If you’re involved in cross-border contracts, sanctions can result in uncertainty around enforceability. The High Court’s decision in LLC EuroChem North-West-2 & Anor v Société Générale S.A. & Ors [2025] EWHC 1938 (Comm) provides legal guidance on what happens when sanctions regimes render the performance of a contract unlawful in the place where it needs to be performed.

This case arose in the context of financial services and on-demand bonds. The judgment has broader implications for commercial parties with cross-border operations involved in the manufacturing and sale of industrial goods. Understanding this judgment can help you navigate risk and protect your contractual interests.

Overview of the dispute

The claimants were part of a Russian fertiliser conglomerate. The defendants (Société Générale and ING Bank) are large financial institutions. The case concerned six on-demand bonds worth over €280 million, issued by Société Générale and ING Bank in favour of LLC EuroChem North-West-2, a Russian subsidiary of the EuroChem Group. The bonds were governed by English law but the obligations on the banks were to pay money in France and Italy out of their branches in France and Italy.

The bonds were issued in connection with the construction of a fertiliser plant in Russia by an Italian contractor called Tecnimont S.p.A.. After Russia’s invasion of Ukraine in February 2022, the EU imposed sanctions on the founder of EuroChem and his wife (Andrey Melnichenko and Aleksandra Melnichenko).

Tecnimont stopped working on the construction of the fertiliser plant invoking force majeure under the contract due to the EU sanctions imposed on Mr Melnichenko.

EuroChem demanded payment under the bonds arguing that Tecnimont had defaulted under the contract.

The banks refused, arguing that payment would breach EU sanctions law, which prohibits making funds available to entities owned or controlled by sanctioned persons.

The English court considered whether the banks were entitled to refuse to perform the contracts (by refusing to pay under the bonds in France and Italy) on the basis that performance would be illegal.

The case considered the application of important common law in the context of sanctions called the Ralli Bros principle – English courts will not enforce a contract if performance would be illegal in the jurisdiction where it has to be carried out.

Our key takeaways

The Ralli Bros Principle

This principle in English common law comes from Ralli Bros v Compania Naviera Sota y Aznar [1920] 2 KB 287. In that case the English court held that an English law contract for the carriage of goods through a foreign port could not be enforced in the English court where performance was illegal under local foreign laws applying where the port was situated.  Therefore English courts are not prepared to make rulings which require commercial parties to break the law in another country for the purposes of fulfilling contractual obligations.

The application of this common law is nuanced and requires specialist legal input when setting up cross-border contractual arrangements where there is potential sanctions risk.

Key features of the Ralli Bros Principle:

• It doesn’t change the governing law of the contract. It operates to add a layer of legal protection for commercial parties which will take into account what’s happening in the country where the contract is to be physically performed.
• It doesn’t automatically cancel the contract. It does not mean all of the contract is void and parties can walk away completely. Careful analysis and consideration is required of each individual contract against the specific facts.
• It has a narrow application and must only be used sparingly. English courts will only be prepared to invoke this principle where the position is clear that there will be a breach under foreign laws. The English courts are not prepared to second-guess foreign courts and the application of their national laws.
• It depends on where the contract is performed. A key part of the analysis considers where performance is to take place. This depends on the precise terms of the contract in question and the position is not always straightforward to ascertain.

Application in EuroChem

The English court decided, on the facts, the place of performance was France and Italy where the banks had branches and where the payments were to be made under the bonds.

EuroChem argued that these multinational banks were able to pay lawfully, under the English law bonds, from their branches in different jurisdictions and to an entity in the EuroChem group which purportedly had a compliance “firewall” around it and was independent of Mr Melnichenko.

The English court did not accept this argument and determined that the obligation was to pay in France and Italy and rejected the compliance firewall argument and accordingly paying under the bonds would have constituted a criminal offence in France and Italy under EU law.

As a result the banks were entitled to refuse payment and the bonds were unenforceable under English law by application of the Ralli Bros principle.

Commercial implications

The Ralli Bros principles is highly relevant to commercial relationships in today’s legal and geopolitical climate.

The EuroChem case demonstrates that English law will in certain specific situations flex around sanctions risk and render performance of contracts illegal in other jurisdictions. This can be a powerful legal tool to protect businesses engaging in cross border trade in the current global sanctions environment which is complex, dynamic and subject to rapid change.

We also recommend to commercial parties engaging in complex cross-border contracting that sanctions risk mitigations are built into the contract drafting from the outset. This includes consideration of the nature of the obligations and where they are to be delivered as well as appropriate diligence around the contract counterparty and the legal jurisdictions which will be engaged in the cross-border trading.

How we can support you

We have expertise in advising clients across a range of sectors on sanctions risk assessments and the structuring and drafting of legal arrangements to mitigate sanctions risk.

Please contact Kieran Craddock, Nick Lees or Andrew Northage for further information.