International sanctions and contracts under Australian law

• Jurisdiction: United States,Federal
• Author: Mr Geoff Farnsworth and Michael Tatham
• Law Firm: Holding Redlich
• Published date: 10 May 2023

Complex sanctions regimes are now a feature of international trade transactions concluded across multiple jurisdictions. It has become important, now more than ever, to conduct proper due diligence to ensure compliance with any international sanctions.

However, despite best endeavours, situations may arise where commercial parties find themselves unable to perform under a contract due to a potential breach of sanctions law. In such circumstances, parties may be left with little alternative but to attempt to avoid the contract, perhaps by invoking Force Majeure (FM).

Case study: MUR Shipping BV v RTI[2022] EWCA Civ 1406

A recent UK Court of Appeal judgment in MUR Shipping BV v RTI [2022] EWCA Civ 1406 (MUR v RTI) illustrates issues surrounding the enforceability of contracts, in this case a charterparty, in the context of sanctions.

The underlying facts were:

• MUR entered into a contract of affreightment with RTI, a company with Russian connections through its parent company
• due to US sanctions, RTI could not make payments in US dollars so they offered to pay MUR the equivalent amount in Euros (expressly stipulating that MUR would be no worse off, and RTI would still technically be performing under the contract).
• MUR terminated the contract in reliance on the FM clause in the contract, citing the sanctions as the FM event
• RTI challenged the termination. The FM clause contained the following clause:

"36.3 A Force Majeure Event is an event or state of affairs which meets all of the following criteria; .. (d) It cannot be overcome by reasonable endeavours from the Party affected."

• the parties accepted that MUR was affected by RTI's inability to comply strictly with the contract through payment in US dollars, but RTI submitted that MUR could overcome the event or state of affairs by accepting Euros, and it was reasonable that it do so.

At first instance, an arbitration tribunal agreed with RTI. On appeal, the High Court agreed with MUR. The matter was then taken to the Court of Appeal, who, by a bare majority agreed with RTI (and the Tribunal).

According to Marles LJ, the question was whether the relevant event or state of affairs could be overcome by reasonable endeavours from MUR as the party affected, i.e. the question was whether accepting payment in euros would overcome the state of affairs resulting from the imposition of sanctions on RTI's parent company.

In reaching the decision, the reasoning of Marles LJ sheds some important light on the...