Sanctions clauses – Tonzip and implications for the insurance market

Summary

In Tonzip Maritime (Singapore) PTd Ltd v 2 Rivers Pte Ltd the Court of Appeal held that vessel owners had been entitled to refuse charterparty voyage orders based on a determination that complying gave rise to a real risk of liability to sanctions within the meaning of a sanctions clause in the charterparty.

The court construed the words "in the reasonable judgement of the Owners... is prohibited by sanctions or will expose the Owners... to sanctions" to apply:

 (i)where the Owner of a vessel reached a reasonable determination that the voyage was more likely than not to trigger the application of sanctions ("is prohibited by sanctions"); and/or

(ii) where, in the reasonable judgement of the Owner, the Owner was "put at risk" of sanctions applying ("will expose the Owners... to sanctions").

Background

Tonzip concerned a charterparty under which a vessel (the MV Catalan Sea) was chartered to transport a cargo of oil from a Black Sea port to the Mediterranean. The vessel owners (the Owners) refused to load the cargo, relying on a sanctions clause in the charterparty and the fact that the shipper of the cargo (the Shipper) was connected to a sanctioned individual (a "Mr G").

The charterer challenged the Owners' position, relying inter alia on legal advice that Mr G did not directly control the Shipper but his brother did, although acknowledging that the EU might view this as de facto control by Mr G. This advice was based on a series of factual assumptions, including the assumption that Mr G did not in fact exercise control over the Shipper.

The sanctions clause in the charterparty included that:

"The owners shall not be obliged to comply with any orders for the employment of the vessel in any carriage, trade, voyage, ship-to-ship transfer operation or other service which in the reasonable judgement of the owners, is prohibited by sanctions or will expose the owners, the vessel or its managers, crew, the vessel's insurers or reinsurers to sanctions. In the event that such a risk arises in relation to a voyage that the vessel is performing, the owners shall be entitled to refuse further performance and the charterers shall be obliged to provide alternative voyage orders." [our emphasis]

Other parts of the sanctions clauses operated for the benefit of the charterer as well as the Owners.

Judgment

The Court of Appeal found that the material before the Owners "clearly flagged a real risk" that sanctions authorities might conclude that Mr G remained sufficiently involved for sanctions to be engaged. The first instance judge had therefore erred in finding that the Owners' determination that complying with the Charterers' voyage orders would have given rise to a real risk of liability to sanctions was not one which any reasonable shipowner could reach.

In reaching this conclusion, the Court of Appeal needed to determine what was meant by the words "in the reasonable judgement of the Owners... will expose the Owners... to sanctions". Were these only satisfied by a reasonable judgement by the Owners, on the balance of probabilities, that sanctions were more likely than not to be contravened if the cargo was loaded? Or was it sufficient that the Owners reasonably formed a judgement that there would be a real risk of a breach of sanctions, without needing to prove on the balance of probabilities that sanctions would apply?

The Court of Appeal held that, based on the ordinary and natural meaning of the text, the clause catered for two situations. The first was where the Owner reasonably judged that compliance with the requirement to load and transport the oil was prohibited by sanctions. That involved the Owner reaching a reasonable determination that the voyage was more likely than not to trigger the application of sanctions. The second was where, in the reasonable judgement of the Owner, compliance will "expose" the Owner to sanctions. This "clearly involves a judgment as to something else" (sic). That "something else" was the assessment that it would mean the Owner was "put at risk" of sanctions applying. In other words, this was a looser requirement than having to judge that, on the balance of probabilities, sanctions would apply. Rather, it involved asking whether the Owner is put at risk of sanctions applying.

It was noteworthy that the relevant sanctions clause catered for an actual prohibition and the risk of exposure to sanctions separately. That suggested two different threshold questions that the Owner needed to ask itself when exercising its judgement.

The Court of Appeal considered that this conclusion was reinforced by the commercial context. This included: (a) the disparity of information between the Owner and the charterer as to the facts, including the beneficial ownership of the Shipper; (b) the fact that information relevant to the application of sanctions is often hidden from public view; (c) the fact that sanctions laws are generally broadly phrased, complex and can involve a number of jurisdictions simultaneously; and (d) the speed with which vessel owners are required to make decisions on the potential applicability of sanctions given the significance of delay in the carriage of goods by sea set against the backdrop of moving commodity and freight prices. These factors may help commercial parties considering the application of sanctions clauses in other contexts to determine the level of certainty needed before relying on the risk of breaching sanctions to refuse performance.

Commentary - Tonzip and Mamancochet- the key differences for the insurance market

In Tonzip, the clause before the court was very similar in a number of respects to the clause considered by the Court in Mamancochet Mining Ltd v Aegis Managing Agency Ltd & Others, which decision was distinguished by the Court of Appeal in Tonzip to reach a different view on construction.

The court in Mamancochet held that insurers must prove that a payment is actually prohibited by law in order to refuse to pay a claim under a standard sanctions clause. In Mamancochet, the applicable sanctions clause (the JELC clause, which is replicated in material terms in LMA 3100A and 3200) stated: "No (re)insurer shall be deemed to provide cover and no (re)insurer shall be liable to pay any claim or provide any benefit hereunder to the extent that the provision of such cover, payment of such claim or provision of such benefit would expose that (re)insurer to any sanction, prohibition or restriction under United Nations resolutions or the trade or economic sanctions, laws, or regulations of the European Union, United Kingdom or United States of America."

The court in Tonzip differentiated between the two decisions as follows.

1. First, the clause in Mamancochet did not draw a distinction between being prohibited by sanctions and being exposed to sanctions, whereas the clause in Tonzip did.

2. Secondly, the sanctions clause in Mamancochet operated to relieve one party (the insurers) from the performance of accrued payment obligations. In contrast, in the Tonzip case, the sanctions wording appeared in clauses that availed both parties.

3. Thirdly, the decision whether or not to pay an insurance claim does not involve a decision "in the heat of the moment" whereas a decision whether or not to load or transport a cargo does.

4. In addition, the standard insurance sanctions clause considered in Mamancochet does not give the insurer the power to exercise reasonable judgement as to whether sanctions apply. Rather, the insurer must show that, in fact, payment of a claims would "expose [the insurer]... to sanctions...".  The Court of Appeal in Tonzip left open the question as to the extent to which the exercise of judgement by the Owner was subject to the Braganza reasonableness test, on the basis that it was objectively reasonable in any event.

We note that both clauses use the phrase "would/will expose" a party to sanctions, however. Neither clause uses the phrase "expose to the risk" in terms. There are some differences in the commercial context between a charterparty and an insurance claim. These were highlighted by the Court of Appeal in Tonzip. However, there are also some clear similarities. In particular, the point that sanctions are often complex and broadly drafted applies equally to insurance as it does to charterparties. Indeed, in Mamancochet, the challenge for the insurance market was that, on the one hand, there was a real risk of the relevant administration considering that sanctions precluded payment of the insurance claim but, on the other hand, there was an inability to point clearly to a specific sanction rule that, on the balance of probabilities, would be breached. 

For the moment, our view is that Mamancochet will remain the leading case on the insurance market standard sanctions clauses, but we may now begin to see challenges based on the decision in Tonzip. The Tonzip decision also gives some helpful pointers as to how a sanctions clause might be broadened to capture the "risk of being exposed" to sanctions as well as the fact that a course of action would in fact, on the balance of probabilities, give rise to a sanctions breach.