Navigating Australia’s sanctions regime is highly complex. The coordinated sanctions effort by Australia and other countries against the Russia Federation as a result of the Ukraine war especially create unexpected risks for businesses in a globally connected world. It is in every Australian business’ interest to be prepared to respond to this changing landscape. This alert references the new Russian and Ukraine sanctions imposed by Australia, contracting considerations for businesses, and what Australian directors should be aware of.
Summary of the new Russian and Ukraine sanctions
Russia
- The Minister has increased powers to name individuals and companies as “designated persons” and has named additional individuals and companies (including several Russian corporates and banks) as designated persons. It is prohibited to directly or indirectly make an asset available to, or for the benefit of, a designated person or entity, other than as authorised by a permit granted by the Foreign Minister. Any person who holds an asset owned or controlled by a designated person must freeze that asset and may not use or deal with that asset or allow the asset to be used or dealt with, or facilitate the use or dealing with the asset, other than authorised by a permit granted by the Foreign Minister. Designated persons are also subject to travel bans.
- The Minister has also declared further goods related to oil and other energy products as sanctioned imports and various aluminium products and luxury goods as sanctioned exports.
Ukraine
- The trade sanctions that have been in effect in relation to Crimea and Sevastopol have not substantially changed, but have now been extended to the regions of Donetsk and Luhansk.
Read our previous article about the Australian sanctions against Russian/Ukraine.
Implications for existing contracts
In some cases, these changes in law may mean that it is not possible for a company to perform its obligations under its contracts with Russian or Ukrainian entities or contracts that have geographical connections to sanctioned areas. If there is a specific sanctions clause within the contract, it should be reviewed to assess:
- whether it is triggered where compliance would cause an actual breach of sanctions or a potential breach;
- whether a party has any discretion in deciding whether the clause would be triggered; and
- whether the rights or obligations are completely extinguished or merely suspended.
Where there is no specific sanctions clause, the following legal tools and common provisions may assist a company which is prevented from completing its obligations under a contract involving sanctioned goods or a sanctioned counterparty.
Force Majeure
If a contract includes a force majeure clause, it may allow the contracting parties to cancel the contract, be excused from performing all or part of its obligations under the contract or suspend performance under the contract. Force majeure clauses commonly include ‘an act of war’, ‘supply chain disruption’, or ‘cyber attack’ as events which could trigger these rights. Parties seeking to terminate or be excused from performance under the contract should check the force majeure clause to see if relevant specific events are listed, or whether a broader category of event might be relied upon.
It is also important to check when the clause will be triggered, for example, the clause may only apply where a party is actually prevented from complying with its obligations, or where the party cannot comply after using reasonable endeavours to do so. In the recent English law case of MUR Shipping BV v RTI Limited (where the imposition of sanctions was found to trigger the force majeure clause), the court found that the requirement for the party seeking to rely on the force majeure clause to make reasonable endeavours did not extend to forfeit their right to receive payment in US Dollars.
Illegality
At common law, a contract will be unenforceable where it is illegal or unlawful for one or more parties to perform their obligations under the contract. The significance of the contract being unenforceable (as opposed to void) is that the contract still creates a legal relationship between the parties, however, the court will not assist a party to enforce the contract. This means that where part of the transaction has already been completed (for example money has already been paid), it will not automatically be unwound.
Further, a contract will be unenforceable if it cannot be legally performed in the place of performance (see Ralli Brothers v Campania Naviera sota [1920] 2 KB 287, which was followed in Gujarat NRE Coke Limited v Coeclerici Asia (Pte) Ltd [2013] FCAFC 109). Interestingly, the common law doctrine was upheld despite an express contractual clause to the contrary. (We note that this rule is sometimes classified as part of the law of frustration.)
A contract may also provide an event of default for illegality (we note that this is included in standard form loan documentation in the Australian market).
Frustration for subsequent illegality
A change in law after the formation of a contract, has historically been found to trigger the common law doctrine of frustration of a contract (see, for example, Ertel Bieber & Co v Rio Tinto Co, Ltd [1918–19] All ER Rep 127 in which the contract was found to be discharged on the basis that the outbreak of war rendered it illegal for the Respondent to transact with the German counterparty).
In contrast to the doctrine of illegality, if a contract is frustrated, all current and prospective rights and obligations are cancelled. The contract is not retrospectively unwound either.
Directors duties considerations for the board
Misconduct in respect of sanctions legislation is ultimately the responsibility of the company’s board of directors. The case of ASIC v Flugge [2016] VSC 779 (the “Australian Wheat Board Case”) is illustrative of the level of oversight required. In that case the former chairman and director of AWB Limited, Trevor Flugge) was found to have failed to make necessary enquiries and to take action to prevent AWB from breaching relevant sanctions legislation.
In that case, it was alleged, amongst other things, that AWB Limited made an agreement with Iraq that the AWB would pay a transportation fee to the Iraqi government (via an agent) which was recouped by AWB by inflating the price of wheat and withdrawing additional funds from the escrow account held by the United Nations which was established to facilitate the Oil-for-Food-Program (where the proceeds from the sale of oil from Iraq was put into an escrow account, which could then be used to purchase wheat).
The Supreme Court of Victoria found that Mr Flugge believed that the transportation fee had UN approval, however, a reasonable director would have made further inquiries into whether the UN had been fully informed by AWB of the circumstances of the transportation fee. Specifically, Mr Flugge knew:
- of the UN sanctions against Iraq; and
- that the fee would have been in breach of UN sanctions, if the UN had not approved of the payment of the fee.
Ultimately, Mr Flugge was found to have breached his duty under s 180(1) (duty to exercise powers and discharge duties with the degree of care and diligence that a reasonable person in the director’s position would exercise).
Reasonable precautions and due diligence defence
A breach of the Australian sanctions legislation is a strict liability offence. However, there is a defence if companies can show they took reasonable precautions and exercised due diligence to avoid the breach. This includes:
- Establishing a sanctions policy and framework for identifying sanctions laws, determining their application to the company and ensuring compliance with Australian sanctions laws. This could include training, escalation to senior management and the Board, monitoring and compliance audits.
- Taking “reasonable” steps in respect of each transaction. At a minimum companies may be required to screen parties against the Consolidated List of designated persons, however the Department of Foreign Affairs has indicated that additional steps and due diligence may be required.
- Monitoring changes to Australian sanctions laws to ensure framework and due diligence procedures remain current.
Other issues to consider in navigating the sanctions regime
Other relevant issues that companies and Board should consider in navigating the sanctions regime include:
- General risks associated with high-risk jurisdictions;
- AML/CTF and non-proliferation requirements;
- Anti-discrimination laws;
- financial exclusion mitigation measures;
- ESG factors;
- Continuous disclosure and reporting obligations;
- Reputational considerations; and
- Stakeholder engagement
The International Swaps and Derivatives Association, Inc have published a guidance note for addressing sanctions issues in ISDA Documentation which is available here.
