Oil & Gas - Russian Companies and Force Majeure/Sanctions revisited

In Litasco SA v Der Mond Oil and Gas Africa SA and Locafrique Holdings SA [2023] EWHC 2866 (Comm), the Commercial Court confirmed its approach to applying sanctions to oil and gas entities with Russian connections and the application of force majeure and sanctions clauses in that context. The decision highlights that the application of sanctions law is likely to be fact specific. Further, a force majeure clause is unlikely to come to the rescue where the obligation to perform has already passed by the time that the force majeure event occurs.    

Facts

Litasco SA (“Litasco”) is a Swiss oil marketing and trading company that is wholly owned by Lukoil PJSC, a Russian oil company. Der Mond Oil and Gas Africa SA (“Der Mond”) is a Senegalese company involved in oil trading (particularly in the West African market).

On 29 April 2021, Litasco entered into a contract to sell Der Mond 950,000 barrels of ERHA (Nigerian) crude oil (the “Contract”). Clause 14 of the Contract contained a Force Majeure clause that provided as follows:

“14.1 If by reason of ‘force majeure’, which for the purpose of this Agreement shall mean any cause beyond the reasonable control of the affected Party including, but not limited to, any act of God, war, terrorism, riots, acts of a public enemy, fires, strikes, labour disputes, accidents, or any act in consequence of compliance with any order of any government or governmental or executive authority, either Party is delayed or hindered or prevented from complying with its obligations under this Agreement, the affected Party will immediately give notice to the other Party stating:

14.1.1 the nature of the force majeure event;

14.1.2 its effect on the obligations under this Agreement of the Party giving the notice; and

14.1.3 the estimated date the contingency is expected to be removed.

14.2 To the extent that the affected Party is or has been delayed or hindered or prevented by a ‘force majeure’ event from complying with its obligations under this Agreement, the affected Party may suspend the performance of its obligations until the contingency is removed.

14.3 If:

14.3.1 the force majeure event cannot be permanently removed; or 

14.3.2 a force majeure event results in a delay extending beyond ten (10) days;

14.3.3 either Party may terminate the Agreement upon notice and both the Parties will be relieved of their further contractual obligations, except for their accrued rights and obligations which shall survive the termination of the Agreement in accordance with this provision.

14.4 Neither Party shall be responsible for any loss or damage caused by any failure or delay in the fulfilment of its obligations under the Agreement if such failure or delay arises”.

In relation to sanctions, clause 15.1 of the Contract provided as follows:

“15.1 Each Party acknowledges and understands that the performance of the Parties’ respective obligations arising out of the Agreement shall be in compliance with any United Nations Resolutions or any Regulations which have the force of law in Switzerland, the EU, the United States of America, the United Kingdom and/or the country or countries in which the Oil may be loaded, delivered, discharged stored or transit during the performance of the Agreement and/or the counter of origin of the Oil, and which:

15.1.1 are directly or indirectly applicable to one or both of the Parties or to the transaction contemplated under this Agreement;

15.1.2 relate to foreign trade controls, export controls, embargoes or internal boycotts of any type (applying, without limitation, to the financing, payment, insurance, transportation, delivery or storage of the Oil); and

15.1.3 are imposed against:

(a) any natural or legal persons, entities or bodies from a particular designated country; or

(b) any natural or legal persons, entities or bodies controlled by such persons, entities or bodies, any other natural or legal persons, entities or bodies that are, in any way, subject to such controls, embargoes or boycotts,

hereinafter referred to as the “Trade Sanctions”.”

The cargo was delivered and Der Mond made partial payments in respect of the contractual purchase price in November 2021 and January 2022, before defaulting on a further scheduled payment.

Following negotiations, the parties entered into a deed of payment which provided for a further five monthly payments (the “Deed of Payment”). The Deed of Payment also permitted Litasco to accelerate the entire debt in the event of default. When payment was not forthcoming, Litasco accelerated the debt and demanded the outstanding balance, which at that point stood at €44,445,987.51 (excluding interest).

Proceedings were commenced to enforce these claims but were later stayed whilst negotiations between the parties took place, during which Litasco and Der Mond entered into an addendum to the Contract dated 5 November 2022 (the “Addendum”). The Addendum set out a new repayment schedule, under which two further payments were made by Der Mond. When Der Mond defaulted on the third payment however, Litasco again accelerated the entire debt, and the stay on proceedings was lifted on 10 March 2023.

Litasco applied for summary judgment on 5 June 2023. Der Mond argued that the force majeure clause had been engaged because payment to Litasco had to be made through the international banking system, which was not possible.

Decision

The alleged refusal of the banks to make payments to Litasco was argued to be an event “beyond the reasonable control” of the defendants, which had “delayed, hindered, or prevented” them from complying with their obligation to pay.

Litasco however adduced evidence of payments it had received from a variety of international banks throughout 2022 and 2023 (such as Credit EuropeBank and Deutsche Bank) and it was proved instead that Der Mond was unable to make the outstanding payments due to a lack of foreign currency in its account. This was further compounded by the fact that Der Mond itself was able to make payments to Litasco in both November and December 2022 via the international banking system.

The Commercial Court sought to distinguish between circumstances that prevent or hinder a party in complying with their obligations because of a force majeure event and where a party simply lacks the financial resources to meet their obligations.

In addition, Foxton J held that Der Mond was not entitled to engage the force majeure clause to suspend payment as the Contract had been fully fulfilled on Litasco’s part before any alleged force majeure event had occurred. As a result, Der Mond’s payment obligations under the Contract had become due, and were initially payable, before such time as well.

The Contract also supports the conclusion that Litasco was entitled to receive payment for the following reasons:

• Clause 14.3.3 allowed Litasco to terminate the Contract if a force majeure event continued for more than 10 days.
• Clause 14.8 would have been engaged even if the force majeure defence had succeeded. The clause stated that “Notwithstanding this [Force Majeure] clause, neither Party shall be relieved of making payment…of any sums that have accrued due under this Agreement prior to its suspension or termination…”.

In either eventuality, the accrued payment obligations of Der Mond would have remained post suspension or termination of the Contract.

Trade Sanctions

Der Mond’s sanctions defence was advanced both under clause 15 of the Contract and as a matter of general law, relying in both instances on the Russia (Sanctions) (EU Exit) (Amendment) Regulations 2019 (the “2019 Regulations”).

In arguing that the 2019 Regulations had been imposed against Litasco, Der Mond sought to rely on Regulations 12 and 7.

Regulation 12 provides that funds must not be made indirectly available to a “designated person”, which includes making them available to an entity that is owned or controlled by a designated person (under the meaning of Regulation 7). Regulation 7 then deals with the concepts of ownership and control, stating that an entity (“C”) is owned or controlled by another person (“P”) if:

• Regulation 7(1): “P— (a) holds directly or indirectly more than 50% of the shares in C, (b) holds directly or indirectly more than 50% of the voting rights in C, or (c) holds the right directly or indirectly to appoint or remove a majority of the board of directors of C” or
• Regulation 7(4): “…it is reasonable, having regard to all the circumstances, to expect that P would (if P chose to) be able, in most cases or in significant respects, by whatever means and whether directly or indirectly, to achieve the result that affairs of C are conducted in accordance with P’s wishes.

Litasco successfully proved that neither it nor its parent company, Lukoil PJSC, had been named as an entity sanctioned by the 2019 Regulations. In addition, Litasco demonstrated that whilst its former founder, president and CEO was sanctioned under the 2019 Regulations on 13 April 2022, he had stepped down from the board at the time with his shareholding in Lukoil PJSC standing at 8.5%, which did not meet the threshold to amount to a controlling stake in Litasco.

Der Mond also advanced the argument that Litasco was controlled by President Putin, who has been sanctioned by the 2019 Regulations. In reaching his conclusion on the issue of control, Foxton J reviewed the High Court and Court of Appeal’s decisions in Mints v National Bank Trust and Bank Okritie [2023] EWCA Civ 1132 (“Mints”), which Der Mond sought to rely upon. In Mints, the Court of Appeal held that President Putin did exercise control over the claimant bank, given that it was 97.9% owned by the Central Bank of Russia and was classified as “an organ of the Russian state”. In the present case however, Lukoil PJSC is not a state-owned body and Foxton J therefore determined that there was no evidence to contend that funds received by Litasco would be used in accordance with President Putin’s wishes.

In addition, Foxton J went on to address obiter comments made by the Court of Appeal in Mints which stated that the “control” test should be interpreted broadly so as to deem any entity as being controlled by a designated person where that designated person already does or could at any time decide to “call the shots” of the entity in question. Whilst Foxton J conceded that it is arguable that President Putin has the means of placing Litasco, or indeed any company, under his de facto control should he decide to do so, he stated that the correct interpretation of Regulation 7(4) is that it is concerned with an “existing influence” of a designated person rather than a state of affairs which a designated person is in a position to bring about. The implication of the latter viewpoint is that President Putin is arguably in control of all companies in Russia, even the ones of whose existence he is “wholly ignorant” of and of whose affairs are conducted on a routine basis without him.

Comment

The decision highlights:

1. The need for careful drafting of force majeure and sanctions clauses. The existence of sanctions against a state or state-entities does not always translate to giving a party a legitimate reason, under a force majeure/sanctions clause or at law, for refusing to perform contractual obligations with entities domiciled in that jurisdiction not clearly falling within the scope of sanctions. Most of the time, they will not.
2. Whilst events such as the Russian-Ukraine war and imposed sanctions may mean that a party no longer wishes to perform a contract with a Russian entity, it does not follow that this will be permissible under the relevant contract.
3. In respect of force majeure and sanctions clauses, much will turn on the specific words of the clause and whether they discharge the obligation to perform and/or relieve a party from sanction for failing to do so. In this respect, where a payment obligation arises prior to a force majeure event commencing, purely relying on force majeure may be insufficient (although sanctions remedies may come to the rescue).    
4. Perhaps more importantly, the decision offers further clarity on how the English courts are likely to interpret the application of the 2019 Regulations, particularly with regards to the approach to establishing “control” of an entity by a “nominated person” under Regulation 7. Foxton J’s introduction of the “existing influence” element to the “control” test demonstrates that courts will look to establish de-facto control on a case-by-case basis and will not simply allow parties to use the sanctions regimes as an excuse for defaulting on contractual obligations with Russian companies solely due to their (or their parent’s) incorporation in Russia.