The Russian invasion of Ukraine has turned the spotlight onto two particular types
of clause in commodities contracts: sanctions and force majeure (“FM”). The
avalanche of global sanctions imposed in response to the invasion created huge
challenges for commercial parties and many found themselves having to put
sanctions related contractual wording to the test as a result.
In addition, a large number of affected commercial parties triggered the FM
clauses in their contracts. Doing so always involves risk: it is difficult successfully
to argue that contractual performance has been prevented or delayed by FM, in
part because English courts and arbitration tribunals will interpret such clauses
strictly and narrowly, against the party seeking to rely on them. Given all this, a recent decision of the Commercial Court (unrelated to the Ukraine war) has attracted particular interest because it required first the arbitral tribunal and then the Commercial Court to interpret a FM provision in light of the application of sanctions. Background In June 2016, MUR Shipping BV (“Owners”) concluded a Contract of Affreightment (“COA”) with RTI Ltd
(“Charterers”) for the carriage of bauxite over several shipments.
The COA provided for payment of the freight in US dollars. It also included a FM clause, which stated, amongst other things, that the FM event could not be “overcome by reasonable endeavours from the Party affected.”
In April 2018, the US Department of the Treasury’s Office of Foreign Assets Control applied sanctions to Charterers’
parent company. Owners invoked the FM clause and issued a notice which stated that:
− it would be a breach of sanctions to load any further cargoes under the COA.
− the sanctions would prevent dollar payments, which were required under the COA.
Charterers responded that sanctions would not interfere with cargo operations and that payment could be made in euros instead. Owners argued that freight had to be paid in US dollars and the FM event did impact cargo operations, as they could not be expected to load and discharge cargo without receiving payment in accordance
with the COA. Charterers found alternative tonnage and brought a claim for the additional costs incurred by way of arbitration under the terms of the COA.
Tribunal’s Decision
The Tribunal held that payment in US dollars would fall foul of sanctions, as any US dollar payments would very likely have to pass through a US intermediary bank, which would stop the transfer based on Charterers’ status as a blocked party in order to investigate further. It held that “common sense indicates that any US bank would exercise
extreme caution before making a payment that could conceivably fall foul of sanctions legislation.”