Economic sanctions in commercial disputes: the Russian courts’ approach

Anton Maltsev
Melling, Voitishkin and Partners, Russia
Anton.Maltsev@mv.legal

Tatiana Bolshakova
Melling, Voitishkin and Partners, Russia
Tatiana.Bolshakova@mv.legal

Today's global economy is very different from that of a few years ago. Armed conflicts and political developments surrounding such conflicts have led to trade restrictions, including economic sanctions. In the sanctions-driven environment, many companies have experienced supply chain disruptions. More than any other country, Russia has been affected by supply chain disruptions since February 2022. Not surprisingly, these issues have led to various commercial disputes both in Russia and in the international arena. A number of European, North American and other foreign suppliers of goods and services suspended the performance of contracts with their Russian counterparties or terminated them altogether. Russian counterparties have retaliated with claims, particularly for repayment of advances, damages, default interest and more.

A key issue for judges and arbitrators dealing with such supply chain disruption disputes would be to determine the consequences of economic sanctions for the parties, particularly with respect to relief from liability for breach of contract on the part of the seller or service provider.

The international community may be interested to know how this issue has been addressed in Russian courts.

Initially, the Russian courts took a paternalistic approach, stating that foreign sanctions could not be taken into account in a breach of contract case because the sanctions were contrary to Russian public policy. Accordingly, the foreign sanctions should be classified as a commercial risk of the defaulting party rather than as force majeure or impossibility of performance, on which the defaulting party could otherwise rely.

This approach was illustrated in JSC Russian Railways v Siemens Aktiengesellschaft and Siemens Mobility LLC. In 2011, the parties entered into an agreement for the maintenance of electric trains. In March 2022, Siemens notified Russian Railways that it was terminating the agreement due to the imposition of EU economic sanctions against Russian Railways. The court sided with the claimant, stating that foreign economic sanctions (except those adopted with the involvement of the UN Security Council) are contrary to Russian public policy. 

A similar approach was taken by the Russian Supreme Court in JSC Federal Passenger Company v Patentes Talgo S.L. The court pointed out that the foreign party's compliance with foreign restrictive measures does not exempt it from liability for breach of contract. The foreign party had to take exhaustive measures to organise its business in such a way that it could properly perform its obligations despite organisational, technical and financial obstacles, including, inter alia, the disruption of logistical and transport chains.

Such a conservative approach to foreign sanctions is still very widespread in the Russian judiciary.

However, a different approach has recently been demonstrated in some notable cases.

1) In T2 Mobile v Satel TVK and Ericsson Corporation,[1] the parties entered into a 2014 contract under which T2 Mobile purchased telecommunications equipment from Satel TVK and telecommunications services from Ericsson Corporation. As of March 2022, the supply of the equipment to the Russian market was restricted. The manufacturer of the equipment (Ericsson) attempted to obtain permission from the export trade authorities to release the equipment for delivery to Russia. However, no permission was granted.

The Russian court found that the EU sanctions, as well as Ericsson's failure to obtain an export license, resulted in the objective impossibility of bringing the equipment to Russia, which could not have been foreseen by the parties at the time of concluding the contract. The court classified these circumstances as force majeure.

2) In UGMK v Sandvik Mining and Construction CIS,[2] a supplier of foreign equipment was exempt from liability for non-delivery of equipment manufactured in Europe. The equipment was not delivered to Russia by the manufacturer due to EU sanctions. As a result, the supplier terminated the contract with the buyer. However, the buyer disagreed with the supplier. The buyer insisted that the supplier should have found a way to obtain replacement equipment from third parties outside the EU.

The court sided with the supplier. According to the court, the contract contained a ‘sanctions compliance’ clause. This clause gave the supplier the right to terminate the contract in the event of foreign trade restrictions relevant to the performance of the contract. The parties were bound by this clause.

This case is noteworthy because the basis for releasing the seller from liability was the parties' agreement itself, and not legal grounds, such as force majeure or impossibility of performance.

3) In IS Teks v Moscow Industrial Bank,[3] the claimant, a company called IS Teks, sent funds in US dollars to its counterparty in Kazakhstan. However, the funds were frozen en route to the recipient due to US sanctions against the payer's bank (Moscow Industrial Bank). The court found that the payer's bank was sanctioned after the payment had been initiated, not before. The bank could not have avoided it. The court also noted that the claimant could apply to OFAC for a license to release the frozen funds. Therefore, as the court pointed out, the bank could not be held liable for the claimant’s inaction with respect to OFAC. 

4) In JSC Baltic Plant v Wartsila Oyj Abp, [4] the court released a Finnish guarantor from liability for non-payment under performance bonds in favour of its Russian counterparty. The court ruled that the respondent was not legally able to fulfill the claims of the sanctioned party in light of EU sanctions. Moreover, the court noted that the respondent would be criminally liable under its domestic law for violating the sanctions.

Summarising these selected cases and depending on the circumstances of a particular situation, the following defenses may be available to foreign parties in Russia in sanctions-related breach of contract cases.

Force majeure

Under Russian law, an event of force majeure must be extraordinary and unavoidable. Indeed, economic sanctions are unavoidable for parties to a private contract. Whether sanctions are also extraordinary is more controversial. It may be difficult to prove that the parties could not have expected or foreseen economic sanctions, as new sanctions are regularly imposed.

Impossibility of performance

Unlike force majeure, impossibility of performance does not have to be caused by an extraordinary or unavoidable event. If performance is objectively impossible for either party, the obligation to perform will terminate. However, termination of the contract does not necessarily relieve the nonperforming party from liability for the breach, eg, damages.

Failure of the claimant to mitigate its own losses

Even if the above concepts do not apply, the court may release the respondent from liability if the claimant failed to mitigate its alleged losses. Failure to contact the foreign sanctions authority (if available to the claimant) could be considered a failure to mitigate losses.    

Agreement of the parties

Finally, the court may invoke the principle of freedom of contract. The parties are free to include a ‘sanctions compliance’ clause that limits the parties' liability in the event of new sanctions. 

Conclusion

The above defences may be available in Russian courts if the contract is governed by Russian law. In principle, the parties may also agree to apply non-Russian law to their contract. In this case, the defenses available to the parties will be determined by the law applicable to the contract. It should be noted, however, that a Russian court may refuse to apply foreign law on public policy grounds.  Russian law defenses may still be relevant. 

The application of economic sanctions is a very sensitive issue in Russian courts, which is far from being settled. One thing seems clear at this stage: the number of sanctions-related disputes is growing. It is to be hoped that the courts will adopt a balanced and reasonable approach to sanctions in such disputes.