EU sanctions and claims for damages: can a Russian party claim damages in the event of non-delivery?

A Russian or sanctioned party may seek damages, specific performance or a refund if a European company fails to deliver due to EU sanctions. Article 11 of EU Regulation 833/2014 may offer protection in such a situation. This ‘no-claims’ provision is intended to prevent a party from seeking, through the courts, to derive benefit from a contract that can no longer be performed due to sanctions.

Why do claims arise in the context of sanctions?

Sanctions often affect existing contracts. A European company may still be permitted to supply goods or services at the time the contract is concluded, but may later be faced with a ban as a result of a new package of sanctions. If, as a result, the other party does not receive goods or services, it may argue that there has been a breach of contract and claim damages. This often puts companies in a difficult position. If they deliver, they may be breaching sanctions, but if they do not deliver, they run the risk of a civil claim. It is precisely to address this tension that the no-claims clause is intended.

What types of claims does Article 11 protect?

In short, Article 11 provides that certain claims relating to contracts or transactions affected by sanctions will not be upheld if they are brought by Russian parties, sanctioned parties or parties acting on their behalf or for their benefit.

This does not only concern traditional claims for damages; in principle, any type of claim relating to a contract or transaction that cannot be performed as a result of the sanctions falls within the scope of the no-claims provision. The provision mentions, amongst other things, claims for damages, set-off and warranty claims. The list is not exhaustive. Other civil law remedies may therefore also fall within the scope if they relate to a contract that can no longer be performed due to sanctions.

The term ‘contracts or other transactions’ must also be interpreted broadly. It encompasses supply agreements, financing agreements, the settlement of financial instruments, public procurement procedures, supply contracts, banking security interests, public procurement contracts and other commercial contracts.

In a recent opinion by the Advocate General of the Court of Justice of the European Union in the Reibel case, it was concluded that a Russian party cannot enforce repayment of an advance payment for goods which, due to EU sanctions, were not permitted to be supplied. The Court of Justice has yet to deliver a final ruling on this matter and may also depart from the Advocate General’s opinion, but the opinion is already relevant in litigation practice.

What if the claim is brought before an arbitral tribunal?

An arbitration clause does not preclude the application of EU sanctions. A Russian party may attempt to bring a claim before an arbitral tribunal, but that does not mean that any awarded sum can simply be paid or enforced.

According to the Advocate General in Reibel, it must be possible to review an arbitral award against the public policy of the Union. If an arbitral award orders payment in breach of the ‘no-claims’ provision, this may have consequences for recognition, enforcement and voluntary payment.

Does Article 11 apply only to Russian parties?

Not always. The provision also applies to parties acting on behalf of or for the benefit of Russian or sanctioned parties. This may, for example, be relevant in the case of a distributor outside Russia who supplies goods or services to Russian end-users.

Dutch case law has interpreted this concept broadly. If it is plausible that the proceeds of a claim will ultimately benefit Russian parties, Article 11 may be relevant. On the other hand, foreign case law, such as that of the Court of Appeal in Paris, takes a more critical view of purely hypothetical or speculative risks of onward flow. For businesses, this means that the facts surrounding cash flows, end-users and group relationships can be decisive.

It is also important to note that a parallel ‘no-claims’ provision is included in other EU sanctions regulations, such as those against Belarus, Syria, Iran, Libya, Myanmar and Sudan. Our recommendations may therefore also be relevant in relation to sanctioned parties covered by those regulations.

Practical recommendations

A claim by a Russian or  sanctioned party need not automatically be accepted if a company fails to supply goods or services due to EU sanctions. Article 11 may offer protection against claims for specific performance, damages, warranties or other civil law remedies relating to the sanction-related non-performance.

It is particularly important for businesses to prepare their case thoroughly. Document why delivery was not permitted, which sanctions rules were relevant, who the other party and the end-user were, and why any claim falls under Article 11. In legal proceedings or arbitration, this documentation may be decisive for the success of the defence.

Do you have any questions about a potential claim for damages relating to non-delivery of goods or other questions regarding sanctions, please do not hesitate to contact us.

See also: EU sanctions against Russia and advance payments: what about refunds if delivery is no longer permitted?