The Impact of Sanctions on the Performance of International Transport Contracts

How Do Sanctions Affect the Performance of International Transport Contracts?

Economic and trade sanctions can affect various stages of the international transport chain, from entering into contracts and selecting a transport company to insuring cargo, making payments, and delivering goods. These restrictions may make access to certain financial services, ports, insurers, transport fleets, or trade routes more difficult or, in some cases, unlawful.

In international transport contracts, the effects of sanctions depend on several factors, including the nature of the restriction, the countries and persons involved, the origin and destination of the goods, the type of cargo, the mode of transport, and the law governing the contract. Accordingly, the mere existence of sanctions does not mean that every transaction connected with a particular country or region is prohibited or incapable of performance. This article examines the impact of sanctions on the performance of international transport contracts, their legal consequences, their relationship with force majeure and contractual liability, and measures for managing the associated risks.

What Are Economic and Trade Sanctions?

Sanctions are legal and administrative restrictions imposed by governments or international organizations for specified purposes on economic, commercial, or financial activities, or on dealings involving persons and entities. Their scope may range from prohibitions on transactions with designated persons to restrictions on the export of goods, the provision of services, the transfer of funds, or access to transport infrastructure. Sanctions may be considered in the following categories according to the authority imposing them:

• United Nations Sanctions: These sanctions are imposed by the United Nations Security Council under the powers conferred by the UN Charter. Their scope and subject matter depend on the relevant resolutions and may include arms restrictions, asset freezes targeting specified persons and entities, or other measures. Countries implement these decisions through their respective legal and administrative mechanisms. Accordingly, assessing the effects of a sanction requires examining the relevant resolution and its implementing regulations within the applicable legal system.
• Unilateral or Regional Sanctions: Certain countries and regional bodies, including the United States, the European Union, and the United Kingdom, impose restrictions on specified persons, companies, activities, or economic sectors under their own laws and regulations. These restrictions may include prohibitions on providing transport services, restrictions on equipment exports, asset freezes, or prohibitions on financial and insurance services. An important legal consideration is that the jurisdictional scope of these sanctions varies. For example, European Union regulations generally apply to persons and entities within its jurisdiction, while United States regulations apply to persons and activities subject to United States jurisdiction. Therefore, the mere existence of a sanction does not automatically require every company worldwide to comply with the same restriction. However, certain regulations may also have legal effects for persons outside their primary territorial scope.
• Primary Sanctions: Some sanctions regimes distinguish between primary and secondary sanctions. Primary sanctions generally target persons, companies, and activities that fall within the jurisdiction of the imposing country under its laws.
• Secondary Sanctions: Secondary sanctions may, in specified circumstances, expose persons or companies outside the territory of the imposing country to restrictions. For example, conducting certain transactions with sanctioned persons or entities may expose a foreign company to consequences such as restricted access to the imposing country’s market or financial system. Primary and secondary sanctions differ in their scope and legal basis and must be assessed in light of the regulations governing each sanctions program.

How Do Sanctions Affect International Transport Contracts?

Sanctions can disrupt various stages of performing a transport contract. In some cases, carriage remains technically possible, but access to financial, insurance, or port services becomes restricted. In other cases, the carriage of the goods or the provision of related services is itself prohibited. The principal effects of sanctions include the following:

• Restrictions on the Selection of Transport Companies and Fleets: Certain sanctions regulations restrict the activities of specified transport companies or the provision of services to listed persons and entities. In these circumstances, selecting a carrier, shipowner, airline, or fleet operator requires assessing their legal status. For example, if the transport company or vessel owner appears on a sanctions list applicable to the transaction, entering into a contract or continuing the relationship may be subject to legal restrictions. In maritime transport, it is also important to examine the vessel’s beneficial ownership, operating company, flag, and operational history. In some cases, unusual changes in vessel ownership or flag, together with unreliable information concerning its route, may indicate the need for further investigation.
• Restrictions on Access to Ports and Transport Routes: Sanctions may restrict the entry of certain vessels into specified ports, the use of port services, or passage along particular routes. These restrictions may result in rerouting, longer transit times, higher port charges, or the need to use an alternative port. For example, if a vessel is denied entry to the destination port because of its ownership status or the nature of its cargo, the transport company may have to discharge the cargo at another port or revise the transport arrangements. In these circumstances, it is necessary to determine whether the contract permits rerouting or requires the other party’s consent, and which party must bear the additional costs.
• Disruption of Banking Services and Funds Transfers: A significant consequence of sanctions is restricted access to banking and financial services. Even where carriage remains technically possible, difficulties may arise in paying transport charges, vessel hire, storage charges, or other contractual amounts. For example, an intermediary bank may refuse to process a payment because the transaction is connected with a person or entity subject to restrictions, or may require further review and a license before processing it. This situation may cause payment delays, increase funds transfer costs, and lead to disputes over when a payment obligation must be fulfilled. International transport contracts should clearly specify the payment method, the currency to be used, the intermediary banks, and each party’s responsibility if a payment is rejected or suspended.
• Restrictions on Obtaining Insurance and Reinsurance: Insurance and reinsurance are important components of international transport. Sanctions may restrict the provision of insurance services for certain persons, vessels, cargoes, or transactions. For example, an insurer may be unable to issue a policy or pay a claim because one of the parties to the transaction appears on an applicable sanctions list. Reinsurers may also decline to assume risks associated with a particular route or cargo. As a result, insurance costs may increase, or suitable coverage may become more difficult to obtain. In this context, a distinction must be drawn between a legal prohibition on providing insurance and an insurer’s commercial decision to decline a risk. In some cases, insurance is not prohibited by law, but the insurer declines the risk because of its internal policies or risk assessment.
• Restrictions on the Export and Import of Goods: Some sanctions concern specific types of goods. In such cases, the export, import, or transfer of specified goods, or the provision of related services, may be prohibited or subject to licensing requirements. These restrictions can also affect transport contracts. For example, if the transfer of particular goods to the specified destination is prohibited under the relevant regulations, the transport company may be unable to carry them lawfully. Certain goods may also be subject to export controls and licensing requirements because of their dual-use nature, meaning they can be used for both civilian and military purposes. Accordingly, before carriage begins, it is important to examine the tariff code, the technical nature of the goods, their end use, the countries of origin and destination, and the persons involved in the transaction.
• Increased Costs and Time Required for Contract Performance: Even when sanctions do not directly prevent contract performance, they may increase transport costs and transit times. These costs must be assessed under the contract to determine whether they can be recovered from the other party. Potential consequences include:

• • Higher insurance and financial services costs.
  • The need to use alternative routes.
  • Higher transit and port service charges.
  • Longer document review procedures.
  • Fewer available transport companies.
  • Increased storage and cargo detention costs.
  • Greater difficulty obtaining the spare parts and equipment required for the fleet.

The Impact of Sanctions on Different Types of Transport Contracts

The effects of sanctions are not uniform across all modes of transport. The means of transport, applicable regulations, and services involved may influence the extent to which the restrictions affect performance.

The Impact of Sanctions on Maritime Transport Contracts

Given its reliance on insurance, port services, fuel supplies, vessel registration, and trade finance, maritime transport faces a range of sanctions risks. Sanctions may affect:

• The ability to use vessels owned by specified persons or companies.
• Access to certain ports and port services.
• The provision of hull and marine liability insurance.
• The supply of fuel and equipment required by the vessel.
• Payment of freight and ancillary charges.
• The provision of technical and repair services to vessels.

In these contracts, it is particularly important to assess the status of the vessel’s beneficial owner, the vessel management company, the insurer, and the persons connected with the cargo.

The Impact of Sanctions on Air Transport Contracts

In air transport, sanctions may affect access to aircraft, spare parts, technical equipment, maintenance services, and financial services. Certain regulations may also restrict specific flights, the provision of services to particular airlines, or the carriage of certain categories of goods. For example, if an airline or the aircraft used is subject to an applicable restriction, the performance of the transport contract may encounter legal or operational obstacles.

The Impact of Sanctions on Road Transport Contracts

In international road transport, border restrictions, prohibitions on certain transport companies’ activities, restrictions on vehicle movements, and customs controls may affect contract performance. On certain routes, the transport company may need to use an alternative fleet or transfer the goods to another vehicle at the border. These changes may extend delivery times and increase transport costs.

The Impact of Sanctions on Rail Transport Contracts

Sanctions relating to railway companies, railway equipment, the supply of spare parts, financial services, or transport infrastructure may affect certain rail routes. Restrictions on the provision of services to specified companies, or difficulties in obtaining equipment, may reduce transport capacity or alter the schedule for moving goods.

Do Sanctions Automatically Terminate or Suspend a Transport Contract?

One important question in international contract law is whether the imposition of sanctions alone results in the termination or suspension of a contract. The answer depends on the contractual terms, the nature of the sanctions, the governing law, and the extent to which the restriction affects the performance of the obligation.

In general, the mere imposition of a sanction does not automatically terminate all related contracts. It is necessary to determine whether the sanction prohibits or renders impossible the performance of a particular obligation, whether a lawful alternative is available, and what the contract provides for such circumstances.

For example, if a new restriction merely increases transport costs, the matter may be considered in the context of contractual adjustment or hardship. However, if the relevant regulations categorically prohibit the provision of a service or the transfer of particular goods, the matter may fall within the scope of legal impossibility of performance or force majeure. The legal effects of sanctions must therefore be assessed on a case-by-case basis.

The Relationship Between Sanctions and Force Majeure Clauses in Transport Contracts

Force majeure refers to events beyond the control of the party required to perform which, where the relevant legal or contractual conditions are satisfied, may prevent performance or affect liability arising from a failure to perform. Sanctions may constitute force majeure in certain circumstances, but this conclusion is not automatic. Several matters must be considered when assessing whether force majeure may be invoked:

• Were the Sanctions Imposed After the Contract Was Concluded? The timing of the sanctions is particularly important. If the restriction existed before the contract was concluded and the parties knew, or reasonably should have known, of its existence, it will be more difficult to rely on its unforeseeability. Conversely, a new restriction imposed after the contract is concluded may provide grounds for considering whether force majeure applies.
• Have the Sanctions Actually Prevented Performance of the Obligation? A distinction must be drawn between a legal prohibition on performance and an increase in difficulty or cost. For example, if a transport company cannot lawfully provide services to a particular person because of a legal restriction, an impediment to performance may have arisen. However, if carriage remains lawful and possible and only its costs have increased, the matter may be considered under hardship provisions or a cost adjustment clause.
• Could the Affected Party Have Prevented the Impediment or Mitigated Its Effects? Under many legal systems and contractual provisions, the affected party must demonstrate that the impediment was beyond its control and that it had no reasonable means of preventing it or overcoming its effects. For example, the availability of an alternative transport company or another lawful route may influence the assessment of a force majeure claim.
• Have the Force Majeure Notice Requirements Been Satisfied? Many contracts require the affected party to notify the other party of the impediment within a specified period. The notice must explain the nature of the sanctions, the obligation affected, the date on which the restriction arose or became known, and its effects on contract performance. Failure to comply with the notice deadline may affect the availability of relief under the force majeure clause.

The Distinction Between Hardship and Force Majeure in Sanctions Situations

Sanctions may increase the cost of performing a contract or entirely prohibit the performance of a particular obligation. To identify the appropriate legal response, it is necessary to distinguish between hardship and force majeure. In cases of hardship, performance remains possible, but fundamental changes in economic circumstances make it exceptionally costly or difficult for one of the parties. Such circumstances generally raise the possibility of renegotiating the contractual terms.

In cases of force majeure, an impediment beyond the control of the party required to perform may render performance impossible or seriously disrupt it. Where the necessary conditions are satisfied, relief from liability or the suspension of obligations may be available.

For example, if new sanctions significantly increase insurance costs for a transport route, hardship may arise. However, if the same regulations prohibit the provision of transport services to a particular person or in respect of a particular consignment, the matter may be considered under force majeure or a legal prohibition on performance. The final assessment depends on the contractual terms and the governing law. A single event may also constitute force majeure in relation to certain obligations while giving rise to hardship in relation to others.

The Legal Effects of Sanctions on Carrier Liability

One important issue in disputes arising from sanctions is determining the carrier’s liability. A carrier may face claims for damages arising from delay, failure to deliver goods, or breach of other contractual obligations. However, if the failure to perform results from a legal restriction beyond the carrier’s control, relief from liability may be considered. The following matters must be examined:

• Did the sanctions directly prevent performance of the obligation?
• Was the carrier aware of the restriction when the contract was concluded?
• Was an alternative route or transport company available?
• Did the carrier promptly notify the cargo owner?
• Were reasonable steps taken to mitigate the loss?
• Does the contract specify responsibility for changes in regulations and sanctions?

For example, if a transport company accepts the carriage of particular goods while knowing from the outset that their carriage is legally prohibited, it may be unable to avoid contractual liability later merely by relying on that same restriction. Conversely, if the restriction is imposed after the contract is concluded and makes performance legally impossible, the matter must be assessed under the requirements for force majeure and the governing law.

Frequently Asked Questions About the Impact of Sanctions on International Transport Contracts