The Commercial Court has dismissed a c.€212 million claim brought by EuroChem Group AG and its Russian subsidiary, EuroChem NW2, against Société Générale and ING Bank, following a four-week trial. 

The Judgment is likely to be of considerable wider interest given its focus on the application of the EU’s Russian sanctions regime and the scope of the Ralli Bros defence.

The claim related to six on-demand bonds which Société Générale and ING had issued to EuroChem NW2 in connection with the construction of a fertilizer plant in Russia.  When EuroChem NW2 made demands under the bonds, Société Générale and ING declined to pay on the basis that doing so would put them in breach of EU sanctions, given inter alia the EuroChem group’s links to Mr Melnichenko.  Mr Melnichenko and his wife had been designated by the EU by being listed under Annex I to Council Regulation (EU) No. 269/2014.  

The Court has confirmed that payment by Société Générale and ING under the bonds would be a breach of EU sanctions.  In particular, the Court had to consider whether EuroChem NW2 was ultimately “owned, held or controlled” by Mr Melnichenko within the meaning of Article 2 of EU Regulation 269.

The Court held that, despite the complex trust structure, EuroChem NW2 was ultimately owned by Mr Melnichenko.  In reaching that finding, the Court held that the beneficiary under a discretionary trust is the ‘owner’ of the trust assets for the purposes of Article 2 of EU Regulation 269 and that in any event Mr Melnichenko’s trust was not a true discretionary trust given the level of control he retained.  The Court also held that Mr Melnichenko has “de facto” control of EuroChem NW2. 

In light of Mr Melnichenko’s ownership and control, the Court held that the bonds were frozen under Article 2 of Regulation 269.  EuroChem NW2’s subsequent attempt to assign the proceeds of the bonds to its Swiss parent company with “ring-fencing” measures recognised by several EU member states was accordingly ineffective. 

Given that the governing law of the bonds was English law, the Court had to consider what (if any) impact the EU law illegality had on the enforceability of the demands under the bonds.

  • The Court considered the rule in Ralli Bros, that only illegality in the place of performance can excuse performance of an English law governed contract.  The Court concluded that the place of performance of the bonds issued by Société Générale  was France, such that the illegality under EU (and thus French) law rendered the bonds unenforceable.  The place of performance in respect of the bond issued by ING was held to be Italy, and the same conclusion reached. 
  • In the alternative, the Court held that even if the case did not fall squarely within the rule in Ralli Bros (in particular if the Claimants were right about the place of performance being Russia), the bonds could not be enforced as a matter of public policy (applying Magdeev v Tsvetkov [2020] EWHC 887 (Comm)).  The Court explained that the purpose of the EU sanctions regulations is “as grave as any imaginable”, and the fact that UK/English public policy in that regard is precisely aligned with that of the EU was an important pointer to the very great significance that should be attached to comity on the facts of this case. 

The Judgment also provides important guidance for practitioners as to the inappropriate use of redactions in disclosure and the use of confidentiality club arrangements. 

Richard Handyside KC, James Duffy KC and Natasha Bennett appeared for Société Générale, instructed by Herbert Smith Freehills Kramer LLP.

A copy of the judgment is available here.