The Court of Appeal’s recent judgment in The CATALAN SEA will inevitably be welcomed by shipowners. It confirms that, where a charterparty sanctions clause is drafted in sufficiently broad terms, owners may refuse charterers’ employment orders if, in their reasonable judgment, performing those orders would expose them to a real risk of sanctions liability.
Why the case matters
The dispute arose before the invasion of Ukraine but against the backdrop of existing UK and EU sanctions relating to Belarus. After the vessel arrived at the nominated Russian loading port, the owners became concerned that the cargo shipper, Neftisa, remained connected to a designated individual despite an apparent transfer of ownership to his brother.
The charterers attempted to reassure the owners by providing a corporate confirmation letter together with legal opinions concluding that Neftisa was not owned or controlled by the sanctioned individual. The owners remained unconvinced, refused to load the cargo and requested alternative voyage orders under the charterparty’s sanctions clause.
At first instance, the High Court concluded that no reasonable owner could have formed that view because there was insufficient evidence that the sanctioned individual continued to control the company. The Court of Appeal took a different approach.
Rather than asking whether the owners had proved continued control, the Court focused on the contractual question: was it objectively reasonable for the owners to conclude that complying with the charterers’ orders created a real risk of sanctions liability? The answer was yes.
The Court considered that various factors, including an intra-family transfer following sanctions, limited supporting documentation, compliance reports highlighting sanctions concerns and legal opinions containing significant factual assumptions, were sufficient to justify the owners’ decision.
What should charterers do differently?
1. Sanctions due diligence starts before the fixture
Many sanctions disputes become difficult because they are first identified after the vessel has arrived at the loading port.
Charterers should consider screening cargo interests, shippers, receivers and beneficial ownership structures before concluding the fixture, particularly where cargoes originate from higher-risk jurisdictions or involve counterparties with historic sanctions exposure.
2. Legal opinions are not a complete answer
One interesting feature of The CATALAN SEA is that the charterers produced several legal opinions supporting their position.
Nevertheless, those opinions did not persuade the Court because they relied heavily on factual assumptions that had not been independently verified. Indeed, parts of the opinions expressly acknowledged that sanctions authorities could reach a different conclusion if the underlying facts proved otherwise.
For charterers, this serves as an important reminder that legal advice is only as persuasive as the factual material on which it is based.
3. Documentary evidence matters
The Court attached considerable significance to the lack of independent evidence supporting the alleged transfer of ownership.
Simple assertions that a designated individual no longer controls a company may not be sufficient where objective evidence is unavailable.
Where ownership or control may become contentious, charterers should be prepared to produce corporate records, shareholder documentation or other contemporaneous evidence capable of demonstrating that any restructuring was genuine rather than cosmetic.
4. Expect owners to take a cautious approach
The decision reflects the commercial reality facing shipowners.
The consequences of incorrectly assessing sanctions risk can include criminal liability, civil penalties, loss of insurance cover and reputational damage. Against that backdrop, owners are unlikely to accept explanations that leave significant uncertainty unresolved.
Charterers should therefore anticipate that owners may adopt a more conservative approach when sanctions questions arise, particularly where there are gaps in the available information.
5. Treat disputes over sanctions clauses carefully
Perhaps the most important practical lesson concerns the parties’ response once the dispute arose.
Rather than providing alternative voyage orders, the charterers treated the owners’ refusal as a repudiatory breach. The owners accepted that repudiation and terminated the charterparty.
The Court of Appeal ultimately concluded that the owners had been entitled to rely on the sanctions clause.
Before alleging wrongful refusal or seeking to terminate a charterparty in similar circumstances, charterers should carefully assess whether the owner may have an objectively reasonable basis for its concerns. A mistaken assessment could significantly alter the allocation of liability between the parties.
Looking ahead
Although The CATALAN SEA arose under a particular sanctions clause and on its own facts, its wider significance extends beyond this dispute.
The judgment recognises that sanctions compliance frequently involves decisions being made in real time, on incomplete information and against the possibility of severe regulatory consequences. Courts are unlikely to expect owners to eliminate every factual uncertainty before taking protective action.
For charterers, the practical implication is clear. Effective sanctions compliance is no longer limited to legal review after a dispute has arisen. It should form part of fixture planning, counterparty due diligence and documentary preparation from the very beginning of the transaction.
