The growing reach of sanctions against Russia
On 19 May 2023, the Australian Government (Government) announced plans to impose a ban on the export of all machinery and related parts to Russia and areas of Ukraine temporarily under Russian control.
This is the latest in a series of sanctions imposed by the Government in response to Russia’s invasion of Ukraine in February 2022. The Australian sanctions regime targets a range of Russian and Belarusian individuals and entities as well as certain economic sectors and industries. In addition, the Government has imposed sanctions in relation to “specified Ukraine regions” – namely those areas of Ukraine that are currently under Russian control.
The sanctions are imposed and administered under the Autonomous Sanctions Act 2011 (Cth) (Sanctions Act) and the Autonomous Sanctions Regulations 2011 (Cth) (Sanctions Regulations). They apply to Australian citizens, entities incorporated in Australia, Australian registered body corporates and Australian flagged vessels both in respect of their activities in Australia and their activities abroad.
The Sanctions Act and Sanctions Regulations impose the following measures with respect to Russia and “specified Ukraine regions”:
- restrictions on the export or supply of certain goods;
- restrictions on the import, purchase or transport of certain goods;
- restrictions on certain commercial activities;
- restrictions on the provision of certain services;
- restrictions on providing assets to designated persons or entities;
- restrictions on dealing with the assets of designated persons or entities; and
- travel ban on designated persons.
What happens if you have a contract to make a payment or deliver a good that is prohibited by sanctions?
The sanctions have the potential to prevent performance of contracts that involve the delivery of goods to Russia or areas of Ukraine under Russian control. The sanctions may also prevent performance of contracts involving commercial payments to a sanctioned entity or person, or to an entity which is owned or controlled by a sanctioned entity or person. The sanctions will also likely apply to obligations arising under contracts that were entered into before the sanctions were imposed. Australian parties to such contracts should consider applying to the Australian Sanctions Office (ASO) for a permit to engage in an activity that is otherwise prohibited by sanctions.
Importantly a sanctions permit is authorised by Australia’s Minister of Foreign Affairs and is required to be in the ‘national interest’. Relevant factors in determining this can include whether enabling such a permit would be consistent with Australia’s economic, security and foreign policy, as well as any effect on Australia’s international reputation or standing.
The ASO uses an online Pax system to process permit applications. Applicants must provide detailed information on the goods or services involved, the end use of the goods or services, the end user and the intended transport pathway for the goods or services. The Department of Foreign Affairs and Trade advises that 3 months should be allowed to process the permit, so Australian companies need to act early to ensure they are covered before their contractual obligation falls due. Given this timing, managing the relationship and communications with any affected party is critical in limiting the potential for such a party commencing proceedings.
Why you cannot ignore this risk
A breach of Australian sanctions can have both civil and criminal penalties. For example, penalties include imprisonment of up to 10 years and/or a fine the greater of 2,500 penalty units ($687,500) or three times the value of the transaction. For this reason organisations, their directors, senior management and employees should be cognisant of the sanctions risks, and of their own personal exposure.
Just as sanctions cannot be ignored, the fact that sanctions have been imposed does not mean a party can simply ignore its contractual obligations. Where a party to a contract affected by sanctions fails to perform its obligations, the other party may commence proceedings seeking damages for breach of contract. In cross-border transactions it is common for disputes of this nature to be referred to international arbitration. Engaging in cross-border disputes, whether in foreign courts or in arbitration, can be complex, particularly if the other party is itself sanctioned or commences proceedings in a sanctioned jurisdiction.
Where an arbitral tribunal decides in favour of the claimant:
- paying compensation, for example in the form of damages ordered in an arbitral award, can also risk breaching Australian sanctions; and
- on the other hand, if payment is not voluntarily made, the claimant may be able to seek enforcement of an arbitral award under the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958) (NYC), which provides for the enforcement of arbitral awards in 172 states, including Australia, as if it were a judgment of a domestic court. This could result in the claimant trying to seize assets in Australia, or in any other jurisdiction where the unsuccessful party holds assets.
Companies should take proactive steps to protect against the risk of a contractual dispute. These include:
- reviewing your contracts now to ensure that your obligations comply with Australian sanctions law;
- checking your contracts and considering the application of force majeure and frustration clauses to sanctions
- assessing the sanctions policy of your bank as well as correspondent banks when considering making a payment to a sanctioned country. Financial institutions often have policies for sanctions which exceed the legal requirements imposed by the sanctioning country; and
- if sanctions may prevent performance of the contract, consider proactively applying to the ASO for authorisation to engage in the sanctioned activity. Even if ASO does not give authorisation, documenting efforts to perform contractual obligations—including seeking permission from the Government—can strengthen a company’s position in subsequent legal proceedings.