Sanctions do not obviate contractual liabilities

Russian sanctions prevented millions of dollars in vessel-hire payments, but could not extinguish the underlying contracts or guarantees, rules High Court.

In a decision likely to interest lawyers advising businesses caught between their contractual obligations and international sanctions , the High Court in London has ruled that restrictions which make payment unlawful may suspend the obligation to pay without destroying the contract itself – especially where the contract already determines who bears the consequences if performance becomes impossible. Handing down her decision on 2 October, Deputy High Court Judge Lesley Anderson KC granted summary judgment in a dispute over guarantees securing seven vessels ultimately owned by Russia’s state-owned transport leasing company JSC GTLK.

The ruling leaves four guarantors facing claims of approximately $12.9 million plus interest, with three also facing a further $29.1 million plus interest.

At the heart of the case was a question that has both confronted and frustrated companies since Russia’s invasion of Ukraine: what happens when sanctions bang heads with a long-term commercial contract and make payment unlawful?

The court’s answer was that sanctions are not a get-out-of-jail-free card: where illegality affects a contractual payment, the effect is to suspend the obligation rather than frustrate the entire agreement.

GTLK Malta Four owned two floating cranes, three tugboats and two barges, which it chartered to Cyprus-incorporated Pola Logistics under seven 10-year bareboat charters entered into between 2018 and 2020. Its ultimate owner was JSC GTLK, whose sole shareholder is the Russian Ministry of Transport.

Pola Logistics’ obligations under the charters were guaranteed by Pola Maritime, Capstans Holdings, Valbridge and Voje Holding. Those four companies are the defendants in the High Court claim brought by GTLK Malta Four; Pola Logistics itself is not a defendant.

The EU designated JSC GTLK on 8 April 2022 for financially supporting and benefiting from the Russian government. Pola Logistics immediately stopped paying hire, while its insurers said cover for the vessels had automatically terminated. The UK designated JSC GTLK on 21 April and the US followed on 2 August. Because hire was payable in US dollars by wire transfer, payments would pass through US intermediary banks. The parties accepted that US sanctions made payment unlawful where it had to be made.

On 1 September 2022, Pola Logistics purported to terminate the charters.

The restrictions later eased after GTLK Europe, GTLK Malta Four’s immediate parent, entered liquidation in Ireland in May 2023, putting it under the control of independent liquidators. The Irish High Court subsequently accepted that it was no longer controlled by its sanctioned Russian parent, while UK and US authorities issued licences permitting certain payments involving the group. With the sanctions position now changed, GTLK terminated the charters in February 2024 for unpaid hire and demanded that Pola Logistics purchase the vessels. In October it called on the guarantees.

The defendant guarantors argued that the sanctions had either frustrated the contracts or entitled Pola Logistics to terminate them because it had been deprived of peaceful use and possession of the vessels. Their case was that Pola Logistics could no longer lawfully pay hire, obtain insurance or enjoy the commercial benefit of the vessels.

GTLK relied heavily on clause 38.10, described during the proceedings as the “hell or highwater clause”, which it said placed the risk of being unable to use the vessels squarely on Pola Logistics. Although the clause did not expressly refer to sanctions, they were mentioned elsewhere in the contracts. GTLK argued that the documents, read as a whole, showed that the parties had contemplated sanctions affecting the owner and decided who would bear the consequences.

The guarantees presented another problem for the defendants. If Pola Logistics failed to pay, the guarantors had agreed to pay as if they were themselves the principal debtor. The guarantees also covered circumstances in which an underlying obligation became unenforceable, invalid or illegal and were drafted specifically to prevent those problems from releasing the guarantors.

Deputy Judge Anderson agreed with GTLK that the contracts had placed the risk on Pola Logistics. She rejected the argument that sanctions immediately frustrated contracts which still had at least five years left to run. There was no authority, she said, for treating a long-term charter as frustrated the moment sanctions made performance impossible. The question was whether the disruption would last long enough to turn the original deal into something fundamentally different.

The sanctions undoubtedly interfered with Pola Logistics’ ability to perform, but that did not mean the charters had ceased to exist. Their effect on the payment obligation was to suspend it rather than destroy it.

The wording of the charters also undermined the frustration argument. Having already agreed who would bear the consequences of such disruption, Pola could not use frustration to escape those obligations.

The defendants therefore failed on both fronts: the charters had not been frustrated or validly terminated, while the guarantees had been drafted to survive problems with the underlying obligations. The judge concluded that the defendants had “no real prospect” of establishing frustration or termination, or of escaping liability under the guarantees, and granted summary judgment.

Separate London Maritime Arbitrators Association proceedings brought by Pola Logistics over the charters are ongoing.

In GTLK Malta Four (claimant) v Pola Maritime and others (defendants) , the claimant was represented by Robert Thomas KC and Koye Akoni of Quadrant Chambers, instructed by Freshfields. The defendants were represented by Steven Berry KC and Joseph Rich of Essex Court Chambers, instructed by MFB Solicitors.