Sanctions adopted by the EU against a third country, such as Russia, Iran or others, are designed to protect the EU's public interest. These sanctions and their legal effects are binding, which means that their provisions cannot be derogated from by agreement.
Under a sanctions regime, local authorities refuse to grant export licenses to the sanctioned country. Local banks may also freeze money transfers. In addition, EU sanctions very often prevent an entity subject to the restrictive measures in question from being able to obtain performance of a transaction or contract, which is therefore prohibited.
What happens to contracts in progress when sanctions are introduced?
European regulations prevent targeted entities from taking legal action. For example, Article 11 of Regulation (EU) n°2022/328 states:
" 1. No request for a contract is accepted. or transaction, the performance of which has been affected, directly or indirectly, in whole or in part, by the measures imposed under this Regulation, including claims for compensation or any other such claim, such as a claim for compensation or a claim under a guarantee, including a claim for the extension or payment of a bond, guarantee or indemnity, including a financial guarantee or financial indemnity, in any form whatsoever, if made by: (a)legal persons, entities or bodies listed in Annexes III, IV, V, VI, XII or XIII or referred to in Article 5(1)(b) or (c), Article 5(2)(b) or (c), Article 5(3)(c) or (d), Article 5(4)(b) or (c) and Article 5a(a), (b) or (c) ; (b)any other Russian person, entity or body;(c)any person, entity or body acting through or on behalf of any of the persons, entities or bodies referred to in points (a) or (b) of this paragraph.2In any proceedings to give effect to a request, the burden of proof that satisfaction of the request is not prohibited by paragraph 1 shall lie with the person seeking to give effect to that request.3. This Article is without prejudice to the right of the persons, entities and bodies referred to in paragraph 1 to judicial review of the legality of failure to comply with contractual obligations in accordance with this Regulation."
This provision prohibits the "satisfaction of claims" in relation to any contract or transaction whose performance has been affected, directly or indirectly, in whole or in part, by the sanction measures. This provision does not prohibit legal proceedings relating to the "claim". It simply prohibits the "satisfaction" of such "claims".
Contracts affected by sanctions could be subject to judicial or arbitral review, but the judge would have limited powers. He could order the repayment of advance payments made before the introduction of sanctions. But he would not be able to order the payment of contractual penalties, as he could not satisfy a claim aimed at drawing financial consequences from the non-performance of a prohibited contract.
We can assist you in legal proceedings arising from the effect of sanctions on your current contracts. Do not hesitate to Contact us for further information.
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