High Court rules on the effect of sanctions when interpreting contractual clauses

On 27 January 2023, the High Court handed down judgment in Gravelor Shipping Ltd v GTLK Asia M5 Ltd & Anor [2023] EWHC 131 (Comm), where it considered the potential implications of MUR Shipping BV v RTI Ltd [2022] EWHC 467 (Comm) in interpreting contractual clauses intended to deal with the effect of sanctions. The case concerned the payment of the purchase price for two ships to an entity that is the target of asset-freeze sanctions.

Background

Gravelor, a company incorporated in Cyprus, financed two ships (the Vessels) via a bareboat arrangement with GTLK Asia M5 Limited and GTLK Asia M6 (GTLK) acting as lenders (the Arrangement). GTLK’s ultimate parent company is JSC State Transportation Leasing Company (JSC GTLK), a Russian state-owned entity. Following the Russian invasion of Ukraine in February 2022, JSC GTLK were the subject of both EU and UK asset-freeze sanctions in April 2022 and US blocking sanctions in September 2022 in connection with the financial support and benefits it received from the Russian Government.

The effect of sanctions

Until the Russian invasion of Ukraine, Gravelor upheld its obligations under the Arrangement, making all required payments. In March 2022, Gravelor expressed its intention to exercise its purchase options under the Arrangement. However, as a direct result of the EU asset-freeze sanctions in April 2022, Gravelor was (a) unable to meet a number of its payment obligations to GTLK; and (b) the transfer or trade of the Vessels was blocked. GTLK argued that under the Arrangement, this constituted an Event of Default, and consequently called for accelerated payment of the sums payable, nominating an account with JSC Gazprombank in Moscow for payment of the sums owed.

EU sanctions prevented payment into the nominated JSC Gazprombank account, as its owners were targeted by asset-freeze sanctions and it became illegal to credit the nominated account or to make funds or economic resources available to GTLK in any way. Similarly, US sanctions had the effect of blocking all payments to GTLK entities.

Gravelor applied for summary judgment upon its claim for specific performance in relation to purchase options, seeking to rely on a wide interpretation of a clause relating to sanctions payment restrictions (the Sanctions Payment clause).

The High Court Decision

The High Court held that Gravelor was entitled to summary judgment.

First, when considering Gravelor’s claim for specific performance, the High Court considered the Sanctions Payment clause, which stipulated that if GTLK was to be the target of sanctions, thus preventing payments being processed, the parties would be required to take “all necessary steps in order for the payments to be resumed”. Agreeing with the earlier decision in MUR Shipping BV v RTI Ltd [2022] EWHC 467 (Comm), Mr Justice Foxton considered that such wording would extend effective payment to:

• an alternative bank account nominated by GTLK;
• a frozen bank account nominated by GTLK; and/or
• payment in Euros instead of USD.

Additionally, agreeing with previous authority, the Court also held that where money is transferred to a blocked account, this does in fact constitute payment, even if the recipient does not have access to the funds immediately. The court emphasised that the aim of clauses like the Sanctions Payment clause is to avoid the impossibility of payments due to sanctions. As such, it must be physically possible to make a payment into an alternative or frozen bank account as nominated by GTLK.

Key takeaways

The Court accepted that being unable to access funds in a frozen account would be to the detriment of GTLK, as a result of the legal and practical constraints imposed on those companies who are obliged to comply with sanctions regimes. But the consequences on Gravelor of not being able to make a contractually compliant payment would also be significant. Following MUR Shipping, Foxton J held that the clause required a party to accept performance otherwise than in strict accordance with the terms of the contract when extraneous circumstances render performance impossible.

Gravelor serves as an important step in strengthening the position of the non-sanctioned party to a transaction. It shows the efficacy of contractual force majeure clauses in protecting parties indirectly affected by sanctions, Covid or other recent disruptions, especially in susceptible sectors such as transport.

With thanks to Grace Littlewood for her assistance in preparing this post.