High Court dismisses force majeure and trade sanctions defences in breach of contract claim, and considers “ownership and control” test under UK sanctions

The High Court has allowed a summary judgment application in relation to a breach of contract claim, finding that there was no realistic prospect of the defendants being able to rely on force majeure and change of trade sanctions provisions in the agreement: Litasco SA v Der Mond Oil and Gas Africa SA & Anor (Rev1) [2023] EWHC 2866 (Comm).

Significantly, the court also clarified the application of the “ownership and control” test under the UK sanctions regime, following recent obiter comments made by the Court of Appeal in Mints v PJSC National Bank Trust [2023] EWCA Civ 1132 (see our blog post on the decision here). The test concerns circumstances in which companies which are not themselves listed as designated persons must be treated as subject to sanctions restrictions on the basis of their ownership or control by a designated person. In Mints, the court said (on an obiter basis) that for the purpose of the test, Russian President Vladimir Putin could in one sense be deemed to control everything in Russia.

In the present case, the court clarified that the ownership and control test requires an “existing influence” by a designated person over the relevant affairs of the company, not just one they may be in a position to bring about. Whilst Mr Putin could arguably put all of the company’s assets under his control, this alone did not suffice. The court also analysed the question of control in the context of the relevant restriction. Since the case concerned the “making available” prohibition, the court took the view that the “central  focus” of the control question was whether there was evidence that Mr Putin could control any funds made available to the company in question. There was no evidence that payment of the debt in question would be used in accordance with Mr Putin’s wishes, and the test was not satisfied.

We consider the decision in more detail below.

Background

In 2021, the claimant (a Swiss oil trading company, which is wholly owned by a Russian oil company) entered into a contract with the first defendant (a Senegalese oil trading company) for the supply of crude oil. The agreement provided that the parties could suspend performance of their obligations due to a force majeure event or a change in applicable sanctions regimes.

The first defendant made partial payments of the purchase price but failed to pay the balance. The parties restructured the debt and the second defendant (the first defendant’s parent company) provided a guarantee in respect of the outstanding sums.

In February 2022, Russia invaded the Ukraine, following which the UK Government introduced a range of sanctions against Russian persons and entities. In March 2022, the claimant accelerated the debt and demanded the outstanding balance.

The claimant commenced proceedings and issued a summary judgment application against the defendants for the outstanding sum. The defendants advanced a number of defences, including pursuant to change in sanctions and force majeure clauses. The defendants also submitted that although neither the claimant nor its parent were designated persons under the UK sanctions regime, the defendants were prohibited from making payment to the claimant under Regulations 7 and 12 of the Russia (Sanctions) (EU Exit) Regulations 2019 (2019 Regulations) because the claimant is controlled by Mr Putin.

Decision

The High Court found in favour of the claimant, allowing its summary judgment application.

The force majeure defence

The force majeure clause provided that where either party was “delayed or hindered or prevented from complying with its obligations” under the agreement, it could, on notice to the other, suspend performance of its obligations.

The defendants submitted that the force majeure clause had been engaged, adducing evidence of five African banks who were unwilling to make payment to the claimant because of sanctions concerns.

The court rejected the defendants’ submissions and held that, on the facts, the reality was that they simply did not have sufficient foreign currency to make payment. While the Russia-Ukraine war may have caused a downturn in their trade and reduced their inflows of foreign currency, the causal effect of such events on their ability to pay the sums due was too remote.

In reaching this conclusion, the court commented on the difference between force majeure clauses triggered when a force majeure event “prevents” performance and those where performance is “hindered”, which have a wider field of operation. The concept of prevention can be equated to something “rendering delivery impossible”, whereas hinderance means “something less than that namely rendering delivery more or less difficult, but not impossible”.

The court also commented that a seller who has an accrued right to payment has, by definition, already done what it is necessary to do on its part to be paid. Against this background, an argument that a party owing an accrued debt obligation is relieved of performance because paying the debt has been made more difficult is one which must be approached with particular circumspection. Even in the context of force majeure clauses under which hindering performance is sufficient, a significant degree of difficulty would be required (perhaps one approaching, albeit falling short of, impossibility) before difficulty in making payment would suspend performance of an accrued obligation.

The sanctions defences

The defendants sought to rely on a change in sanctions clause, which provided that the payment obligations under the agreement could be suspended where a change in applicable sanctions regimes resulted in the risk of penalty for complying with such obligations.

The court found that the clause was not engaged because, inter alia, it related to a change in sanctions that were “directly or indirectly applicable to one or both of the parties or to the transaction”. The contract was between a Swiss subsidiary of a Russian company and two Senegalese companies, in relation to the delivery of Nigerian crude to Senegal, and no evidence had been adduced that the 2019 Regulations were applicable. This underlines the importance of careful drafting of sanctions provisions if a party wishes to be able to rely on a sanctions clause to excuse non-performance where sanctions risks arise under non-applicable law; the most common scenario in which this occurs is where a party is concerned about US sanctions implications but US law is not applicable (or not clearly applicable) to it.

The defendants also relied on Regulations 7 and 12 of the 2019 Regulations. Regulation 12 provides that a person must not make funds available directly or indirectly to a designated person, or “a person who is owned or controlled directly or indirectly… by the designated person”.

Regulation 7(4) provides that an entity (C) is owned or controlled directly or indirectly by a designated person (P) if, inter alia, it is reasonable to expect that P would, having regard to all the circumstances, be able “by whatever means and whether directly or indirectly, to achieve the result that affairs of C are conducted in accordance with P’s wishes”.

The defendants submitted that they could not make payment to the claimant (although it was not a designated person under the UK regime and nor was its parent) because for the purposes of the 2019 Regulations, the claimant is controlled by Mr Putin.

In this context, the defendants relied upon recent obiter comments made regarding the ownership and control test in Mints. In that case, the Court of Appeal said that Mr Putin controlled a Russian financial institution (which was 97.9% owned by the Central Bank of Russia) because he is “at the apex of a command economy” and “in a very real sense (and certainly in the sense of Regulation 7(4)) could be deemed to control everything in Russia”.

In Mints, it was submitted, however, that the Central Bank of Russia is an organ of the Russian state over which Mr Putin exercises de facto control, and that in practice it serves as an arm of the executive. In this case, the defendants did not point to any similar evidence said to show that the claimant’s parent company was presently under the de facto control of Mr Putin. It is not a state-owned body and there is no suggestion that it functions as an organ of the Russian state. (The court’s discussion of the status of the Central Bank should also now be read in light of the subsequent FCDO clarificatory guidance in respect of ownership and control).

In the present case, the court clarified that the ownership and control test requires an “existing influence” by a designated person over the relevant affairs of the company, not just one they may be in a position to bring about. Whilst Mr Putin could arguably put all of the company’s assets under his control, this alone did not suffice; were matters otherwise, Mr Putin would arguably control companies of whose existence he was wholly ignorant, and whose affairs were conducted on a routine basis without any thought of him. The court also referred to the description in the Mints case of the Regulation 7(4) test as focused on whether the designated person “calls the shots”, noting the difference between this and a designated person who “can call the shots”.

Interestingly, the court also analysed the question of control in the context of the relevant restriction. Indeed, in a discussion regarding a predecessor to the Regulation 7(4) test, namely a control test in the Broadcasting Act 1990, the court noted “that it is always necessary to look at the context in which the issue of control arises when applying a definition of control”. In this case the issue of control arose in the context of Regulation 12 (the ‘making available’ prohibition), and therefore the relevant “affair” which the designated person would need to direct for Regulation 7(4) purposes was the availability of funds. The court found that there was no evidence which suggested that any funds received by Litasco on payment of the debt would be used in accordance with Mr Putin’s wishes.