Sanctions, control, and contractual disputes: The Litasco case

The High Court recently considered whether payments to a subsidiary of Lukoil, a Russian oil company, were prohibited, as it is sanctioned via the broad “ownership and control” test set out in the UK sanctions on Russia. This decision is topical, considering the rise in sanction-related disputes, recent changes in sanctioned entities and issues of force majeure and frustration.

In the case Litasco SA -v- (1) Der Mond Oil and Gas Africa SA (2) Locafrique Holding SA [2023] EWHC 2866 (Comm), the defendants claimed they need not pay Litasco, arguing that: Litasco's controllers were sanctioned, blocking payments; a "force majeure" clause exempted them from liability; and the contract was frustrated.

Is Lukoil sanctioned?

Notably, neither Lukoil nor Litasco are expressly listed (designated) in the UK government’s list of entities under the UK’s ‘asset freeze’ regime (which, broadly speaking, prohibits payments to or from a sanctioned entity).

Importantly, this regime also applies to entities that are ‘owned or controlled’ by persons who are expressly listed. The defendants suggested that Litasco was controlled by designated persons, namely its founder or President Vladimir Putin.

The court concluded that there was insufficient evidence that Litasco’s founder controlled Litasco, the Defendants’ position being described as “pure speculation.”

As for President Putin, the defendants relied on the Court of Appeal’s recent comments which could be interpreted as suggesting that every company in Russia may be under his control given he is “at the apex of a command economy.” However, the High Court held that although President Putin might have the means to place Litasco under his de facto control, this was not enough to satisfy the “control” test.

This is consistent with the joint guidance of the Office of Financial Sanctions Implementation (OFSI) and the Foreign, Commonwealth & Development Office (FCDO) issued two days after, confirming that control would not be established merely by incorporation of an entity in a jurisdiction, in which a sanctioned public official “has a leading role in economic policy or decision-making.”

The contract also contained a “trade sanctions” clause which, to be engaged, would require sanctions that applied “directly or indirectly” to the parties to the transaction. However, as the parties to the transaction were foreign companies, and the contract did not involve performance in the UK, the UK’s Russia sanctions did not trigger this clause. This is a helpful reminder that UK sanctions do not apply to a transaction merely because it is subject to the jurisdiction of the English Court and/or is governed by English law.

Does force majeure apply?

The defendants argued that the force majeure clause was engaged because payment had to be made through the international banking system, and five African banks that were approached were unwilling to make payments to Litasco.

The defendants contended that these refusals to make payment were an event “beyond the reasonable control” of the defendants, which had “delayed, hindered or prevented” them from complying with their obligations. These requirements are typical in force majeure clauses.

The High Court rejected this submission, noting that an argument that a party owing an accrued debt obligation is relieved of performance because payment has been made more difficult “must be approached with particular circumspection.”

Helpfully, the High Court recapped the distinction between force majeure clauses that are triggered when performance is “prevented” or “hindered or delayed”; although the latter is a less stringent requirement (it does not require impossibility), it nonetheless involves a “significant degree of difficulty would be required, perhaps one approaching, albeit falling short of, impossibility.” The evidence before the court fell considerably short of this.

The defendants submitted similar arguments to suggest that the payment obligation was frustrated. The court found it difficult to see how an accrued payment obligation for a wholly executed contract could be frustrated by events after the accrual of that obligation.

This decision serves as an important reminder that a refusal to perform a contract due to sanctions will not be easily accepted by the English Court, showing a careful analysis of the sanctions regime and the contractual framework is essential.

Jon Felce is a partner, Mikhail Vishnyakov is a partner and Florence Sandberg is an associate of Cooke, Young & Keidan