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The impact of EU economic sanctions on business contracts

24 February 2022, the day when Russian troops unlawfully invaded the territory of Ukraine, proved to be the beginning of a test of European solidarity, and of the resilience of the European economy. On a macro level, a huge question has arisen: Can the European economy function without eastern markets? At the micro level, businesses are faced with dilemmas of how to deal with counterparties from that region, particularly in the context of existing long-term contracts at an advanced stage of completion.

A ban on entering into new contracts and performing existing contracts

As a result of the illegal incursion of Russian troops into the territory of Ukraine, the Council of the European Union has decisively tightened its current economic policy towards Russia through a series of amendments to existing sanctions regulations. For private-law relations, in particular between businesses when counterparties are entities from Russia, the most relevant is Council Regulation (EU) No 833/2014 of 31 July 2014 concerning restrictive measures in view of Russia’s actions destabilising the situation in Ukraine.

The sanctions affect many sectors, including heavy industry and high technology. As of 26 February 2022, it is prohibited to conclude agreements whose subject is dual-use goods and technologies (this ban is total and also applies to civilian use), and goods and advanced technologies with potential military applications. As provided in Art. 2(1) and 2a(1) of Regulation 833/2014, transactions are banned for the sale, supply, transfer or export of such goods, directly or indirectly to a natural or legal person, entity or body in Russia or for use in that country. This ban also applies to the provision of technical assistance or brokering services related to the provision, manufacture, maintenance or use of dual-use goods and goods with potential military use.

Since 3 March 2022, analogous sanctions have been in place against Belarus. They are contained in Council Regulation (EC) No 765/2006 of 18 May 2006 concerning restrictive measures in view of the situation in Belarus and the involvement of Belarus in the Russian aggression against Ukraine, which was amended on 17 February and again on 2 March 2022.

No easy qualification of the subject matter of the contract

The EU regulation indicates that sanctions apply to dual-use goods, i.e. items listed in Annex I to Regulation 2021/821 of 20 May 2021 setting up a Union regime for the control of exports, brokering, technical assistance, transit and transfer of dual-use items. This list has been in place for a long time and is based on the Combined Nomenclature (CN) codes for customs classification of goods.

Goods that could potentially be used for military purposes in Russia, i.e. goods and advanced technologies, are included in the list of goods and technology in Annex VII to Regulation 833/2014. This is a new list that does not refer to the CN codes, and the vague wording of some product names may lead to inconsistent practice.

These are items that can contribute to strengthening Russia’s military and technological capabilities. In principle, the bans should not be interpreted broadly, but it should be remembered that in times of armed conflict, goods and technologies that normally serve civilian purposes may also be dedicated to warfare. In each case, this circumstance must be evaluated by businesses having relations with Russia and Belarus. From 26 February 2022 (or 3 March 2022 in the case of Belarus), it is prohibited to conclude contracts for the sale, supply, transfer or export, including the provision of a service in the nature of a guarantee, of goods of potential military use listed in Annex VII to Regulation 833/2014 and dual-use goods.

Possibility to request authorisation to complete contract

In practice, questions arise if it is possible to complete the performance of contracts concluded before 26 February 2022 (or before 3 March 2022 in the case of Belarus), e.g. by sending a batch of goods or installing equipment, and whether additional contracts necessary to perform contracts concluded before that date, e.g. providing maintenance services to a Russian counterparty, are permissible. These issues are addressed in Regulation 833/2014 by way of derogation from the general ban on transactions in dual-use goods and goods with potential military use. Art. 2(5) and Art. 2a(5) of Regulation 833/2014 provide for the possibility of obtaining an exemption from these bans at the consent of the competent authority (in Poland, the Minister of Entrepreneurship and Technology).

What are the conditions for applying for such authorisation?

  1. Status of counterparty

The starting point is to verify the status of the counterparty and the end user of the goods. The end user of a contract item cannot:

  • Be included in the list of entities with whom transactions in dual-use goods and goods with potential military use are banned (Annex IV to Regulation 833/2014), or
  • Have a status of a military end user.

Also, it is necessary to verify the counterparty’s and the end user’s membership of a capital group, as the sanctions also apply to entities owned or controlled by entities listed in the annexes to Regulation 833/2014.

  1. Status of the subject of the transaction and its applications

If verification of the counterparty and end user is successful, the next step is to examine the contract item in terms of its application, as Regulation 833/2014 provides that a state authority cannot issue authorisation if it has reasonable grounds to believe that:

  • The end use of the goods could be of a military nature, or
  • The goods are intended for aviation or the space industry.
  1. Checking the date of the existing contract

The possibility of applying for authorisation from the minister to complete a transaction applies exclusively to contracts concluded before 26 February 2022 (or 3 March 2022 in the case of contracts with entities from Belarus). The next cut-off date provided for in Regulation 833/2014 is 1 May 2022, as under Art. 2(5) and 2a(5) of Regulation 833/2014, authorisation from the minister must be requested before that date.

The state authority (Minister of Entrepreneurship and Technology) is bound by negative premises, i.e. preventing the issuance of authorisation to complete a transaction the subject of which is dual-use goods or goods with a potential military use. This means that if either obstacle arises (involving the entities or the subject matter), the minister must refuse to issue the authorisation.

Monitoring of authorisations

Pursuant to Regulation 833/2014 (in the version in force since 1 March 2022), the competent authorities will exchange information with other member states and the European Commission on authorisations granted or denied. Furthermore, where appropriate and on a reciprocal basis, in consultation with member states, the Commission will exchange information with partner countries with a view to promoting the effectiveness of the implemented export control measures and the consistent application of export control measures applied by partner countries.

This means that decisions made in individual member states allowing completion of contracts (and thus allowing individual exceptions to sanctions) will be monitored at the EU level. In doing so, the authorities have the power to cancel, suspend, amend or revoke the authorisation if they deem it necessary for effective implementation of Regulation 833/2014.

The mechanism of authorisations for completion of existing contracts has been provided for at the level of EU regulations, but it is very difficult to foresee whether it will be applied in practice by individual member states, and if so, to what extent. An in-depth assessment of individual contracts in terms of many legal, economic and social conditions is necessary to act in a way that protects the interests of the company and its employees but is also socially responsible. It is also necessary to constantly monitor the legal and factual environment of business operations, as changes in these areas are subject to unprecedented dynamics.

Joanna Krakowiak, attorney-at-law, Jolanta Prystupa, M&A and Corporate practice, Life Science & Regulatory practice, Wardyński & Partners

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