Sanctions
The sanctions landscape affecting Russia and Ukraine is subject to rapid change and Members with enquiries are referred to the Club’s website and requested to approach their usual contacts at the Club.
- How do the sanctions against Russia/Belarus impact on shipping?
The sanctions that have been implemented in response to the Ukraine invasion cut through key activities in shipping. The restrictions currently in place affect those involved with the sale/transportation of cargoes, the ownership/management/operation/chartering of ships and providers of insurance and other services related to those activities, operators of ports, ship registries, and banks which provide related financing and transactional services. The possibility of prohibitions applying should be considered by shipowners when deciding to whom and for what purposes they agree to charter their vessel, or how it might be employed under an existing charter arrangement; charterers when considering for what purposes and on behalf of whom they employ ships to carry cargoes; traders when deciding from whom and to whom they buy/sell cargoes; P&I and other insurers when considering if cover can respond in the event of an incident involving a prohibited activity or a person/entity subject to restrictions; banks when considering if they can or wish to process transactions which underpin all of the above.
- What are the different types of sanctions that have been imposed?
Details of specific measures can be found on the Steamship Mutual website. They include asset-freeze measures against a large number of individuals, companies, and banks in Russia and Belarus; prohibitions against the provision of certain types of goods, services and technologies to Russia/Belarus, prohibitions against the importation of certain goods to/from those countries (and also Luhansk and Donetsk), engaging in certain types of financial arrangements such as provision of debt and finance, and providing port services to vessels. The list of prohibited activities is expanding almost on a daily basis, and it is important that Members keep abreast of those changes as they occur.
- Do the sanctions implemented by different countries all have the same effect?
The plethora of sanctions that have been implemented are varied in their scope and vary in their application - in many cases the positions adopted by the US, EU, UK, Singapore, Japan, and a number of other countries do not align. It is important to know which sanctions regimes apply to the company and each individual involved in the shipping activity. A company domiciled in Japan will need to comply with Japanese prohibitions, but should also bear in mind that prohibitions implemented by other countries might also be relevant (such as where subsidiaries and branch offices operate or are domiciled). The US frequently uses secondary sanctions as a means to persuade non-US persons to refrain from performing activities which the US wishes to restrict.
In addition, sanctions measures impose “personal” obligations. A UK national employed by a Japanese company would have to comply with UK sanctions laws, while also ensuring the company they work for does not breach applicable sanctions.
- Are there practical examples of sanctions by different countries conflicting?
In the context of the current Russia/Belarus sanctions landscape, some entities/individuals are subject to sanctions imposed by one country but not by others. If for example a Russian-owned company is designated by the US but not the EU, while EU persons may be able to engage with that vessel and/or its owner, they may find that it is not possible practicable to conduct business because banks on which they rely to make and receive payments are prohibited from providing services.
Similarly, a Chinese shipowner may face no sanctions exposure by chartering a ship that is designated by the US, but a US-domiciled insurer or reinsurer might not be able to respond in the event of a claim.
Part of the decision-making process should therefore take into account the possibility that others involved in the trade as a whole might be exposed to different sanctions restrictions, making the trade either unlawful or at least problematic to perform.
- How can I best protect myself as a shipowner/charterer?
In short, conduct due diligence. As a general rule, in the US, EU and UK a person will commit a breach of sanctions if they perform an activity knowing that it is prohibited. If they can demonstrate that they exercised due diligence and took all reasonable steps to ascertain the lawfulness of the activity, but despite this it transpires that the activity was prohibited, they may have a defence and not be guilty of breaching the relevant prohibition. Similar rules may apply in a number of other countries which implement economic sanctions.
Against this background, it is of vital importance that shipping companies know what sanctions restrictions apply to them. If a company fails to keep abreast of sanctions laws applicable to it, and it then performs a prohibited activity, there is a far greater likelihood that it will be found to have knowingly done so, and therefore unable to avail itself of any potential defence(s). Due diligence is making appropriate enquiries as to whether any prohibitions apply to, and in respect of, the parties and activities involved.
- Is there any formal guidance on what due diligence is expected?
Regulators in many countries publish guidance on due diligence and Members should be familiar with the expectations that they are required to meet. In the present context, which involves a fast-changing landscape and rules, Members may also consider the following:
Is there a Russian/Belarusian nexus to a particular trade/transaction/entity? If so, ask the charterer/sub-charterer for full details of the cargoes/parties involved including service providers (such as port operators). In addition, whether or not a sanction issue is identified Members should check their banks (and insurers (see FAQ A8 below) below are able to make and receive payments if there is a Russian / Belarus nexus. Failure to ask pertinent questions would likely mean no defence to any enforcement action that might follow as a result of a sanctions breach (see FAQ A5 above).
Having ascertained those details seek independent legal advice as appropriate on whether a particular fixture might give rise to sanctions risks. It is also possible for queries to be raised with relevant government agencies for guidance. Again, in the context of a future enforcement action in the event of a sanctions breach, obtaining legal advice and/or making such enquiries would likely be treated as a mitigating factor, resulting in a successful defence or lower penalty.
- Are there any other steps to take to protect against the risk of Sanctions, and what steps ought to be taken in the event due diligence identifies a sanctions Issue?
Yes, include an appropriate sanctions clause in any contracts, and if a sanctioned party is identified legal advice will be necessary and contact the Club.
- What position are insurers likely to take?
As with banks different insurers will have differing risk appetites but both will undertake their own due diligence. Sanctions will, or the risk of sanctions may, impact cover and, therefore, it is important to discuss any Russian/ Belarus trades with insurers.
Even if no sanctions issues are identified:
- It may not be possible for Club cover to respond due to banking issues; and
- In addition, the Club may not be able to provide security because of the risk the Club’s banks would not be prepared to make any payment to honour the undertaking provided by the Club.
Contractual Issues
As with any contractual (or other) issues the rights of the parties and consequences of decisions will depend on the particular contractual terms and surrounding facts and circumstances which, in the context of the events in the Ukraine, are liable to rapid change and the effect of sanctions.
The following is, therefore, a summary of some of the issues.
A more detailed discussion of these can be found at Ukraine - Russia Conflict and the Impact on Shipping
- Can Owners refuse orders to proceed to ports in the Black Sea?
War risk clauses incorporated into charterparties may give an owner such a right – see section 2 of Ukraine - Russia Conflict and the Impact on Shipping - Refusing orders to ….. , but only in particular circumstances.
- What are the criteria on which a War Risk clause might apply?
In the case of a typical war risk clause these are:
whether in "reasonable" judgment of the Owners/Master it is dangerous to proceed to that location; and
does the danger arise as a result of the risks defined by the clause – for example war, act of war, civil war or hostilities, warlike operations; laying of mines, blockades
- What is the test for danger?
This is whether the master/Owners consider there is at least a serious possibility that compliance with the charterers’ orders would put the ship in danger from one of the War Risks.
- How is a reasonable judgment defined?
This must be made in good faith and be objectively reasonable. Owners must make necessary enquiries. The question is then whether the Owners made an objectively reasonable judgment (i.e. one that other reasonable owners would have made) based on the enquiries made.
- Do owners need to show that there is a war taking place at the port to which the vessel is ordered?
No. It is sufficient that Owners can show there is a risk of exposure to "war risks" (as defined by the relevant War Risks clause) in calling at the port, which can include matters associated with a war (which can take place away from the immediate war zone) such as blockades of ports, hostilities, requisitioning or confiscation of vessels and other warlike operations.
- At what point in time should a risk of exposure to danger be assessed, and what information is needed?
An owner and master should assess the facts at the time of the relevant order is given. As much information as is reasonably possible should be sought from brokers, underwriters, flag state, and local agents and P&I Club correspondents albeit reliable or up to date information may be difficult to source. Possible indicators of the risks and extent or degree of danger can include:
(i) The level at which AWRP is being charged;
(ii) Reports and the frequency of incidents involving other vessels;
(iii) Advisory notices.
- When might it be possible to cancel or otherwise bring a charterparty to an end?
See section 3 of Ukraine - Russia Conflict and the Impact on Shipping - Cancellation, Frustration and Force Majeure
- Is the port to which the vessel is ordered, or its approaches, unsafe?
See section 4 of Ukraine - Russia Conflict and the Impact on Shipping – Unsafety
With Ukrainian ports closed it is the safety of other ports in the region that may be an issue.
A port is not safe unless, at the relevant time, a ship can reach, use and return from it without being exposed to a danger which cannot be avoided by the exercise of good seamanship (The Eastern City). Safety is judged prospectively at the time the voyage order is given.
- What if at the time that an order is given to proceed to a particular port that port is safe but subsequently becomes unsafe?
Whilst always dependent on the facts if a port subsequently becomes unsafe – perhaps if the war extends beyond the Ukraine, under a time charter a master is entitled to ask for alternative orders.
If a voyage charter, once the charterers have nominated a named port an owner is unlikely to have the contractual right to ask for alternative orders from the charterer.
War Risk clauses will be relevant in these circumstances. Under the Hague and Hague Visby Rules reasonable deviations are permissible (Article IV rule 4) and Act of War is a defence (Article IV Rule 2 (e) to claims for loss or damage to cargo.
P&I Cover
Please see the Club’s article – War Risks cover
- Are P&I liabilities arising from incidents caused by war covered?
No for Owners - Rule 21 of Club’s Rules . These risks are excluded from cover when the incident giving rise to a liability is caused by:
“war, civil war, revolution, rebellion, insurrection or civil strife arising therefrom, or any hostile act by or against a belligerent power or any act of terrorism”.
However, cover for these liabilities can by agreement be extended to include P&I war liabilities but excess of the “proper value” of the entered ship (deemed not to exceed US$500m), or the amount recoverable in respect of the claim under any other policy, whichever is greater (Rules 21 ii & iii) and limited to the lesser of the amount agreed or US$500m.
Charterer’s P&I cover is different. As there is no underlying hull war P&I cover (see (4) below) in place to respond to a charterer’s liabilities, the Club’s Charterers’ Terms provide for P&I cover from the “ground-up” (Clause 16 of the Charterers Rules).
- Are either Owner’s or Charterer’s P&I covers subject to cancellation or termination provisions?
Yes. In the case of cancellation upon 7 days’ notice (Rule 21 iiia and Clause 16 iia) and automatic termination on outbreak of war between any of the UK, the USA, France, the Russian Federation, and the People’s Republic of China (Rule 21 iii b and Clause 16 iib).
- Are there any geographical limits on an Owner’s or charterer’s War P&I cover?
No, unless any areas are excluded under the terms of entry or 7 day’s notice is given of a decision to exclude any areas.
- Can the Club provide Hull War and P&I War risks cover?
Yes. The Club’s separate P&I War Risks cover is from the “ground up”, up to the entry point of the “excess” war cover within Class I P&I, as detailed above. Further information is available on the Club’s website.
