The CATALAN SEA - Relief for Owners as CA clarifies sanctions risk test

By a Charterparty dated 5 November 2021, the “CATALAN SEA” was chartered to carry a cargo of oil from a Russian port to the Mediterranean.

The Charterers 2 Rivers Pte Ltd ordered the Owners Tonzip Maritime Ltd to load a cargo to be shipped by a Russian oil company named Neftisa at the nominated port of Primorsk.

The Owners refused to load the Neftisa cargo and called upon the Charterers to provide alternative voyage orders relying on a clause of the Charterparty referred to in the case as the “EPS Sanctions Clause”.

The EPS Sanctions Clause

The EPS Sanctions Clause provided, in part, as follows:

1. THE OWNERS SHALL NOT BE OBLIGED TO COMPLY WITH ANY ORDERS FOR THE EMPLOYMENT OF THE VESSEL …. 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.

It was accepted by the parties that carriage of the Neftisa cargo would have taken place in part within the EU and the UK. Two of the Vessel's crew were EU nationals, and the Owners’ directors were UK nationals, resident in the EU.

Therefore, for the purposes of the EPS Sanctions Clause, “Sanctions” included the provisions contained in the UK’s Sanctions and Anti-Money Laundering Act 2018 (“SAMLA”); the Republic of Belarus (Sanctions (EU Exit) Regulations 2019/600; Council Regulation (EC) No 765.2006 of 18 May 2006 concerning restrictive measures in respect of Belarus; and Council Decision 2012/642/CFSP of 15 October 2012 concerning restrictive measures against Belarus.

The individuals sanctioned under those measures included Mikhail Gutseriev (“Mr Gutseriev”), a Russian businessman sanctioned by the EU on or about 21 June 2021 and by the UK on 9 August 2021 because of links to the Lukashenko regime in Belarus.

The information obtained by the Owners

By 11 November 2021, there was indication that the cargo would be shipped by PAO Russneft, an associated company of Neftisa. An Infospectrum report dated 16 July 2021 stated that the company was “perceived to be largely controlled by Mikhail Safarbekovich Gutseriev”. It emphasised that Russneft itself was not sanctioned and that after being placed on the EU’s sanctions list in June 2021, Mr Gutseriev was reported as having stood down from the board of the company. Nevertheless, the report identified Mr Gutseriev as the “perceived ultimate beneficial owner”. This report was not made available to all contractual decision makers.

When Neftisa was first identified as the shipper, on or around 15 November, the Owners carried out checks on both Neftisa and Mr Gutseriev using Refinitiv World-Check, a platform used by a number of banks and shipowners for sanctions issues:

• The Refinitiv report on Neftisa stated that the company was “associated to sanctioned individual – reported 2021 … Wholesale trade in crude oil (Apr 2008 - ), Indirect owner and Chairman of the Board of directors: Mikhail Safarbekovich Gutseriev (sanctioned individual) (reported July 2015 – Jul 2021)”. It also stated “Aug 2021 – no further information reported”.
• The Refinitiv report on Mr Gutseriev stated that he was a 54.53% shareholder of the Safmar Group (“June 2021 – ”); Chairman of the board of directors of Neftisa (“Feb 2015 – ”); Chairman of the board of directors of Russneft PJSC (“Feb 2015 - ”); Chairman of the board of directors of the Safmar Group (“ - June 2021”).

Both reports contained a hyperlink to a Kommersant (the Russian financial newspaper) article dated on or about 22 July 2021, however the Owners did not click on the hyperlink. The Kommersant report stated that Mr Gutseriev had: i) transferred the ultimate beneficial ownership of Neftisa to his brother, Mr Sait-Salam Gutseriev, retaining only a 7% share; and ii) been replaced as head of Neftisa's board of directors by Mr Sait-Salam. The article noted that it was not clear whether the EU would evaluate the move as an attempt to circumvent sanctions and that some lawyers/counterparties might still perceive a sanctions risk when contracting with Neftisa.

The information provided by the Charterers

The vessel arrived at the load port on 17 November 2021. In an attempt to persuade the Owners to follow their orders to load the Neftisa cargo, the Charterers provided:

• A letter dated 16 November 2021, on Neftisa headed paper, stating 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’”;
• Legal opinions from the Moscow office of Herbert Smith Freehills LLP (“HSF”):
  1. dated 7 July 2021 addressed to Nefitsa (and stating that it could not be relied upon by any other person) reaching the view that Mr Gutseriev did not satisfy the Ownership, Board Appointment and CEO Appointment tests under Russian law. It said to have relied on information provided to HSF that had not been verified. The only document relied upon in respect of the change of control at Neftisa was a letter expressed to be signed by the sole executive body of Neftisa dated 6 July 2021;
  2. dated 12 July 2021 referring to the advice of 7 July and stating that none of the information reviewed for the purposes of that note suggested that Mr Gutseriev controlled Neftisa, and that the information available did not suggest that the criteria for control under EU sanctions were met. Once again, the opinion was addressed to and stated that it could only be relied upon by Neftisa;
  3. dated 22 July 2021 in respect of UK sanctions stating that none of the information suggested that Mr Gutseriev controlled Neftisa for the purposes of the UK regulations but that “if on the other hand, Neftisa was owned or controlled by Mr M Gutseriev”, the UK regulations would apply. There was a similar provision about reliance being limited to the addressee.
• A legal opinion by Baker McKenzie LLP (“BM”) dated 14 July 2021 similarly addressed solely to Neftisa for its use, and also based on “certain key assumptions”, including that Mr Sait-Salam acted independently from Mr Gutseriev. It concluded that, based on the information provided, Neftisa “should not be regarded as a company controlled by Mr Gutseriev for the purposes of EU sanctions”.

The High Court judgment

The High Court judge held that although the EPS Sanctions Clause should be construed contra proferentem and therefore against the Owners, it did not require the Owners to show that complying with the Charterers’ orders was more likely than not to place Owners in breach of sanctions, only that they had formed a reasonable commercial judgement that complying with the orders created a risk or a danger that Owners would be in breach of sanctions.

However, he held that the test was not satisfied because:

1. The material obtained by the Owners did not evidence Mr Gutseriev’s control of Neftisa in November 2021;
2. The Owners had not been able to confirm whether there was such control and accepted that they did not know whether such control continued;
3. This was so in particular because the Infospectrum report was not made available to all of the contractual decision makers. The report suggested that the reason for Mr Gutseriev to stand down was to give Neftisa freedom to continue to operate;
4. The material presented by the Charterers and the Kommersant report “all spoke with one voice” and “should have been properly taken into account”.

The Court of Appeal decision

The Court of Appeal dismissed the Charterers’ cross-appeal and upheld the High Court judge’s ruling on the construction of the EPS Sanctions Clause. In the Court’s view, both the wording of sub-clause (C) (in particular the reference to ‘such risk’ in the second part of the sub-clause) and the commercial context in which it operates support the conclusion that the wording  ‘…orders…which in the reasonable judgment of the owners…will expose…to sanctions’ meant an exposure to a risk of sanctions and only required Owners to reach a reasonable judgement that compliance with the Charterers’ orders would give rise to a real risk of liability for sanctions rather than a determination that such a liability would arise on the balance of probabilities.

The Court then went on to allow the Owners’ appeal. In the Court’s view, the judge was wrong to conclude that the Owners had not satisfied the relevant test because:

1. The judge was wrong to conclude that the Owners could not have formed a reasonable judgement of the existence of a risk of sanctions without having reached a positive conclusion or belief that Mr Gutseriev’s control continued. The judge had incorrectly interpreted or applied the decisions in Litasco SA v Der Mond Oil and Gas Africa and Vneshprombank LLC v Bedzhamov;
2. The judge was wrong to conclude that to invoke the clause, it was necessary for the Owners to have material “which evidences Mr Gutseriev’s control, direct or indirect, of Neftisa in November 2021”. All that was necessary was for Owners to have reached a reasonable determination that there was a real risk that this was the position;
3. When considering the information that was available to all of the Owners’ decision-makers  - such as that Mr Gutseriev had had a majority ownership stake in the Neftisa ownership structure, that he had transferred his interest to his half-brother, raising a real risk of non-arms’ length dealing, that there was no information as to the consideration provided by his half brother, and the Refinitiv report stating that the company was associated to a sanctioned individual – that was sufficient for an owner to conclude that Mr Gutseriev had not entirely allianated his interest in Neftisa;
4. The package of information provided by Neftisa through the Charterers was based on assumptions originating from a source which could not have offered an independent perspective on the reality of any transfer of control. In addition, in the Court’s view, the BM memorandum would have led a reasonable owner to be even more confident that following the Charterers’ orders involved a real risk of sanctions liability;
5. As to the material that was not taken into account by the Owners, namely the Kommersant report and the infospectrum report on Russneft, the Court said that they did not alter the position - while the Infospectrum report offered a more positive view, it did so in tentative and unsourced terms, and the Kommersant report clearly flagged that lawyers and counterparties could well perceive a sanctions risk.

Conclusion

The Court of Appeal judgment will be welcome by owners. The High Court judgment meant that owners would need to obtain conclusive evidence of and have a positive belief in a material fact before they could reach a reasonable judgement that there was a risk of being exposed to sanctions. This was perceived as a heavy burden in circumstances where ordinarily owners need to make a relatively quick decision as to whether or not to comply with charterers’ orders and will have limited time to investigate what is often an opaque factual position.