What is the threshold to invoke a sanctions clause and refuse orders? The Court of Appeal provides clarity in ‘’The Catalan Sea’’

The Court of Appeal has delivered an important judgment on sanctions clauses in voyage charterparties in Tonzip Maritime (Singapore) Pte Ltd v 2 Rivers Pte Ltd (“The Catalan Sea”) [2026] EWCA Civ 641, overturning the Commercial Court decision. The Court of Appeal held that the owner was entitled to rely on the sanctions clause and refuse to comply with the charterer’s orders on the basis that doing so exposed them to a real risk of sanctions liability.

Facts

Under a charterparty dated 5 November 2021, Tonzip Maritime Pte Ltd (‘’the owner’’) chartered the ship CATALAN SEA to 2 Rivers Pte Ltd (‘’the charterer’’) for the carriage of oil from a Russian Black Sea port (Ust Luga to Primorsk range) to the Mediterranean, with an intended discharge at Aliaga, Turkey.

The charterparty was on an amended ExxonMobil VOY2005 form and incorporated an “EPS Sanctions Clause”. Sub-clause C entitled the owner to refuse to comply with any order “which in the reasonable judgment 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”.

Upon the ship’s arrival at Primorsk, the charterer nominated Neftisa as shipper and ordered the owner to load. It was common ground that performance fell within the territorial scope of the relevant UK and EU sanctions regimes. The owner conducted sanctions screening using Refinitiv World-Check (a platform used by a number of banks and shipowners when managing sanctions issues), which indicated that Neftisa was associated with a designated individual, Mr Mikhail Gutseriev.

Mr Gutseriev had been sanctioned by the EU in June, 2021 and by the UK in August, 2021. Available materials suggested that, following those designations, he allegedly transferred his ultimate beneficial ownership in Neftisa to his brother, Mr Sait-Salam Gutseriev, retaining a 7% shareholding and he was replaced as head of Neftisa's board of directors by Mr Sait-Salam. This purported transfer gave rise to concern, as contemporaneous information indicated uncertainty as to whether it might be viewed as an attempt to circumvent sanctions, and whether dealings with companies controlled by persons affiliated with Mr Gutseriev might amount to the indirect provision of funds to a sanctioned person.

The Refinitiv reports were inconclusive and left the owner concerned that Mr Gutseriev might still exercise control over Neftisa. If the UK and EU authorities concluded that Mr Gutseriev had control of Neftisa, contracting with Neftisa would expose the owner to potential breaches of UK and EU sanctions. In the circumstances, the owner refused to load the cargo and requested alternative voyage orders.

The charterer sought to allay those concerns by providing supporting materials, including: (i) a letter from Neftisa dated 16th November, 2021 asserting that Mr Gutseriev was not a board member and “in accordance with the legislation of the Russian Federation is not the controlling person of “Neftisa”; and (ii) three legal opinions from the Moscow offices of Herbert Smith Freehills and Baker McKenzie indicating that, subject to certain factual assumptions, Neftisa was not owned or controlled by a sanctioned person and as such, was not subject to EU or UK sanctions. These materials did not resolve the owner’s concerns.

The charterer declined to provide alternative orders and purported to cancel the charterparty on the basis of the owner’s refusal to load. The owner’s position was that the purported cancellation amounted to renunciation of the charterparty and that the owner was terminating the charterparty for repudiatory breach.

Subsequently, on 29th June, 2022, Mr Sait-Salam Gutseriev was also sanctioned by the UK. In September, 2023, the European Court of Justice found that Mr Mikhail Gutseriev had remained in control of Neftisa following his purported divestment in June, 2021. In December, 2024, the charterer itself became subject to UK and EU sanctions under a separate regime.

Commercial Court decision

The Commercial Court held that, under the sanctions clause, the owner was not required to prove an actual breach of sanctions but only “exposure to sanctions”, defined as a real risk of liability. While the owner bore the initial burden of establishing that its decision was one that a reasonable owner could make, the evidential burden could shift to the charterer once a prima facie case was established.

However, the judge concluded that the owner’s decision did not meet this standard and was not one which any reasonable owner could reach. He focused on whether the owner had positive evidence that Mr Gutseriev continued to control Neftisa in November, 2021, and held that it did not. The issue of control was characterised as speculative, and the judge found that there was no objectively reasonable basis for refusing to load. Accordingly, the owner’s claim failed.

Court of Appeal

The Court of Appeal allowed the appeal and held that the owner’s decision was objectively reasonable. Whether assessed solely by reference to the material available to the owner at the time, or including additional material referred to at first instance, it was reasonably open to the owner to conclude that complying with the charterer’s orders exposed it to a real risk of sanctions liability.

While agreeing with the Commercial Court’s interpretation of the sanctions clause, the Court of Appeal found that the judge had erred in its application. In particular, the judge: (i) misapplied Litasco v Der Mond Oil and Gas Africa by treating it as supporting a conclusion that the owner could not have formed a reasonable judgment of the existence of a risk of sanctions without having reached a positive conclusion that Mr Gutseriev’s control of Neftisa continued; and (ii) addressed the wrong question, namely whether the owner had made a reasonable determination that Mr Gutseriev’s control of Neftisa continued, rather than whether the owner’s assessment of sanctions risk exposure was objectively reasonable.

The Court of Appeal first considered whether, on the undisputed facts alone, it was reasonably open to the owner to conclude that complying with the charterer’s orders carried a real risk of sanctions liability. Key factors included Mr Gutseriev’s prior majority ownership of Neftisa, the transfer of that interest to his close relative and long-standing business associate following EU designation, and the absence of transparency regarding consideration for that transfer. These circumstances, combined with the Refinitiv report linking Neftisa to a sanctioned individual were capable of raising legitimate concerns that the transfer might not have been genuine but instead a mechanism to circumvent sanctions. On this basis alone, the court accepted that a reasonable owner could have identified a real risk.

However, the owner’s assessment did not rest on these facts alone, as it had also received supporting materials from Neftisa and its advisers. The court found that this additional information did little to dispel concerns. The Neftisa letter and subsequent legal opinions were brief, reliant on assumptions, and ultimately derived from sources lacking independence, such as the company’s own management. Importantly, the legal memoranda expressly acknowledged that sanctions risk depended on the underlying factual reality of control, which remained uncertain. The Baker & Mackenzie memorandum in particular highlighted the possibility of indirect control through influence, familial ties, or informal arrangements, and explicitly warned that authorities might reach a different conclusion from that assumed in the advice.

Finally, the court considered whether other available reports altered the position, including media and risk intelligence materials. While these sources confirmed the restructuring and suggested a possible distancing by Mr Gutseriev, they remained tentative, unsourced, or ambiguous, and continued to flag the risk that authorities might view the changes as insufficient or cosmetic. Taken together, the overall body of information consistently pointed to ongoing uncertainty and potential exposure to sanctions. Accordingly, the court concluded that the judge had erred: it was indeed reasonably open to the owner to determine that complying with the charterer’s orders involved a real risk of sanctions liability.

As Lord Justice Foxton stated ‘’ the Judge erred in concluding that the determination made by the Owners that complying with the Charterers’ voyage orders gave rise to a real risk of liability to sanctions was not a determination which any reasonable shipowner could reach.’’

Comments

This will be a welcome decision for owners and their compliance teams as it provides authoritative guidance on the operation of sanctions clauses framed by reference to “reasonable judgment”. It makes clear that the relevant threshold is not proof of an actual breach, but a reasonable assessment of a real risk of sanctions liability.

In doing so, the Court of Appeal seems to support a pragmatic, risk-based approach and to squarely acknowledge the commercial realities faced by owners, who are often required to take decisions quickly, on the basis of incomplete information, in circumstances where ownership and control structures may be opaque and where the consequences of misjudgement can be severe.

Importantly, the Court of Appeal has confirmed that owners are not required to establish, by positive evidence, that a sanctioned individual retains control. It is sufficient that the owner forms an objectively reasonable view that there is a real risk of sanctions exposure.

Viewed in this light, it reinforces the protective function of sanctions clauses and provides owners with a clearer and more workable framework for risk decision-making, while signalling that the courts may be slow to second‑guess such judgements where they are based on a rational assessment of risk.

If Members have any questions in relation to the above issues they are invited to contact the Club for further information.