05 May 2023
Complex sanctions regimes are now a feature of international trade transactions concluded across multiple jurisdictions. It has become important, now more than ever, to conduct proper due diligence to ensure compliance with any international sanctions.
However, despite best endeavours, situations may arise where commercial parties find themselves unable to perform under a contract due to a potential breach of sanctions law. In such circumstances, parties may be left with little alternative but to attempt to avoid the contract, perhaps by invoking Force Majeure (FM).
A recent UK Court of Appeal judgment in MUR Shipping BV v RTI  EWCA Civ 1406 (MUR v RTI) illustrates issues surrounding the enforceability of contracts, in this case a charterparty, in the context of sanctions.
The underlying facts were:
“36.3 A Force Majeure Event is an event or state of affairs which meets all of the following criteria; …. (d) It cannot be overcome by reasonable endeavours from the Party affected.”
At first instance, an arbitration tribunal agreed with RTI. On appeal, the High Court agreed with MUR. The matter was then taken to the Court of Appeal, who, by a bare majority agreed with RTI (and the Tribunal).
According to Marles LJ, the question was whether the relevant event or state of affairs could be overcome by reasonable endeavours from MUR as the party affected, i.e. the question was whether accepting payment in euros would overcome the state of affairs resulting from the imposition of sanctions on RTI’s parent company.
In reaching the decision, the reasoning of Marles LJ sheds some important light on the operation of FM clauses against the backdrop of sanctions, as Marles LJ looked at the precise wording of the FM clause and considered whether, on the terms of the clause the “endeavours” (payment in Euros) would have been successful in overcoming the “event” or “state of affairs.” He concluded that:
“[t]erms such as ‘state of affairs’ and ‘overcome’ are broad and non-technical terms and clause 36 should be applied in a common sense way which achieves the purpose underlying the parties’ obligations—in this case, concerned with payment obligations, that MUR should receive the right quantity of US dollars in its bank account at the right time. I see no reason why a solution which ensured the achievement of this purpose should not be regarded as overcoming the state of affairs resulting from the imposition of sanctions. It is an ordinary and acceptable use of language to say that a problem or state of affairs is overcome if its adverse consequences are completely avoided.”
The approach of the majority accords with a pragmatic solution to a tricky situation often faced by parties in the transport industry. In this case, receipt of payment in an alternate currency was effective in overcoming a potential breach of sanctions with no detriment to MUR. However, this may not always be the case.
For instance, Australia imposes a number of independent and autonomous sanctions, which cannot be circumvented by the methods used by the parties in MUR v RTI. This is explained in further detail below, but first, a brief overview of the Australian sanctions regime will help put things into perspective.
Sanctions in Australia are implemented principally by the Charter of the United Nations Act 1945 (COTUNA), the Autonomous Sanctions Act 2011 (ASA) and the Customs Act 1901, as well as through regulations made under these Acts. Australian sanctions laws apply broadly and include activities:
Australia implements United Nations Security Council (UNSC) sanctions regimes and Australian autonomous sanctions regimes (AASR). Sanctions law offences under the COTUNA for an individual or body corporate generally involve dealing with freezable assets, giving an asset to a sanctioned person, and contravening a UN sanctions enforcement law.
In addition, the Australian Government has decided to implement AASR as a matter of independent Australian foreign policy. The AASR may supplement UNSC sanctions regimes or be separate from them. AASR is intended to achieve three objectives:
The COTUNA, the ASA and their regulations provide for a wide range of prescribed general prohibitions on:
Sanctions implemented in Australia generally involve the prohibition of:
In regard to the above general prohibitions, Australia’s sanctions regulations make it clear that dealing with a designated person or entity includes making assets available, either directly or indirectly, to, or for the benefit of the designated person or entity. This would include through subsidiaries of the designated person or entity.
Contraventions of Australian sanctions laws can result in severe criminal offences. An individual or body corporate can be charged with an offence if they engage in conduct that contravenes a condition of a licence, permission, consent, authorisation or approval (however described) under a UN sanction enforcement law. Under Australian sanctions laws, "engage in conduct" is defined as performing an act or omitting to perform an act. The law does not set a minimum threshold for an offence. If found guilty, the punishment for violating Australian sanctions laws includes:
These offences are strict liability offences for bodies corporate, meaning that it is not necessary to prove any fault element (intent, knowledge, recklessness or negligence) for a body corporate to be found guilty. It is, however, a defence for bodies corporate to demonstrate they took reasonable precautions and exercised due diligence to prevent or avoid any contravention from occurring. Australian sanctions laws do not expand upon what constitutes ‘reasonable precautions’ and ‘due diligence’, which will depend on the individual circumstances in any given case.
Australia’s sanctions regimes are very broad and far-reaching, meaning that it is unlikely that one will be capable of circumventing Australian sanctions laws through the use of ‘reasonable endeavours’, such as payment from a subsidiary company in a foreign currency. Indeed, if an Australian body corporate or individual is involved in a contract which includes a designated person or body corporate, either directly or indirectly, Australian sanctions laws make it clear that financial transactions, including making an asset available to, or dealing with an asset of, a person or entity subject to targeted financial sanctions, constitutes a breach.
This means that even though parties may be capable of using ‘reasonable endeavours’ to circumvent a FM clause pertaining to sanctions within a contract, the underlying contract and transaction with a designated person or entity, including any of their subsidiaries, will still be subject to Australian sanctions laws.
If MUR v RTI had involved an Australian individual, even an employee of the company who was involved in the matter, or a corporation owned or controlled by Australians or people in Australia, then the sanctions imposed on RTI’s parent company would not have been capable of being circumvented. Moreover, depending on the nature and structure of the contract, it may have constituted a breach of Australian sanctions laws even if the subsidiary made payment in a foreign currency.
Therefore, Australian entities and individuals seeking to enter into contracts with foreign entities who may have links to sanctioned individuals or body corporates should ensure that proper due diligence and reasonable precautions are taken to vet them prior to entering into any contracts, as an FM clause may do little to save you from a potential breach of Australian sanctions laws which could incur serious consequences.
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The information in this article is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.