Catalan Sea – sanctions clauses and risk assessment revisited: Court of Appeal clarifies the test

Our previous analysis of the Commercial Court’s decision in Tonzip Maritime (Singapore) Pte Ltd v 2 Rivers Pte Ltd [2026] EWCA Civ 641 concluded that the threshold for invoking a sanctions clause required a careful and objectively reasonable assessment of risk; parties needed a solid evidential basis for their concerns; and reliance on incomplete or speculative material could expose them to a finding of wrongful termination.

The Court of Appeal has now revisited the position and provided important clarification on both the interpretation of sanctions clauses and the standard required to justify non-performance.

Clarification of the contractual test

The Court of Appeal has confirmed that where a sanctions clause refers to exposure to sanctions, this is satisfied where a party forms a reasonable judgment that there is a real risk of sanctions. It is not necessary to establish that a breach is more likely than not.

This is a significant clarification. The test is concerned with risk rather than probability. A party does not need to prove that sanctions will be triggered, only that there is a sufficiently real and non-speculative risk.

Commercial context

The court placed considerable emphasis on the commercial realities of maritime trade. Decision makers often have limited information, tight timelines, and imperfect visibility over ownership structures and counterparties. In that context, requiring certainty or proof on the balance of probabilities would be unrealistic.

The standard reflects the need for parties to make prompt decisions in circumstances of uncertainty, particularly where sanctions regimes are complex and evolving.

Error in the first instance approach

Although the High Court identified the correct test, it was found to have applied it incorrectly. In particular, it treated the absence of a positive conclusion on underlying facts such as control as decisive.

The Court of Appeal made clear that this was the wrong approach. A party is not required to reach a concluded view that a sanctioned person exercises control. It is sufficient that there is a reasonable basis for believing that such a risk exists.

Objective reasonableness of the decision

On the facts, the Court of Appeal held that the owners’ decision to refuse performance was objectively reasonable.

The material available to the decision makers supported a real risk of sanctions, including the circumstances of ownership changes, the relationships between relevant individuals, and the inherent possibility of arrangements designed to circumvent sanctions.

Even though legal advice had been provided suggesting no control, that advice was heavily qualified and based on assumptions. This did not eliminate the risk and could not be treated as determinative.

Role of the decision making process

The court clarified that the focus is on whether the decision reached was objectively reasonable, not whether the process by which it was reached was flawless.

A decision will not be unreasonable simply because further enquiries could have been made or because the process was imperfect, provided that the conclusion itself was one that a reasonable commercial party could reach on the available material.

Legal and commercial implications

Revised threshold for sanctions risk

The Commercial Court’s initial decision suggested that parties faced significant exposure where sanctions concerns were not firmly substantiated. This position now requires adjustment.

The Court of Appeal has confirmed that a reasonable apprehension of a real risk is sufficient. This lowers the threshold and gives greater latitude to parties acting cautiously in response to sanctions concerns.

Reduced risk of wrongful termination claims

While the risk of wrongful termination remains, the decision demonstrates that courts will be reluctant to second guess commercial judgments where there is a credible evidential basis for concern. The key question is whether the decision was reasonably open, not whether it was ultimately correct.

Importance of factual indicators

The judgment emphasises the importance of underlying factual indicators that may give rise to sanctions risk. These include opaque ownership arrangements, transfers involving family members or close associates, and incomplete or assumption based explanations.

Even where counterparties present material suggesting compliance, that material must be scrutinised carefully.

Limits of legal opinions

Legal advice will not necessarily resolve sanctions risk where it is based on assumptions or limited information. Decision makers must assess the reliability and independence of that advice, rather than treating it as conclusive.

Continued relevance of due diligence

Although the focus is now firmly on outcome rather than process, a structured and reasoned approach to due diligence remains important. It will assist in demonstrating that the decision taken was grounded in available evidence and commercial judgment.

Practical takeaways

Adopt a risk-based approach

Parties should focus on whether there is a real and credible risk of sanctions, rather than seeking to establish certainty.

Interrogate ownership structures

Particular care should be taken where there have been recent ownership changes involving individuals connected to sanctioned persons.

Assess supporting material critically

Letters, certifications, and legal opinions should be analysed for their assumptions and limitations. They should not be accepted at face value.

Ensure decisions are evidentially grounded

While the process is not determinative, decision makers should ensure that their conclusions can be justified by reference to identifiable material.

Act decisively where appropriate

The decision supports taking precautionary action where there is a credible sanctions risk, particularly in fast-moving commercial contexts.

Conclusion

The Court of Appeal has brought welcome clarity to the operation of sanctions clauses. It confirms that a party may refuse performance where there is a reasonable apprehension of a real risk of sanctions, without needing to establish that a breach is probable.

This represents a more commercially realistic standard and provides greater protection to parties operating in complex and uncertain sanctions environments. It also shifts the focus from certainty to reasoned risk assessment, while retaining the requirement that decisions must be supported by objective and defensible evidence.