have exposed them to sanctions. Of course, had they loaded the cargo and been found to be in breach of sanctions, they would have been exposed to liabilities and fines without any clear route to compensation from the charterers. Compliance with sanctions is absolute – it is not open to the shipowner to argue that they did not know for certain that the shipper was sanctioned via its connection with a designated person!
We understand that this decision is pending determination by the Court of Appeal which may take us back to what “risk of sanctions” or “danger of sanctions” means when it comes to reasonable judgment. Ultimately, a line has to be drawn where the burden shifts. Does the absence of positive evidence shift the burden to the charterer to prove that there is no sanctions risk? Or does the burden remain on the shipowner? If the former, then it has been suggested that this has wider ramifications as many parties in contracts are bound to perform subject to the liberties set out in sanctions clauses. Where a risk of sanctions arises, what does the party need to do so show that it has exercised its reasonable judgment? How can it protect itself?
Pending clarification from the Court of Appeal, when a red flag is raised, the party raising the flag may be in difficulties. It has been suggested that Refinitiv and World Check are not enough and that the due diligence exercise should be far more extensive. If time permits, legal opinions should be obtained from solicitors or Counsel, particularly where legal opinions are presented by the other party stating that there is no sanctions risk (as happened in this case). It is also useful to have a documented decision making process so that this can be referenced later when it comes to the issue of reasonable judgment.
Finally, just in case it happens (and it did arise on one of our recent cases) don’t accept an indemnity in exchange for loading cargo that may be sanctioned. An indemnity given to facilitate illegal activity will be void as a matter of public policy.
Nick Burgess
Partner
