In Litasco SA v Der Mond Oil & Gas Africa SA & another [2023] EWHC 2866 (Comm), the High Court granted summary judgment in favour of Litasco SA (Litasco) in relation to a claim for payment of sums due under a crude oil purchase agreement. Several defences were advanced by Der Mond Oil and Gas Africa SA (Der Mond) and Locafrique Holding SA (together, the Defendants), including reliance on the force majeure and sanctions clauses of the contract. The High Court rejected all the defences and considered in further detail the important issue of the interpretation of "control" under UK sanctions law, following the recent Court of Appeal Judgment in PJSC National Bank Trust and another v Mints and others [2023] EWCA Civ 1132 (Mints).
Background
The dispute concerned the sale of crude oil between two oil trading companies pursuant to a purchase agreement dated April 2021 (as modified by an addendum dated 7 November 2022) (the Oil Contract). Litasco delivered all the crude oil in accordance with the Oil Contract but did not receive full payment from Der Mond, resulting in Litasco accelerating the debt and demanding full payment.
The Force Majeure defence
The Defendants argued that the force majeure clause was engaged because the payment would have had to have been made through the international banking system, and no European clearing bank would make the payments to Litasco. It was said that this refusal by the banks to make the payment was an event that was "beyond the reasonable control" of the Defendants which "delayed, hindered or prevented" them from complying with their obligations to pay Litasco, resulting in the payment obligation being suspended.
Mr Justice Foxton considered the scope of the clause extended to events that hindered performance, rather than rendering it impossible. The distinction between "prevention" and "hindrance" was important - a force majeure clause that is triggered when an event "hinders" performance of an obligation will "have a wider field of operation than those limited to events which "prevent" performance". This was especially important in the context of a party owing an accrued debt obligation that simply lacked the financial resources to satisfy its obligations and so attempts to rely on a force majeure clause.
Mr Justice Foxton ruled that Der Mond's payment obligation of the accrued debt was not hindered as it was only the method of performance that was rendered more difficult, as opposed to performance itself. The court found that Der Mond was unable to make the payments due to not having sufficient foreign currency in its account, rather than any difficulties in making payments through the international banking system and a lack of foreign currency accordingly did not constitute a force majeure event.
The sanctions defence
The sanctions clause in the Oil Contract allowed either party to suspend performance if any sanctions regulations were directly or indirectly applicable to either party or to the transaction. Der Mond argued that, despite neither Litasco (a Swiss company) nor its Russian parent (Lukoil) being listed as designated persons pursuant to the Russia (Sanctions) (EU Exit) Amendment Regulations 2019 (2019 Regulations), it was prevented from paying Litasco under Regulation 12 of the 2019 Regulations.
In summary, Regulation 12 provides that a person "must not make funds available directly or indirectly to a designated person" - importantly, this includes a non-designated person (or entity) which is "owned or controlled directly or indirectly" by a designated person. For the purposes of the 2019 Regulations (under Regulation 7), a non-designated entity will be "owned or controlled" by a designated person where the designated person directly or indirectly: (i) holds more than 50% of the shares or voting rights in the entity; (ii) holds the rights to appoint or remove a majority of the board of directors of the entity; or (iii) it is reasonable, having regard to all the circumstances to expect that the designated person would (if they chose to) be able, in most cases or in significant respects, by whatever means and whether directly or indirectly, to achieve the result that the affairs of the entity will be conducted in accordance with the designated person's wishes.
The Defendants argued that Litasco should be treated as a designated person because it was "controlled" by multiple designated persons: Mr Vagit Alekperov, the CEO and president of Lukoil (before he stepped down in April 2022) and President Vladimir Putin. Mr Justice Foxton found that Litasco was not controlled by Mr Aleperov because he had resigned as CEO shortly after he was sanctioned, and his shareholding in Lukoil of 8.5% did not meet the requisite threshold to amount to a controlling stake in the parent company. The Defendants also submitted no evidence to support the contention that Mr Alekperov continued to exercise control over Lukoil.
As regards President Putin's purported control over Litasco or Lukoil, Mr Justice Foxton distinguished the facts of this case from the Mints case. In the Mints case, the Russian bank in question, NBT, was at least 97.9% owned by the Central Bank of Russia, "an organ of the Russian State over which President Putin exercised de facto control". By contrast, Mr Justice Foxton noted that Lukoil was not a state-owned entity, and the Defendants had offered no evidence to suggest Lukoil functioned as an organ of the Russian state, or to suggest that Litasco was under the de facto control of President Putin. Mr Justice Foxton acknowledged that while it is strongly arguably that President Putin had the ability to place Litasco and its assets under his de-facto control, the relevant question is whether he had already exerted that influence, noting "the better interpretation of Regulation 7(4) is that it is concerned with an existing influence of a designated person over a relevant affair of the company....not a state of affairs which a designated person is in a position to bring about. Were matters otherwise, it would follow that President Putin was arguably in control ... of companies of whose existence he was wholly ignorant, and whose affairs were conducted on a routine basis without any thought of him.".
The issue of control in this case arose in the context of Regulation 12 of the 2019 Regulations, with the key question being "whether making funds indirectly available to Litasco amounts to "making funds indirectly available" to President Putin". Mr Justice Foxton concluded that there was no evidence providing an arguable basis for contending that funds received by Litasco on payment of this debt would be used in accordance with President Putin's wishes, such that there was no arguable case put to the Court that President Putin controls Litasco within the meaning of the 2019 Regulations.
Key takeaways
The rejection of the force majeure defence highlights the importance of looking at:
the precise words of the force majeure clause, in particular, whether the clause operates only where performance is prevented or also where it is hindered;- and the nature of the obligation and the possible methods of performance on a case-by-case basis before relying on force majeure.
Mr Justice Foxton distinguished between those genuinely hindered by force majeure and those who simply lacked the means to make payment.
The High Court concluded that there was no arguable case that Litasco was controlled by a designated person and in any event, the 2019 Regulations did not prevent a money judgment being entered in Litasco's favour. Unlike the obiter remarks on the interpretation of control made in the Mints Court of Appeal case, Mr Justice Foxton's consideration of "control" and consequential rejection of the sanctions defence is binding and suggests that a pragmatic approach to the interpretation of "control" may be taken by the Courts in future. Notwithstanding this, in circumstances where courts are reaching different conclusions, many have called for more clarity on this important issue beyond the UK government's further guidance released late last year.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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