Counsel London
"In overturning the High Court’s decision, the court has re-evaluated what constitutes a “real risk” of exposure to sanctions and in doing so, has recalibrated the evidential threshold required for shipowners seeking to rely on such clauses."
The Court of Appeal’s decision in Tonzip Maritime (Singapore) Pte Ltd v 2 Rivers Pte Ltd [2026] EWCA Civ 641 (“The Catalan Sea”) provides important clarification on the operation of sanctions clauses in voyage charterparties. In overturning the High Court’s decision, the court has re-evaluated what constitutes a “real risk” of exposure to sanctions and in doing so, has recalibrated the evidential threshold required for shipowners seeking to rely on such clauses.
The judgment will be of considerable significance to owners, charterers and their insurers, particularly in an environment where sanctions regimes are complex, fast-moving and often opaque.
Background
The dispute arose out of a voyage charterparty concluded in November 2021 for the carriage of crude oil from Russia to Turkey. The charterparty incorporated a sanctions clause, permitting owners to refuse to follow an order “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.”
On or about 21 June 2021, Mr Mikhail Gutseriev, a Russian businessman, had been designated under the EU sanctions regime. Sanctions from the UK followed on 9 August 2021. Mr Gutseriev was historically connected with a Russian oil company, Neftisa, which owners identified as the proposed shipper of the cargo under the charterparty.
Following his designation, it was reported in Kommersant (a Russian financial newspaper) that Mr Gutseriev had transferred his interest in Neftisa to his brother, retaining a minority share. However, contemporaneous commentary indicated uncertainty as to whether this transfer would be regarded as genuine or as an attempt to circumvent sanctions, and whether dealings with Neftisa might still expose counterparties to sanctions.
Upon arrival at the load port, the vessel’s proposed shipper, Neftisa, was flagged in owners’ sanctions screening checks as being associated with Mr Gutseriev. The charterers provided legal opinions, considering the issue of ownership and control, from the Moscow offices of Herbert Smith Freehills LLP and Baker McKenzie LLP, in addition to other material which was intended to suggest that Mr Gutseriev had transferred control of Neftisa. However, owners remained concerned that the arrangement might be ineffective or could be viewed as an attempt to circumvent sanctions. Owners therefore refused to load the cargo and requested alternative voyage orders.
Charterers rejected that position and purported to cancel the charterparty. Owners treated this as a repudiatory breach.
High Court decision
At first instance, the High Court accepted that the clause entitled owners to act on the basis of a reasonable apprehension of sanctions risk. The issues before the court concerned, primarily, the true construction of the sanctions clause; i.e. whether the owners needed to show on the balance of probabilities (more likely than not) that in complying with charterers’ orders owners would breach the relevant sanctions laws, or was it sufficient for owners to prove that they had formed a reasonable commercial judgement that complying with the order created a risk or danger that owners would be in breach of sanctions. The court also considered whether the owners had made an objectively reasonable judgement that there was an exposure to sanctions.
Although the High Court determined that a reasonable commercial judgement of “risk or danger” (rather than a “more likely than not” test) was a sufficient legal basis for a refusal to comply with the order, on the facts, it held that owners’ refusal to comply was not objectively reasonable. In particular, the court found that the available evidence did not establish conclusively that the shipper remained controlled by a sanctioned individual and so consequently owners could not have made an “objectively reasonable decision” on whether there was a risk or danger of breaching sanctions laws.
The result was that owners were in repudiatory breach and charterers’ counterclaim succeeded.
The issues on appeal
Owners appealed and charterers cross-appealed. The appeal raised two principal issues:
- Was the lower court judge correct in his construction of the sanctions clause?
- Had owners made a reasonable commercial judgement to refuse performance considering the information available at the time?
"While the High Court had broadly accepted that the clause operated by reference to a risk-based standard, the central question was whether it had applied that standard too stringently."
While the High Court had broadly accepted that the clause operated by reference to a risk-based standard, the central question was whether it had applied that standard too stringently.
The Court of Appeal’s decision
The true construction of the sanctions clause
The Court of Appeal rejected charterers’ cross appeal on the interpretation of the language “expose…to sanctions” in the sanctions clause. It confirmed that where these words are included, the relevant threshold is a reasonable judgement that there is a real risk of sanctions, not proof that a breach is more likely than not.
Accordingly, owners need not establish that sanctions would in fact be infringed nor that such an outcome is more likely than not. It is sufficient that there is a real risk of a breach of sanctions, assessed on a reasonable basis.
What is a reasonable commercial judgement?
Though the Court of Appeal upheld the judge’s construction of the sanctions clause, it also confirmed that the High Court had misapplied the legal test to determine whether owners had made a reasonable judgement that complying with charterers’ orders would expose them to sanctions. The High Court had also erred in its conclusion that the determination made by the owners was not a determination that any reasonable shipowner could reach.
The court considered several criticisms by owners of the High Court’s reasoning and conclusions as to what amounts to a reasonable judgement. Owners submitted that the lower court judge had wrongly relied on the decisions in Litasco SA v Der Mond Oil and Gas Africa [2023] EWHC 2866 (Comm) and Vneshprombank LLC v Bedzhamov [2024] EWHC 1048 (Ch) in reaching his conclusion. This was accepted by the Court of Appeal. In particular, it was noted that Litasco had been treated as legal authority for the proposition that a determination which involved speculation could not be a reasonable determination, but the Court of Appeal held that Litasco did not establish any such proposition. Vneshprombank had been incorrectly relied on to support the conclusion that the fact that the decision maker “did not have a positive belief in Mr Gutseriev’s continuing control was fatal to the Owners’ contention that they had made a reasonable determination.” In addressing the criticisms, the court also accepted owners’ contention that they need only reasonably determine the risk that Mr Gutseriev retained de facto control of Neftisa, rather than prove whether control was retained.
The Court of Appeal stressed that certainty is not required in so far as it relates to the evidence available to the owners in deciding whether complying with orders may involve a real risk of liability for sanctions. It accepted, contrary to the lower court view, that on the initial evidence available to owners, a reasonable owner could conclude that Mr Gutseriev “had not in fact wholly alienated his interest in Neftisa”. Although charterers provided the legal opinions and a letter from Neftisa, the Court of Appeal held that this additional material was predicated on “assumptions originating from a source which could not have offered an independent perspective on the reality of any transfer of control.”
Comment
"The court astutely considered the purpose and need for broad language in a sanctions clause, finding that charterers’ construction failed to distinguish between an exposure of the charterparty to sanctions and a charterparty being prohibited or restricted by sanctions."
The decision provides welcome clarity on the operation of sanctions clauses and the meaning of “real risk” in this context.
In the context of interpretation of clauses, the decision of the Court of Appeal is orthodox in its approach. The court held that the language used in the sanctions clause was “sufficiently clear to qualify the Owners’ obligation to follow Charterers’ orders”. The court astutely considered the purpose and need for broad language in a sanctions clause, finding that charterers’ construction failed to distinguish between an exposure of the charterparty to sanctions (i.e. there may not yet have been any contravention of sanctions laws) and a charterparty being prohibited or restricted by sanctions (where the focus is on the legal effect of a contravention). The use of the language of “will expose”, in conjunction with “is prohibited” favoured the “real risk” interpretation. This was further supported by other parts of the clause that dealt with orders already being performed and which used the language of “such risk”, which the Court of Appeal held would refer to the “lowest common denominator” (being the risk of exposure to and not prohibition by sanctions) of the two alternative potential occurrences of sanctions impacting the charterparty.
This conclusion was also said to be supported by the commercial context, such as the need for prospective and speedy determination, the fact the owners were likely to be less well-informed than the charterers and the broadly phrased and complex nature of sanctions laws.
It confirms that the threshold is risk-based rather than probability-based, aligning the legal test with commercial reality. Parties are not required to reach definitive conclusions on complex issues such as ownership or control, which may be inherently uncertain. Also, the judgment underscores the importance of contemporaneous, objectively reasonable decision-making. While the threshold is not unduly onerous, it still requires a rational evidential foundation.
Finally, the Court of Appeal’s reasoning highlights the protective function of sanctions clauses. They are intended to allow parties to avoid exposure to potentially severe legal and financial consequences in circumstances of genuine uncertainty.
In practical terms, the decision is likely to afford shipowners greater confidence when invoking sanctions clauses, while also reinforcing the need for careful and well-documented risk assessments at the time decisions are made.
The authors are grateful to London Partner Simon Kavanagh and Consultant Andrew Hutcheon, members of our sanctions group, for their input on this article.
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