10 March 2024

Sanctions update - Illegality, force majeure and step-in rights



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This case should be considered when contemplating business in territories subject to international economic sanctions.
Australia International Law
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These proceedings stemmed from QAL's and the Rio Tinto entities' (the Respondents) decision to cease production and supply of aluminium manufacturing inputs to three Russian companies (the Russian Entities) following the Australian Government's imposition of economic sanctions on Russia and certain Russian business-people (the Sanctions). The Sanctions were made under the Autonomous Sanctions Regulations 2011 (Cth) in March 2022 in response to Russia's invasion of Ukraine in February of that year.

Relevantly, the Sanctions prohibit:

  1. the supply of aluminium oxide (alumina) to a person where, as a direct or indirect result, the alumina is transferred to Russia, for use in Russia or for the benefit of Russia; and
  2. directly or indirectly making an asset available to or for the benefit of certain "designated individuals".1

The Federal Court of Australia was asked to consider the Sanctions in the context of a relatively complex contractual arrangement between multiple sophisticated parties.


Alumina and Bauxite Company Limited (ABC), Queensland Aluminium Limited (QAL) and certain Rio Tinto entities were engaged in a business arrangement revolving around the operations of an alumina refinery operated by QAL in Gladstone, Queensland (the Gladstone Refinery). Shares in QAL were distributed between ABC (20%) and a number of the Rio Tinto entities involved in the Refinery's operations (80%).

The terms governing the arrangement were contained in a range of contracts (a Participation Agreement, Tolling Contracts, a Supply Agreement and a Shipping Agreement) pursuant to which the Rio Tinto entities agreed to supply bauxite ore to ABC and ship it to the Gladstone Refinery where it would be processed into alumina by QAL. The refined alumina would then be distributed between the ABC and the Rio Tinto entities.

Notably, a number of these contracts expressly acknowledged the possibility of the imposition of economic sanctions that might affect the Gladstone refinery arrangement. In short, the contracts provided that QAL and the Rio Tinto entities would be entitled to cease doing business with ABC in circumstances where the Australian Government imposed sanctions which affect the Russian Entities, ABC or any of their affiliates, that were likely to prevent QAL from undertaking business activity with ABC and its affiliates (the Step-in Clause).

When the Sanctions were implemented, QAL decided to cease supply of alumina to ABC, relying on the Step-in Clause. Likewise the Rio Tinto entities invoked force majeure provisions in the agreements and ceased supplying to, and shipping bauxite on behalf of, ABC.

The Russian Entities commenced proceedings against QAL and the Rio Tinto entities in August 2022, seeking injunctive relief and damages in respect of breaches of contract.

The Arguments

The gist of the Russian Entities' claim was that continued supply of alumina to ABC would not amount to a breach of the Sanctions, and therefore, the Step-in Clause had not been validly invoked. Relevantly, prior to the cessation of supply, ABC offered certain undertakings to the Respondents which it claimed would ensure continuing compliance with the Sanctions (e.g., ABC would not supply alumina to Russia or the Russian Entities, and all alumina would be sold directly to third parties outside Russia).

QAL and the Rio Tinto entities each argued that their obligation to supply alumina to ABC had been obviated by valid invocation of the Step-in Clause.

The Rio Tinto entities also offered two additional defences:

  1. The Sanctions rendered performance of their contractual obligations to ABC illegal (supervening illegality); and
  2. QAL's decision to cease production and supply of alumina for ABC in response to the imposition of the Sanctions was a force majeure event for the purposes of relevant contracts between the Russian parties and the Rio Tinto respondents.


The Federal Court ruled in favour of the Respondents, finding that their obligation to continue to supply and ship alumina to the Russian Entities was obviated by reason of supervening illegality. Additionally, it found that the Rio Tinto entities' liability was excluded by application of the relevant force majeure clauses.


Construction of the Sanctions

The Court found that delivery of the alumina to ABC would have, on the balance of probabilities, constituted a breach of the Sanctions and that this would have been the case even where ABC complied with its offered undertaking to not supply the alumina to Russia or any Russian Entities.

The Court stated that delivery would generally facilitate security of the Russian Entities' supply of alumina which would "benefit Russia in the form of employment within Russia and increased tax revenue."2

The Court grappled with questions of construction over the breadth of the Sanctions, where through an interposed chain of companies designated persons have an indirect financial interest, but ultimately held that the supply would have indirectly rendered a financial benefit to two named Russian individuals and so was prohibited.3

"Step-in Clause"

Notwithstanding the Court's finding that that the Sanctions were likely to prevent QAL from undertaking business activity with ABC, the Court rejected the Step-in Clause defence proffered by QAL, finding that the Sanctions were imposed on the Russian Federation and not the Russian Entities affected by the Step-in Clause.4

Supervening Illegality

The common law principle of 'supervening illegality' stands for the proposition that a party will be excused from performance of a contractual obligation where a change to the law renders performance of that obligation unlawful.5

In this case, the Russian Entities did not dispute the Respondent's contention that the defence of supervening illegality would be available in circumstances where the Court found that a supply of alumina to ABC would constitute a breach of the Sanctions, which the Court ultimately did.

Force Majeure

The Court ruled that both QAL and the Rio Tinto entities' decision to cease supplying, shipping and delivering alumina to ABC by reason of the Sanctions was a force majeure event for the purposes of particular contracts. These clauses excused their performance of the contract and expressly excluded their liability.6

Importantly, the force majeure clauses were specific to capture the Sanctions.7

Conclusions and Takeaways

The decision in Alumina and Bauxite Company Ltd v Queensland Alumina Ltd [2024] FCA 43 directly considered the scope of the Sanctions and demonstrated how Australian courts are likely to rule in future proceedings involving supplies to sanctioned entities and individuals. The decision should be taken into account by firms contemplating or currently engaged in business with companies based in territories that are subject to international economic sanctions.

The judgment provides useful perspective as to the interpretation of "step-in" and force majeure clauses in international supply and shipping agreements. In this case, the respondent firms took considerable benefit from the inclusion of clauses which explicitly countenanced disruption to their business as a result of the imposition of economic sanctions.


1 Two "designated individuals" named in the Sanctions had indirect shareholdings in the Russian entities through their parent company, UC Rusal.

2 [290]

3 [291]

4 [355]

5 See, eg, Gerraty v McGavin (1914) 18 CLR 152, cited at [357].

6 [381]

7 [367]

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