February 12, 2023

English High Court of Justice decides two commercial cases concerning payment obligations to sanctioned Russian entities

The UK High Court of Justice recently issued two decisions related to payment obligations in contracts involving sanctioned Russian state-owned entities. On December 8, 2022, in Havila Kystruten AS et al v. STLC Europe Twenty Three Leasing Limited, the High Court decided an ownership dispute in favor of Havila Kystruten AS concerning four cruise ships that were built or in the process of being built at a Turkish shipyard – builds that were financed by indirect subsidiaries of GTLK, a Russian state-owned and controlled financing house. On April 8, 2022, GTLK was sanctioned by the EU and by the US in September 2022, which triggered a termination event under the contract that required immediate payment of a termination sum or risk foreclosure on the vessels – a sum that Havila Kystruten failed to pay because of GTLK’s sanctions status. Havila Kystruten had, however, taken steps to obtain a license in order to make the payment. The High Court awarded Havila Kystruten ownership of the vessels and enabled the company to settle its payment obligations to GTLK with a payment into a frozen account, in compliance with sanctions regulations.

On January 23, 2023 in Gravelor Shipping Limited v. GTLK Asia M5 Limited et al, the High Court published a similar decision in favor of Gravelor Shipping Limited, a Cypriot company that entered into two bareboat charterparties with owners GTLK Asia M5 and GTLK Asia M6 whose parent company, JSC GTLK, was owned or controlled by the Russian Ministry of Transportation. The dispute arose when Gravelor failed to make a payment for hire to the owners in April 2022, the month that the EU and US imposed sanctions upon GTLK entities. The owners indicated that the non-payment was an Event of Default and terminated the charterparties “effective immediately”. In response, Gravelor exercised its option to purchase the vessels under the charterparties, which required full payment to be made to the owners in US dollars and into a Moscow bank account. While Gravelor was willing to pay the option price provided by the owners, it took steps to obtain a license that would enable the payments to be made in euros into a frozen account, in order to avoid possible sanctions violations. Because the owners claimed that Gravelor failed to properly exercise the option to purchase, Gravelor petitioned the court for an order of specific performance to compel the owners to transfer title of the vessels, arguing that its payment in euros was sufficient to satisfy the purchase option. While an ownership determination has not yet been decided by the court, the High Court definitively ruled that the owners should have accepted Gravelor’s payments in euros into a frozen account or into an alternative bank account to ensure that the payments were made into a “sanctions free” account.