Litasco SA v Der Mond Oil and Gas SA
DMC/SandT/24/02
England
Litasco SA v Der Mond Oil & Gas Africa SA
English Commercial Court: Foxton J: [2023] EWHC 2866 (Comm): 15 November 2023
Judgment Available on BAILII @ https://www.bailii.org/ew/cases/EWHC/Comm/2023/2866.html
Fredrick Alliott (instructed by MFB Solicitors) for Litasco (Sellers)
Yash Kulkarni KC and Gaurav Sharma (instructed by Withers LLP) for Der Mond (Buyers)
Summary
Sellers succeeded in their application for summary judgment, for the sums owed by Buyers under an addendum to a deed of payment entered into by the parties after Buyers had defaulted in payment of the balance due under a sale contract for crude oil. The defences raised by Buyers, which were based on trade sanctions, on the grounds that Sellers had connections with Russia, were dismissed by the High Court. The Judge held that Buyers had no defence under the terms of the relevant contract, that they could not rely on the Russia (Sanctions) (EU Exit) Regulations 2019 (the “2019 Regulations”) and there was no other compelling reason why the dispute should proceed to a trial. The Judge also held that the powers of President Putin, as the head of a command economy, did not amount in this case to “control” of any party engaged in these proceedings.
Case note contributed by Jim Leighton, LLM (Maritime Law), LLB (Hons), BSc (Hons), Solicitor Advocate of England & Wales, IMI Qualified Mediator, LMAA Supporting Member and International Contributor to DMC’s Case Notes
Background
Sellers, a company incorporated in Switzerland and wholly-owned by a Russian oil company called Lukoil PJSC, and Buyers, a company incorporated in Senegal, entered into a sale contract for Nigerian crude oil on CFR Dakar, Senegal terms, under which only part payment was made after delivery of the cargo. Buyers later failed to pay the balance of the purchase price due. This led the parties to enter into a deed of payment, and later an addendum thereto, but the payments due thereunder were only satisfied in part. In consequence, Sellers commenced the present proceedings to enforce their claim under the addendum.
Buyers raised defences based on alleged misrepresentation, frustration and the force majeure and trade sanctions terms incorporated from the sale contract into the addendum. Sellers considered that the alleged defences did not have a realistic prospect of success and there was, in any event, no compelling reason for a trial. As such, Sellers applied to the High Court for summary judgment. This note focuses on the trade sanctions (clause 15 – fn.1) related aspects of the defence.
Judgment
Having set out the background to the dispute, the relevant trade sanctions clause, the parties’ respective arguments and reviewed the case law, the Judge proceeded to address whether the defence had a realistic prospect of success or whether there was any other compelling reason for a trial in any event.
The Judge noted that there could be a potential defence based on (1) the terms of the contract, with reference to clause 15.2, and/or (2) separately under the 2019 Regulations. The former depended on “the reasonable belief of the Seller” alone. However, the latter depended on the 2019 Regulations as properly construed and based on the actual facts, not the reasonable belief of a party as to the risks it might face.
The Judge also pointed out that the Court of Appeal in Mints v PJSC National Bank Trust (Mints – fn.2) had held that the 2019 Regulations did not prevent the court from entering a money judgment in favour of a sanctioned party. On that basis, the 2019 Regulations did not provide a defence to a claim for such a judgment.
Did Clause 15.2 Apply?
Having considered clause 15.2, the Judge was satisfied that it did not apply. Leaving aside any question of the “reasonable belief of the Seller”, Buyers had not identified any relevant ‘Sanctions Changes’, as defined by clause 15.2, since the date on which the parties had entered into the contract. For that reason alone, the contractual sanctions defence failed.
Did the 2019 Regulations Apply?
Having considered the 2019 Regulations, in particular regulation 7 (fn.3) which addresses the issue of whether a body or entity is owned or controlled directly or indirectly by a sanctioned person, the Judge considered that it was not arguable that the 2019 Regulations were directly or indirectly applicable to one or both of the parties to the transaction in the absence of Buyers identifying the basis on which they said the 2019 Regulations so applied.
Accordingly, absent such an explanation, the Judge held that there was no arguable case that Sellers were controlled by a person who had been sanctioned under the 2019 Regulations. Notably, neither Sellers nor their parent company (Lukoil PJSC) had been named as a sanctioned entity.
As regards regulation 12 of the 2019 Regulations, which makes it an offence to make funds available to a sanctioned (designated) person, and with regulation 7 in mind, the Judge noted that, while the former founder and president (Mr Alekperov) of Sellers and Lukoil PJSC had been sanctioned, he had stood down from Sellers after he was sanctioned and the evidence available showed his shareholding in Lukoil PJSC to be 8.5%, which was insufficient to amount to a controlling stake in Sellers.
In relation to the President of Russia (President Putin) who had also been sanctioned, the Judge was prepared to assume that it was strongly arguable that President Putin had the means of placing all of Sellers and/or their assets under his de facto control, should he decide to do so. However, the Judge considered that the better view of regulation 7(4) was that it concerned an existing influence of a sanctioned person over a relevant affair of the company and not a state of affairs which a designated person was in a position to bring about.
The Judge considered that, were matters otherwise, it would follow that President Putin was arguably in control, for Regulation 7(4) purposes, of companies of whose existence he was wholly ignorant, and whose affairs were conducted on a routine basis without any thought of him. The Judge took comfort in that view by noting that the Chancellor of the High Court, Sir Julian Flaux, in the Court of Appeal opinion in Mints, endorsed part of the summary of the effect of regulation 7(4), namely that it applied “when the designated person ‘calls the shots’”, not the wider formulation (“if the designated person calls the shots, or can call the shots”).
Therefore, while the Judge accepted that the Chancellor had lent some limited support to a view that being “at the apex of a command economy” might be sufficient for regulation 7(4) purposes, and that “Mr Putin could be deemed to control everything in Russia”, those observations were couched in tentative terms, and necessarily reflected the particular context in which they were made.
Finally, in line with Mints, the mere existence of the 2019 Regulations did not, without more, prevent a money judgment being entered in Sellers’ favour.
Some other reason for a Trial?
The Judge did not consider the present case should proceed to trial as a test case on the issue of ‘control’ under the 2019 Regulations. There was no arguable evidential basis for such a debate nor should Sellers be deprived of a judgment not prohibited by the 2019 Regulations simply to provide the occasion for it.
Comment
This judgment provides some relief to concerns due to the obiter (non-binding) view expressed by the Court of Appeal in Mints, to the effect that regulation 7 of the 2019 Regulations may apply to any Russia related public body or private entity over which President Putin may in principle be able to exercise ‘control’. That was contrary to the first instance judgment in Mints (fn.4), where Cockerill J held that a designated person who exercised ‘political control’ over another entity did not satisfy the requirement for ‘control’ in regulation 7.
Following the Court of Appeal handing down Mints, on 6 October 2023, the UK Foreign, Commonwealth & Development Office (FCDO) published guidance, on 17 November 2023 (Guidance – fn.5), to confirm that the FCDO does not presume a Russia related public body or private entity to be controlled by a designated official because such an official holds office in a Russian public body or could in principle exercise control over a Russia related private entity.
The Guidance was published two days after the present judgment was handed down, and so goes some way to fortify the view that the 2019 Regulations require actual proof of direct or indirect control of a Russia related public body or private entity before a breach of regulation 12 (which makes it an offence to make funds available to a sanctioned person) could be proven. Yet, the 2019 Regulations is a dense piece of legislation that is not simple to interpret.
It will be interesting to see how this debate develops in the future disputes the Judge anticipated would soon come before the courts on the issue of ‘control’. That is because a fair reading of regulation 7(4) is amenable to a view that the sanctioned person (P) need not have taken any step to control the body or entity (C), given the phrase “P would (if P chose to) be able … to achieve the result that affairs of C are conducted in accordance with P’s wishes” (emphasis added).
Footnote 1:
“15 TRADE SANCTIONS … 15.2 If, at any time during the validity of the Agreement, there is an effective amendment to any existing Trade Sanctions or new Trade Sanctions have become or are due to become effective, which in the reasonable belief of the Seller may:
15.2.1 result in or risk the Seller breaching Trade Sanctions by performing any one or more of its obligations under the Agreement; and/or
15.2.2 result in or risk the imposition of any penalty, prohibition or impediment in any way of the payment obligations between the Parties,
hereinafter referred to as ‘Sanctions Changes’
then at any time following such occurrence, may, at its sole and absolute discretion (with no obligation), suspend performance of any one or more of its obligations under the Agreement (including without limitation those which are affected by the Trade Sanctions), without any liability to the other Party whatsoever. Any such suspension of performance shall be notified by the Seller to the other Party. …”
Footnote 2: [2023] EWCA Civ 1132, see paragraph [225] in particular, available at https://www.bailii.org/ew/cases/EWCA/Civ/2023/1132.html
Footnote 3:
“Meaning of ‘owned or controlled directly or indirectly’
7.—(1) A person who is not an individual ("C") is "owned or controlled directly or indirectly" by another person ("P") if either of the following two conditions is met (or both are met).
(2) The first condition is that P—
(a) holds directly or indirectly more than 50% of the shares in C,
(b) holds directly or indirectly more than 50% of the voting rights in C, or
(c) holds the right directly or indirectly to appoint or remove a majority of the board of directors of C.
(3) Schedule 1 contains provision applying for the purpose of interpreting paragraph (2).
(4) The second condition is that it is reasonable, having regard to all the circumstances, to expect that P would (if P chose to) be able, in most cases or in significant respects, by whatever means and whether directly or indirectly, to achieve the result that affairs of C are conducted in accordance with P’s wishes.”
Footnote 4: [2023] EWHC 118 (Comm), see paragraphs [216]-[248], available at https://www.bailii.org/ew/cases/EWHC/Comm/2023/118.html
Footnote 5: see paragraphs 2 and 3 in particular, available at https://www.gov.uk/government/publications/ownership-and-control-public-officials-and-control-guidance/ownership-and-control-public-officials-and-control-guidance
