BackgroundUchalinsky GOK JSC (a company of the Ural Mining and Metallurgical Company Group) (“Purchaser”) and Sandvik Mining and Construction CIS LLC (a subsidiary of Sweden’s Sandvik) (“Supplier”) entered into a supply contract of 8 February 2022 (“Contract”).
The Contract provided for penalties for the late delivery or under delivery of goods.
The Supplier delayed the delivery of equipment. Such delay in the delivery was caused by the sanctions. Sandvik’s manufacturing plant did not give a definite answer on the possible delivery dates, due to the need to analyse the sanctions. Subsequently the manufacturer refused to supply goods to the Supplier.
The Supplier proposed to the Purchaser to terminate the Contract, but the Purchaser refused to do so and filed a claim with the Moscow City Arbitrazh Court (“Moscow Court”) seeking a penalty
In its turn, the Supplier gave the Purchaser notice of unilateral termination of the Contract.
Sanctions clauseAccording to the Judgment of the Moscow Court of 6 April 2023, the Contract contained the following sanctions clause:
“Under clause 10 of the Contract, the Parties agreed that the Parties, the Parties’ obligations and the Goods may be subject to embargo regime, administrative restrictions or other similar circumstances, applicable provisions of the export and trade rules and regulations of the United States, United Kingdom, the European Union and the member states of the European Union, which are beyond the Parties’ control (‘Circumstance’), which may prevent or limit the fulfilment by the Party of its obligations under this Contract. Each Party shall not be liable for any direct or indirect loss, downtime, costs, expenses, damages, etc., directly or indirectly caused to the other Party or the UMMC Entities in connection with such Circumstance. Each of the Parties, including the UMMC Entities, waives any possible claims and liability measures in connection with the failure by the other Party to fulfil its obligations under this Contract due to the existence of the Circumstances).”
Court’s findingsThe Moscow Court concluded that the Purchaser’s actions were not in good faith.
It stated that the circumstances in the sanctions clause had occurred before the Purchaser filed the claim. At the same time, clause 10 of the Contract does not require absolute impossibility of delivery (as evidenced by the words “may prevent or limit...”). Therefore, the court rejected the possible argument that the goods could have been purchased from other persons (including in the countries which did not adopt sanctions).
The court of appeal dismissed the Purchaser’s argument that the parties’ liability under the Contract should be regarded from the viewpoint of Article 401 of the Russian Civil Code (i.e. as force majeure). In the court’s opinion, Article 401 of the Russian Civil Code covers cases of non-performance or improper performance of an obligation, while by virtue of clause 10 of the Contract the parties “concluded a transaction conditional on the occurrence of the circumstances specified in the clause.” However, it is not clear from the text of the judgment why the court believed that the transaction was conditional.
Relevance of the caseThis is one of the few cases where a court held sanctions clause to be valid and enforceable. The court applied the sanctions clause rather than referred to force majeure (Article 401 of the Civil Code of the Russian Federation) or the impossibility of fulfilment (Article 416 of the Civil Code of the Russian Federation) as the ground for release from liability.
In our opinion, the courts’ position might have been influenced by the fact that the Contract was concluded on 8 February 2022, ie before the European Union imposed large-scale sanctions against Russia, which the parties could not have expected at that time.
However, we note that the Purchaser may still file a “second” cassation appeal with the Economic Collegium of the Russian Supreme Court, which may quash the decisions of the lower courts. We cannot rule out that the Russian Supreme Court may hold the sanctions clause as invalid and unenforceable, for example, due to the inadmissibility of extraterritorial effect of the European Union’s sanctions, contradiction with the public policy of Russia and/or harm to the sovereignty of the Russian state. Russian courts have on several occasions taken such position (for example, in cases