ARTICLE
10 May 2023

International sanctions and contracts under Australian law

HR
Holding Redlich

Contributor

Holding Redlich, a national commercial law firm with offices in Melbourne, Canberra, Sydney, Brisbane, and Cairns, delivers tailored solutions with expert legal thinking and industry knowledge, prioritizing client partnerships.
It has become extremely important to conduct proper due diligence to ensure compliance with any international sanctions.
Australia Corporate/Commercial Law

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 operation of FM clauses against the backdrop of sanctions, as Marles LJ looked at the precise wording of the FM clause and considered whether, on the terms of the clause the "endeavours" (payment in Euros) would have been successful in overcoming the "event" or "state of affairs." He concluded that:

"[t]erms such as 'state of affairs' and 'overcome' are broad and non-technical terms and clause 36 should be applied in a common sense way which achieves the purpose underlying the parties' obligations-in this case, concerned with payment obligations, that MUR should receive the right quantity of US dollars in its bank account at the right time. I see no reason why a solution which ensured the achievement of this purpose should not be regarded as overcoming the state of affairs resulting from the imposition of sanctions. It is an ordinary and acceptable use of language to say that a problem or state of affairs is overcome if its adverse consequences are completely avoided."

The approach of the majority accords with a pragmatic solution to a tricky situation often faced by parties in the transport industry. In this case, receipt of payment in an alternate currency was effective in overcoming a potential breach of sanctions with no detriment to MUR. However, this may not always be the case.

For instance, Australia imposes a number of independent and autonomous sanctions, which cannot be circumvented by the methods used by the parties in MUR v RTI. This is explained in further detail below, but first, a brief overview of the Australian sanctions regime will help put things into perspective.

Australia's sanctions regime

Sanctions in Australia are implemented principally by the Charter of the United Nations Act 1945 (COTUNA), the Autonomous Sanctions Act 2011 (ASA) and the Customs Act 1901, as well as through regulations made under these Acts. Australian sanctions laws apply broadly and include activities:

  • carried out in Australia
  • carried out by Australian citizens anywhere in the world
  • carried out by companies incorporated overseas that are owned or controlled by Australians or persons in Australia; and/or
  • carried out on board Australian-flagged vessels and aircraft.

Australia implements United Nations Security Council (UNSC) sanctions regimes and Australian autonomous sanctions regimes (AASR). Sanctions law offences under the COTUNA for an individual or body corporate generally involve dealing with freezable assets, giving an asset to a sanctioned person, and contravening a UN sanctions enforcement law.

In addition, the Australian Government has decided to implement AASR as a matter of independent Australian foreign policy. The AASR may supplement UNSC sanctions regimes or be separate from them. AASR is intended to achieve three objectives:

  • to limit the adverse consequences of a situation of international concern (for example, by denying access to military or paramilitary goods, or to goods, technologies or funding that enable the pursuit of programs of proliferation concern)
  • to seek to influence those responsible for giving rise to a situation of international concern to modify their behaviour to remove the concern (by motivating them to adopt different policies)
  • to penalise those responsible (for example, by denying access to international travel or the international financial system).

The COTUNA, the ASA and their regulations provide for a wide range of prescribed general prohibitions on:

  • making a 'sanctioned supply' of 'export sanctioned goods'
  • making a 'sanctioned import' of 'import sanctioned goods'
  • providing a 'sanctioned service'
  • engaging in a 'sanctioned commercial activity'
  • dealing with a 'designated person or entity'
  • using or dealing with a 'controlled asset'; or
  • the entry into or transit through Australia of a 'designated person' or a 'declared person'.

Sanctions implemented in Australia generally involve the prohibition of:

  • the unauthorised supply of export sanctioned goods, such as arms and related matériel, and, in specific instances, dual-use goods which could contribute to weapons of mass destruction programs
  • the unauthorised provision of sanctioned services, such as technical training, advice, services or assistance related to the supply, manufacture, maintenance or use of specific goods, which are usually services that are related to export sanctioned goods
  • certain financial transactions, including making an asset available to, or dealing with an asset of, a person or entity subject to targeted financial sanctions
  • travel for certain persons identified by the legislation.

In regard to the above general prohibitions, Australia's sanctions regulations make it clear that dealing with a designated person or entity includes making assets available, either directly or indirectly, to, or for the benefit of the designated person or entity. This would include through subsidiaries of the designated person or entity.

Contraventions of Australian sanctions laws can result in severe criminal offences. An individual or body corporate can be charged with an offence if they engage in conduct that contravenes a condition of a licence, permission, consent, authorisation or approval (however described) under a UN sanction enforcement law. Under Australian sanctions laws, "engage in conduct" is defined as performing an act or omitting to perform an act. The law does not set a minimum threshold for an offence. If found guilty, the punishment for violating Australian sanctions laws includes:

  • a fine the greater of 2,500 penalty units ($450,000 as of 31 July 2015) or three times the value of the transaction and/or up to 10 years in prison, for individuals
  • a fine the greater of 10,000 penalty units ($1.8 million as of 31 July 2015) or three times the value of the transaction, for bodies corporate.

These offences are strict liability offences for bodies corporate, meaning that it is not necessary to prove any fault element (intent, knowledge, recklessness or negligence) for a body corporate to be found guilty. It is, however, a defence for bodies corporate to demonstrate they took reasonable precautions and exercised due diligence to prevent or avoid any contravention from occurring. Australian sanctions laws do not expand upon what constitutes 'reasonable precautions' and 'due diligence', which will depend on the individual circumstances in any given case.

Key takeaways

Australia's sanctions regimes are very broad and far-reaching, meaning that it is unlikely that one will be capable of circumventing Australian sanctions laws through the use of 'reasonable endeavours', such as payment from a subsidiary company in a foreign currency. Indeed, if an Australian body corporate or individual is involved in a contract which includes a designated person or body corporate, either directly or indirectly, Australian sanctions laws make it clear that financial transactions, including making an asset available to, or dealing with an asset of, a person or entity subject to targeted financial sanctions, constitutes a breach.

This means that even though parties may be capable of using 'reasonable endeavours' to circumvent a FM clause pertaining to sanctions within a contract, the underlying contract and transaction with a designated person or entity, including any of their subsidiaries, will still be subject to Australian sanctions laws.

If MUR v RTI had involved an Australian individual, even an employee of the company who was involved in the matter, or a corporation owned or controlled by Australians or people in Australia, then the sanctions imposed on RTI's parent company would not have been capable of being circumvented. Moreover, depending on the nature and structure of the contract, it may have constituted a breach of Australian sanctions laws even if the subsidiary made payment in a foreign currency.

Therefore, Australian entities and individuals seeking to enter into contracts with foreign entities who may have links to sanctioned individuals or body corporates should ensure that proper due diligence and reasonable precautions are taken to vet them prior to entering into any contracts, as an FM clause may do little to save you from a potential breach of Australian sanctions laws which could incur serious consequences.

This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.

Find out more and explore further thought leadership around Business Law and Corporate Law

Mondaq uses cookies on this website. By using our website you agree to our use of cookies as set out in our Privacy Policy.

Learn More