Litasco SA -v- Der Mond Oil & Gas Africa SA & another [2023] EWHC 2866 (Comm)
The Court has granted summary judgment against a Senegalese oil trading company that defaulted on an instalment of the purchase price for a cargo of Nigerian crude oil bought from a Swiss oil marketing and trading company that was wholly-owned by a Russian oil company. Summary judgment was also granted against the buyer’s parent company guarantor.
In doing so, the Court dismissed various defences put forward by the buyer, including those based on the force majeure (FM) and sanctions provisions incorporated into their contract.
This is the first reported decision to consider the recent Court of Appeal judgment in Mints -v- PJSC National Bank Trust & another [2023] EWCA Civ 1132, which addressed among other things the meaning and scope of ‘control’ within the context of the UK sanctions regime and whether this extended to political control such that it could be said Russian President Putin ‘controlled’ all Russian businesses.
The Court in this case distinguished Mints on the facts. However, it also inclined to the view that there was a difference between actual de facto control as opposed to the ability to assume control under domestic law where this right had not been exercised.
The background facts
On 29 April 2022, the parties entered into a contract for 950,000 barrels of Nigerian crude oil CFR Dakar, Senegal. The cargo was delivered and the buyer made partial payments in respect of the price in November 2021 and January 2022. However, it failed to pay the balance. On 17 January 2022, the parties entered into a deed of payment that provided for the balance to be paid in instalments over five months. The deed of payment incorporated all rights and remedies arising under the sale contract.
The first instalment was paid but the second instalment was not forthcoming and the seller accelerated the debt as it was entitled to do under the deed of payment. The defendant relied on the contractual FM and trade sanctions provisions. The parties then agreed a new repayment schedule by way of an addendum dated 4/5 November 2022.
Two payments were made under the addendum: on 8 November 2022 via Ecobank, a West and Central African Bank; and on 9 December 2022, via FBN Bank Senegal, a subsidiary of First Bank of Nigeria. The third instalment, due 10 January 2022, was not paid. The buyer asked for more time to pay because it was having difficulty in accessing sufficient foreign currency. The seller accelerated the debt once again and, in English Court proceedings, sought summary judgment.
2019 Sanctions Regulations
Regulation 12 of the UK Russia (Sanctions) (EU Exit) (Amendment) Regulations 2019 (2019 Regulations) provides as follows:
- “A person (‘P’) must not make funds available directly or indirectly to a designated person if P knows, or has reasonable cause to suspect, that P is making the funds so available…
- Paragraph (1) is subject to Part 7 (Exceptions and licences).
- A person who contravenes the prohibition in paragraph (1) commits an offence.
- The reference in paragraph (1) to making funds available indirectly to a designated person includes, in particular, a reference to making them available to a person who is owned or controlled directly or indirectly (within the meaning of regulation 7) by the designated person.”
Regulation 7 states:
- “A person who is not an individual (‘C’) is ‘owned or controlled directly or indirectly’ by another person (‘P’) if either of the following two conditions is met (or both are met).
- The first condition is that 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…
- …
- The second condition is that 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.”
Mints v. PJSC
One of the issues that arose in this case was whether the UK asset freeze restrictions imposed by the 2019 Regulations extended to the claimant Russian bank because it was controlled by two designated persons, President Putin and the Governor of the Central Bank of Russia. The Court of Appeal emphasised that the language of Regulation 7 was concerned with influence or control and not with ownership.
Disagreeing with the Commercial Court judge on this issue, the Court of Appeal thought that the wording of Regulation 7(4) could extend to control as a result of political office. The Russian Central Bank owned 99.9% of the bank in question and the Governor reported to President Putin, who could be deemed to control everything in Russia for the purposes of the Regulation.
FCDO guidance
In response to the Court of Appeal judgment, on 17 November 2023, the Foreign and Commonwealth Development Office (FCDO) issued a guidance stating that there is no presumption on the part of the UK government that a private entity is subject to the control of a designated public official simply because that entity is based or incorporated in a jurisdiction in which that official has a leading role in economic policy or decision-making. Further evidence would be required to demonstrate that the relevant official exercises control over that entity under UK sanctions regulations.
The guidance further stated that, for the purposes of Regulation 7(4), the UK government does not consider that President Putin exercises indirect or de facto control over all Russian entities simply because he is the President. A person should only be considered to exercise control over certain private entities where this can be supported by sufficient evidence on a case-by-case basis.
The Commercial Court decision
Force majeure
The FM clause provided among other things that ‘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.’
The buyer argued that the FM clause had been engaged because payment had to be made through the international banking system and, on the evidence, no European clearing bank would make payments to the seller. The buyer contended that the refusal of the banks approached to make the payments was an event beyond the buyer’s reasonable control and that this had delayed, hindered or prevented them from complying with their obligations to pay the seller, with the result that the payment obligation had been suspended pursuant to the FM clause.
The Court disagreed. It found on the evidence that the buyer was unable to make the outstanding payments due to a lack of foreign currency in its account, rather than any difficulties in making payments through the international banking system. Lack of foreign currency was not a FM event. It was important in the context of such a FM clause to distinguish between those prevented from or hindered in complying with their obligations because of a FM event and those, such as the buyer, who simply lacked the financial resources to meet their obligations.
In any event, the contract was fully executed on the seller’s part before any alleged FM event occurred, and the buyer’s payment obligations under the contract had accrued due, and were initially payable before that time. On the wording of this FM clause, the buyer was not in those circumstances entitled to suspend payment.
Sanctions
The contractual sanctions clause permitted a party to suspend performance if any sanctions regulations were directly or indirectly applicable to either or both parties or to the transaction in question.
Here, the contract was between a Swiss subsidiary of a Russian company, and two Senegalese companies, in relation to the sale of Nigerian crude which was delivered to Senegal. Neither the seller nor its parent company were sanctioned entities under the 2019 Regulations. The seller’s former founder, CEO and president was sanctioned but had stood down after he was sanctioned and his shareholding in the seller company was only 8.5% which was not sufficient to amount to a controlling stake in the parent company. There was also no evidence he continued to exercise control over the seller.
It was also not arguable that President Putin exercised control over the Russian parent company for the purposes of Regulation 12. Mints could be distinguished. In that case, the Russian bank was almost wholly owned and controlled by a Russian public body, the Central Bank of Russia. On the evidence before the Court, the Central Bank was an organ of the Russian state over which President Putin exercised de facto control and in practice it served as an arm of the executive.
It was against that background that it was conceded in that case that the Russian bank was subject to the control of President Putin. Here, there was no such evidence that the seller’s parent company was under the President’s de facto control. It was not a state-owned body and it did not function as an organ of the Russian state.
Furthermore, the issue of control arose here in the context of Regulation 12, the relevant ‘affair’ for Regulation 7(4) purposes being the availability of funds, and the question being whether making funds available to the Russian parent company amounted to ‘making funds indirectly available to’ President Putin. As a result, the issue of control had, as its central focus, the ability of the designated person to control the use of the funds made available.
It was strongly arguable that President Putin had the power to place the Russian parent company and/or all of its assets under his de facto control, should he decide to do so, However, in the Court’s view, Regulation 7(4) was directed at the existing influence of a designated person over the affairs of a company, not a state of affairs that a designated person could bring about. The ‘control’ argument, therefore, failed.
Finally, the Court dismissed the submission that Regulation 44, prohibiting transactions relating to the export/delivery of energy-related goods to Russia, applied here. Regulation 44 was not engaged by payment for a sale of West African oil for redelivery to West Africa. In any event, the transaction was concluded (with the exception of payment) before the sanctions were imposed.
Comment
The decision usefully clarifies how the English courts are likely to interpret the Court of Appeal decision in Mints, particularly in light of the FCDO guidance. The English Court has shown itself reluctant so far to allow parties to commercial transactions to use international or domestic sanctions regimes as an excuse for defaulting on legitimate contractual obligations.
For further information, please contact:
Siiri Duddington, Partner, Hill Dickinson
siiri.duddington@hilldickinson.com
