Sanctioned Teodor Shipping Takes Samsung Heavy to Court

Teodor Shipping, a Russian-linked shipping company designated under US and EU sanctions, has filed an arbitration claim against Samsung Heavy Industries at the London Maritime Arbitrators Association, seeking $180 million in damages for the cancellation of three LNG carrier newbuild contracts. Samsung terminated the contracts in 2023 citing sanctions compliance obligations, but Teodor argues the terminations were commercially motivated and that sanctions provisions in the shipbuilding contracts did not authorize unilateral cancellation. The case is the most significant legal test of how sanctions interact with long-term shipbuilding agreements.

What Are the Contract Details Behind the Dispute?

Teodor Shipping contracted three 174,000-cubic-meter LNG carriers from Samsung Heavy Industries in 2021, with a combined contract value of approximately $620 million. Advance payments totaling $180 million had been made before Samsung issued termination notices in late 2023, citing the EU's eighth sanctions package against Russia and corresponding US OFAC designations targeting Teodor's beneficial ownership chain.

Samsung retained the advance payments and offered no refund, arguing that sanctions compliance constituted a force majeure event and that the contracts' sanctions clauses permitted termination without refund obligation. The three hulls were subsequently remarketed and sold to a non-sanctioned LNG shipping company at prices that reflected the post-2022 surge in newbuild demand.

What Is Teodor's Legal Argument?

Teodor's arbitration filing contends that the sanctions clauses in the shipbuilding contracts required both parties to use "reasonable efforts" to obtain licenses or restructure the transaction to enable performance, and that Samsung failed to explore any such options before terminating. The filing also alleges that Samsung was commercially motivated to cancel and resell the slots at higher prices, using sanctions as a pretext.

The core legal question is whether sanctions designations automatically trigger termination rights in commercial contracts or whether the sanctioned party has standing to challenge the manner in which termination was executed. English law — which governs most international shipbuilding contracts — does not automatically void contracts involving sanctioned entities; rather, it prohibits performance that would violate applicable sanctions regulations.

Can a Sanctioned Entity Pursue Arbitration in London?

This is a threshold jurisdictional issue that arbitration practitioners are watching closely. UK sanctions regulations prohibit making funds or economic resources available to designated persons. However, UK legal precedent and government guidance have generally held that access to legal proceedings — including arbitration — is a fundamental right that sanctions should not extinguish. The UK Office of Financial Sanctions Implementation has issued licenses permitting sanctioned entities to pay legal fees and participate in litigation.

Samsung is expected to challenge jurisdiction, arguing that any arbitral award in Teodor's favor would constitute making funds available to a sanctioned entity and would be unenforceable. The outcome will set a precedent for dozens of similar disputes where sanctioned entities have been cut off from commercial contracts with significant prepayments outstanding.

What Are the Broader Implications for Shipbuilding Contracts?

The dispute highlights a gap in standard shipbuilding contract drafting. The BIMCO standard newbuilding contract includes sanctions clauses, but their interpretation in cases where one party is designated after contract execution remains largely untested. Shipyards and buyers are now revising contract templates to include explicit provisions for advance payment refund obligations, termination procedures, and dispute resolution mechanisms specifically addressing sanctions scenarios.

For investors in shipbuilding and LNG shipping, the case creates uncertainty about the enforceability of existing contracts with any counterparty that carries sanctions risk — a category that has expanded significantly since 2022.

Conclusion

The Teodor-Samsung arbitration will establish critical legal precedent at the intersection of sanctions law and commercial maritime contracts. Regardless of outcome, it exposes the inadequacy of existing contractual frameworks for managing sanctions risk in long-cycle shipbuilding agreements. Market participants should review existing contracts for sanctions clause specificity and consider whether advance payment protection mechanisms are sufficient if counterparty designation occurs mid-contract.