In today’s globalised commercial environment, the increasing use of sanctions as a tool for foreign policy has made sanctions compliance a critical concern for international businesses operating across borders. This note explores how sanctions can affect commercial relationships and examines the arbitration of sanctions-related disputes under English law.
Overview of the UK Sanctions Regime
The United Kingdom’s sanctions regime is primary based on the Sanctions and Anti-Money Laundering Act 2018 (“SAMLA”), which empowers the government to impose sanctions independently and to implement those arising out of its international obligations (such as from United Nations Security Council decisions).[1] Key examples of sanctions regulations enacted under SAMLA include the Russia (Sanctions) (EU Exit) Regulations 2019, the Global Human Rights Sanctions Regulations 2020, and the Iran (Sanctions) Regulations 2023.
The Office of Financial Sanctions Implementations oversees the implementation of financial sanctions, and it maintains a Consolidated List of Financial Sanctions Targets that acts as a repository of designated individuals and entities.
Generally speaking, a contract that violates a sanctions regulation at the time that it was entered will be deemed void ab initio, meaning that it is treated as though it never came into existence.[2]
If a contract is first entered into and a sanction is later imposed on a party, SAMLA Section 44 prevents liability for acts and omissions that are done in the “reasonable belief” that they are necessary to comply with UK sanctions.[3]
However, this provision does not provide any remedies or allocate the risk of sanctions. It also does not affect the validity of the underlying contract or the rights and obligations that may accrue under it in the future. This means that parties wanting more substantive protection from the risk of sanctions will need to look over the terms of their contract for a sanctions clause or turn toward the common law doctrine of frustration.
Sanctions Clauses
Sanctions clauses are contractual mechanisms that aim to allocate the risks associated with the imposition of, and compliance with, sanctions regimes. They usually provide parties with remedies such as termination, suspension of performance, and/or claims for damages, upon the condition that a party becomes sanctioned. Although they are often expressed directly as “sanctions clauses”, they can also appear in the form of force majeure, illegality, or material adverse change clauses, depending on the wording of the contract.
One example is the BIMCO Sanctions Clause for Voyage Charter Parties 2020, which provides, inter alia, as follows:
(e) If performance involves a Sanctioned Party or a Sanctioned Activity, without prejudice to any other rights that may be available in subclause (d) above:
(i) if loading has not commenced, Owners may cancel this Charter Party; or
(ii) if the voyage or the loading has commenced, Owners may refuse to proceed and discharge any cargo already loaded at any safe port or place of their choice (including the port or place of loading) in complete fulfilment of this Charter Party,
provided always that if this Charter Party provides that loading and/or discharging is to take place within a range of ports or places that do not involve a Sanctioned Party or a Sanctioned Activity, Owners must first request Charterers to nominate an alternative port or place and may cancel the Charter Party or refuse to proceed on the voyage only if such nomination is not made within forty-eight (48) hours after the request.
Sanctions Clauses: Interpretation
According to Cornell, “English courts have taken a strict approach to the interpretation of ‘sanctions clauses’ in English law-governed contracts”.[4]
In Mamancochet Mining Limited, the Commercial Court was tasked with interpreting the meaning of “expose[d]” in the following sanctions clause:
No (re)insurer shall be deemed to provide cover and no (re)insurer shall be liable to pay any claim or provide any benefit hereunder to the extent that the provision of such cover, payment of such claim or provision of such benefit would expose that (re)insurer to any sanction, prohibition or restriction under United Nations resolutions or the trade or economic sanctions, laws, or regulations of the European Union, United Kingdom or the United States of America.[5]
Whereas the defendants argued that “expose” referred to exposure to the mere risk of sanctions, the claimants contended that the clause required proof that payment would, on the balance of probabilities, actually result in a sanctions breach.[6] The Court adopted the narrower reading and found in favour of the claimants,[7] highlighting English law’s reluctance to stretch sanctions clauses beyond their literal meaning.
Because sanctions clauses are creatures of contract, their scope, application, and consequences are a matter of construction. This includes notice provisions and mitigation obligations, which must strictly be complied with.
In Gravelor Shipping, the Commercial Court examined a sanctions clause in a charterparty that required parties to take “all necessary steps” before they could rely on it:
Where a payment under this Charterparty is incapable of being processed by the relevant banking institution and has not been received by the Owner on the due date by virtue of the Owner becoming a Sanctions Target, the Owner and the Charterer shall cooperate and promptly take all necessary steps in order for the payments to be resumed. Any delay in payments resulting solely from the circumstances referred to in the immediately preceding sentence shall not deemed an Event of Default contemplated by clause 7.1(a) of this Charterparty.[8]
Although the disputed payment was due in US Dollars, the Court held that “all necessary steps” extended to requiring the defendants to nominate an alternative bank account and to accept payment in Euros.[9]
This decision stands in contrast with the Supreme Court’s later ruling in RTI Ltd, where a sanctions clause in the form of a force majeure provision suspended performance, including due to sanctions, where the affected event “[could not] be overcome by reasonable endeavors from the Party affected.”[10]
Though the defendant offered to make payment in Euros rather than US Dollars, as required by the contract, the Supreme Court decided that “reasonable endeavours” did not include non-contractual performance unless there was clear wording to require it.[11]
Despite broad similarities between the two cases, the Supreme Court distinguished them on the following grounds:
- The sanctions clause in Gravelor was “much more specific and targeted than the general force majeure clause” in RTI Ltd; and[12]
- The sanctions clause imposed a duty to take “all necessary steps” on both parties, as opposed to the “reasonable endeavours” clause of RTI that only applied to the party affected.[13]
These cases demonstrate the granular approach taken by English courts in determining the meaning of sanctions clauses, the interpretation of which turns on their specific wording and context.
A final point to note is that if a sanctions clause is framed as a force majeure clause, there is a presumption that non-performance must arise from events that are beyond the parties’ control and that are not otherwise accounted for by the contract.[14]
Frustration
Frustration is a common law doctrine that terminates a contract when a contractual obligation becomes “radically different from that which was undertaken” due to a situation which is outside of the parties’ control.[15]
Frustration is more than a mere difficulty in performance or delay, and it is more than “disappointed expectations”.[16] In Edwinton Commercial Corp, the Court of Appeal identified the following factors to consider in determining whether a contract is frustrated:
In my judgment, the application of the doctrine of frustration requires a multi-factorial approach. Among the factors which have to be considered are the terms of the contract itself, its matrix or context, the parties’ knowledge, expectations, assumptions and contemplations, in particular as to risk, as at the time of contract, at any rate so far as these can be ascribed mutually and objectively, and then the nature of the supervening event, and the parties’ reasonable and objectively ascertainable calculations as to the possibilities of future performance in the new circumstances.[17]
Frustration is automatic and takes place immediately upon the occurrence of the frustrating event.[18] However, because it is said to “kill” the contract,[19] and it discharges all future rights and obligations, it is kept within narrow confines.
The Law Reform (Frustrated Contracts) Act 1943 provides that money paid under a frustrated contract must be returned and that money payable in the future ceases to be payable, accounting for any value that has already been retained by a party or money already paid for the purpose of the contract.[20]
Notably, a contract cannot be frustrated when its terms make provision for the occurrence of that frustrating event,[21] because, in that case, the parties have clearly considered the situation in question and performance cannot be said to be “radically different” from what was expected when entering the contract.[22]
It is also generally unlikely for an arbitration agreement to be frustrated due to the imposition of sanctions. In Barclays Bank PLC v VEB, the respondent, a Russian state development corporation subject to sanctions under SAMLA,[23] argued that its arbitration agreement with the applicant had been frustrated. It claimed that sanctions had impaired its access to justice by making it harder to secure legal representation, causing delays in paying the London Court of International Arbitration (“LCIA”) (an arbitral institution), and making it impossible for some of its witnesses to attend an in-person hearing.[24]
The Court of Appeal, however, rejected these arguments. It noted that the respondent was, in fact, being represented before the court, and that the LCIA had a license to receive payments from sanctioned entities for arbitration purposes.[25] The result was that any issue was merely “increased inconvenience and administrative effort but not a radically different performance or a denial of justice.”[26]
Supervening Illegality
The doctrine of supervening illegality terminates a contract where a subsequent law comes into force that makes its performance illegal. In a sense, this can be said to frustrate the contract, and the courts have sometimes treated it as a form of frustration.
In Metropolitan Water Board, for example, a contract could not be performed because of an order by the Ministry of Munitions to cease work in the midst of World War One. This was treated as a case of frustration by supervening illegality.[27] Indeed, according to Chitty, “[i]t is now customary to treat supervening illegality as an instance of frustration”.[28]
However, the courts have also previously expressed that supervening illegality may be different from frustration because it allows for the consideration of public policy.[29]
This is the most likely way for sanctions to affect rights and obligations under a contract outside of a sanctions clause. Regardless of its precise doctrinal status (as an independent remedy or a sub-type of frustration), supervening illegality operates in the same way as frustration to discharge a contract automatically.
However, English courts will typically not find frustration where the affected parties can apply for derogations to overcome the impact of sanctions but no attempt to apply for one has been made.[30]
Which Sanctions Regimes Are Considered?
The main sanctions regime relevant to the law of frustration (and to the interpretation of certain sanctions clauses) is that of the governing law of the contract, but courts will also consider the law of the place of performance.[31]
On rare occasions, it seems that courts may also take other sanctions regimes into account. In Lamesa Investments Ltd, a sanctions clause provided as follows:
In the event that any principle or interest in respect of the [Loan] has not been paid within 14 days from the due date for payment […] [Lamesa] may institute proceedings […] provided that [Cynergy] shall not be in default if […] it satisfied [Lamesa] that such sums were not paid in order to comply with any mandatory provision of law, regulation or order of any court of competent jurisdiction.[32]
Despite the governing law and place of performance both being English, the court interpreted “mandatory provision of law” as including the sanctions law of the United States.[33] In reaching this conclusion, it is notable that the Court of Appeal considered the potentially severe impacts of the defendant being found in violation of US sanctions and the fact that it may no longer be able to bank in the country, as well as the international nature of the underlying facility agreement.[34]
Enforcement
Sanctions may pose issues during the enforcement stage. In this respect, it is notable that Section 103(3) of the Arbitration Act 1996 allows courts to refuse enforcement “if it would be contrary to public policy to recognise or enforce” it. This provision is also contained in Article V.2.(b) of the 1958 New York Convention, and so is mirrored in the legal systems of its 172 parties.
On paper, this may open the door to refusal of enforcement in case an award orders payment to a sanctioned entity on public policy grounds.
Furthermore, post-award interest may not accrue once a party becomes targeted by sanctions. In MODSAF v IMS, a claimant sought to enforce an arbitration award made in 2001. However, it became subject to EU sanctions in 2008, and the Court of Appeal found that post-award interest did not run from this point onward because the defendant could not pay in any event.[35]
Conclusion
Sanctions now constitute a significant source of risk in international commerce, and their implications under English law are multifaceted. Parties must consider the state of the sanctions regime at the time of contracting, the risk that a party will become sanctioned in the future, and the enforceability of arbitral awards in such a case. Meanwhile, English courts continue to adopt a narrow approach to the interpretation of sanctions clauses and the applicability of the doctrine of frustration, meaning that thoughtful contract drafting, along with timely legal advice, are more essential than ever.
[1] Sanctions and Anti-Money Laundering Act 2018, s 1(1).
[2] Archbolds (Freightage) Ltd v S Spanglett Ltd [1961] 1 QB 374, 388 (“The third effect of illegality is to avoid the contract ab initio and that arises if the making of the contract is expressly or impliedly prohibited by statute or is otherwise contrary to public policy.”).
[3] Sanctions and Anti-Money Laundering Act 2018, s 44(2) (“A person is not liable to any civil proceedings to which that person would, in the absence of this section, have been liable in respect of the act.”).
[4] T. Cornell, Chapter 14: Sanctions and Arbitration: The Impact of Sanctions on English Law-Governed Contracts and English-Seated Arbitrations, in G. Fullelove et al. (eds.), International Arbitration in England: Perspectives in Times of Change, p. 281. See, e.g., Seagrain LLC v Glencore Grain BV [2013] EWCA Civ 1627, [29] (“In the discussion of prohibition of export clauses in Benjamin’s Sale of Goods […] it is stated that, if anything there may be a tendency to construe such exemption clauses narrowly, and against the party who seeks to rely on such a clause.”).
[5] Mamancochet Mining Limited v Aegis Managing Agency Limited and Others [2018] EWHC 2643 (Comm), [8] (emphasis added).
[6] Mamancochet Mining Limited v Aegis Managing Agency Limited and Others [2018] EWHC 2643 (Comm), [42-43].
[7] Mamancochet Mining Limited v Aegis Managing Agency Limited and Others [2018] EWHC 2643 (Comm), [50].
[8] Gravelor Shipping Limited v GTLK Asia M5 Limited [2023] EWHC 131 (Comm), [10] (emphasis added).
[9] Gravelor Shipping Limited v GTLK Asia M5 Limited [2023] EWHC 131 (Comm), [92].
[10] RTI Ltd v MUR Shipping BV [2024] UKSC 18, [4].
[11] RTI Ltd v MUR Shipping BV [2024] UKSC 18, [102].
[12] RTI Ltd v MUR Shipping BV [2024] UKSC 18, [100].
[13] RTI Ltd v MUR Shipping BV [2024] UKSC 18, [100].
[14] Fyffes Group Ltd v Reefer Express Lines Pty Ltd [1996] 2 Lloyd’s Rep 171, 196 (“In general I think it fair to approach such clauses with the presumption that the expression force majeure is likely to be restricted to supervening events which arise without the fault of either party and for which neither of them has undertaken responsibility.”). See also RTI Ltd v MUR Shipping BV [2024] UKSC 18, [29] (“It follows that, even if clause 36 had not contained 36.3(d), it would have been interpreted as containing a reasonable endeavours proviso to like effect.”).
[15] Davis Contractors v Fareham Urban DC [1956] AC 696, 728-728.
[16] J Lauritzen A/S v Wijsmuller BV [1990] 1 Lloyd’s Rep 1, 8.
[17] Edwinton Commercial Corp v Tsavliris Russ (Worldwide Salvage & Towage) Ltd [2007] 1 CLC 876, [111].
[18] Canary Wharf (BP4) T1 Limited v European Medicines Agency [2019] EWHC 335 (Ch), [24].
[19] J Lauritzen AS v Wijsmuller BV [1990] 1 Lloyd’s Rep 1, 7.
[20] Law Reform (Frustrated Contracts) Act 1943, s 1.
[21] See Law Reform (Frustrated Contracts) Act 1943, s 2(d).
[22] Davis Contractors v Fareham Urban DC [1956] AC 696, 728-728.
[23] Barclays Bank PLC v VEB.RF [2024] EWHC 1074 (Comm), [11].
[24] Barclays Bank PLC v VEB.RF [2024] EWHC 1074 (Comm), [43-44].
[25] Barclays Bank PLC v VEB.RF [2024] EWHC 1074 (Comm), [46-49].
[26] Barclays Bank PLC v VEB.RF [2024] EWHC 1074 (Comm), [49].
[27] Metropolitan Water Board v Dick, Kerr And Company Limited [1918] AC 119, 130 (“as the respondents are only bound to carry out the old contract and cannot do so owing to supervenient legislation, they are entitled to succeed in their defence to this action.”).
[28] Chapter 23 – Discharge by Frustration in Chitty on Contracts (32nd edn.), para. 23-024.
[29] See Islamic Republic of Iran Shipping Lines v Steamship Mutual Underwriting Association (Bermuda) Limited v HM Treasury, [2010] EWHC 2661 (Comm), [100].
[30] DVB Bank SE v Shere Shipping Company Ltd [2013] EWHC 2321 (Comm) (“where Kerr J said that it was the, … settled law in England… that a supervening prohibition of some contractually undertaken obligation which can be overcome by obtaining a licence, will only frustrate a contract at once if the person affected by the prohibition can show that no licence could in any event have been obtained. If this is uncertain, then his obligation is to use his best endeavours to obtain the necessary licence, and the contract then only becomes frustrated if and when all such efforts have failed.”).
[31] Ralli Brothers v Compañia Naviera Sota Y Aznar [1920] 2 KB 287, 291 (“In my opinion the law is correctly stated by Professor Dicey in his work on the Conflict of Laws […]: ‘A contract… is, in general, invalid in so far as… the performance of it is unlawful by the law of the country where the contract is to be performed…’”).
[32] Lamesa Investments Limited v Cynergy Bank Limited [2020] EWCA Civ 821, [17].
[33] Lamesa Investments Limited v Cynergy Bank Limited [2020] EWCA Civ 821, [47].
[34] Lamesa Investments Limited v Cynergy Bank Limited [2020] EWCA Civ 821, [43].
[35] Ministry of Defence & Support for Armed Forces of the Islamic Republic of Iran v International Military Services Limited [2020] EWCA Civ 145, [1-2].
