The High Court has found in favour of the banks in a dispute with the EuroChem Group, a Russian fertiliser company, concluding that the banks are prohibited from making payment under on-demand bonds due to asset-freezing provisions under EU Regulation 269/2014 (Regulation 269): LLC EuroChem North-West-2 & Anor v Société Générale S.A. & Ors [2025] EWHC 1938 (Comm).
The court found that Mr Melnichenko, who is a "designated person" listed in Annex I to Regulation 269, is the true owner of the relevant EuroChem group entities. On that basis, it found that the bonds in question were frozen under Article 2(1) of Regulation 269, as the French and Italian national competent authorities (NCAs) had determined. Accordingly, the banks were prohibited from making payment under the bonds. In reaching this conclusion, the court held that indirect ownership is sufficient to trigger the asset-freezing provisions under Article 2 of Regulation 269. Furthermore, the court determined that a beneficiary under a discretionary trust is considered the owner of the trust's assets for the purposes of Regulation 269. In addition, the court considered the application of EU Regulation 833/2014(Regulation 833), which restricts claims brought by or on behalf of Russian entities where the claim is connected to contracts and their performance has been affected by the measures imposed under that regulation.
The decision will be of particular interest to financial institutions as it demonstrates the English court's willingness to apply the common law principle in Ralli Bros v Compania Naviera Sotay Aznar [1920] 2 KB 287 (which prevents enforcement of a contract if its performance is illegal in the place of performance), and to refuse enforcement of contracts on public policy grounds in the context of sanctions against Russia. The judgment provides a detailed analysis of the concept of "place of performance" under the Ralli Brothers rule, specifically in relation to on-demand bonds which do not specify a place of performance explicitly, following the approach adopted in Britten Norman Ltd v State Ownership Fund of Romania [2000] Lloyd's Rep and Marconi Communications International Limited v PT Pan Indonesia Bank Limited TBK [2005] EWCA Civ 422.
The judgment reinforces the position that decisions made by NCAs are binding on operators within their jurisdictions, and that compliance with sanctions takes precedence over contractual obligations, even where autonomous financial instruments such as demand bonds are concerned. The decision also provides a detailed analysis of the EU sanctions regulations and the concepts of "ownership and control", particularly in the context of complex corporate structures involving trusts and transfers of ownership.
Herbert Smith Freehills Kramer LLP represented Société Générale S.A. in these proceedings.
We consider the decision in more detail below.
Background
The defendant banks (the Banks) issued six on-demand bonds (the Bonds), governed by English law. The Bonds were issued in favour of the first claimant (EuroChem NW2) in connection with the construction of an ammonia plant in Kingisepp, Russia. Technimont S.P.A. (Tecnimont), an Italian engineering company, was contracted to design and construct the plant.
On 24 February 2022, Russia invaded Ukraine. Subsequently, the EU imposed sanctions on the founder of the EuroChem Group, Mr Andrey Melnichenko and his wife, Mrs Aleksandra Melnichenko. In May 2022, Tecnimont suspended its services to EuroChem NW2. EuroChem NW2 alleged default by Tecnimont and terminated the contracts. The resulting dispute between Tecnimont and EuroChem NW2 was referred to arbitration (not considered further in the present judgment).
In August 2022, EuroChem NW2 made demands under the Bonds. The Banks declined to pay, on the basis that to do so would be illegal because of EU sanctions. On 23 December 2024, EuroChem NW2 entered into a Deed of Assignment and Assumption (the Assignment) by which it assigned the proceeds of the Bonds to its indirect parent EuroChem Group AG (EuroChem AG, the second claimant).
The claimants issued proceedings against the Banks, asserting that valid demands were made under the Bonds, which the Banks were obliged to pay.
The Banks raised several defences: they referred to determinations by NCAs in France, Italy, and the Netherlands that the Bonds were frozen under EU sanctions, making payment illegal. Even if those authorities' views were not decisive, the Banks contended that the Bonds were in fact owned or controlled by Mr Melnichenko, a designated person under the sanctions regime, and that payment would be prohibited under Article 2 of Regulation 269. They also argued that payment would make funds available to sanctioned Russian banks, contrary to Article 2(2) of Regulation 269. In so far as necessary, the Banks also relied on illegality under Article 11 of Regulation 833.
The Banks contended that since payment was illegal in the place of performance, the Bonds were unenforceable under English law due to the rule in Ralli Brothers (the rule on foreign illegality, as explained in more detail below) or as a matter of public policy.
Decision
The High Court found in favour of the Banks, confirming that they were prohibited from making payment under the Bonds due to asset-freezing provisions under EU Sanctions.
Interpretation of EU sanctions regime
The judgment sets out a comprehensive legal analysis of the relevant EU sanctions regime and its application to the facts of the case.
Regulation 269
The court analysed the key provisions of Regulation 269, particularly Article 2, which requires the freezing of all funds and economic resources "belonging to, owned, held or controlled by" designated persons, and prohibits making such resources available to them, directly or indirectly, noting that bonds are explicitly included as "funds" under the regulation.
The court also considered supplementary EU materials, including guidance documents and Commission opinions, which clarify the interpretation of "ownership" and "control" and the operation of "firewalls" intended to insulate EU subsidiaries from the influence of designated persons. The court referred to relevant decisions of the European Court of Justice and national courts, as well as pending referrals from Italian court to the European Court of Justice on the treatment of discretionary trusts under the regulation. The judgment focused on the purposive interpretation required for EU sanctions instruments, emphasising that the concepts of "ownership" and "control" are to be given an autonomous and broad meaning.
Applying these principles, the court found that the Bonds were "funds" within the meaning of Regulation 269 and owned or controlled by EuroChem NW2, which was itself owned or controlled by Mr Melnichenko. The court said this conclusion was supported by both: (1) the determinations of the relevant NCAs (notably in France and Italy); and (2) the court's own factual findings. Each of these issues is considered further below (following the discussion of Regulation 833).
As a result, the Bonds were subject to asset-freezing under Article 2(1) of the regulation, and any payment under the Bonds was prohibited.
Regulation 833
The court explained that Regulation 833 imposes restrictions on the sale, supply, transfer, or export of certain goods and technology to Russia, as well as prohibitions on providing financing or financial assistance related to those items. Of particular relevance was Article 11, which prohibits the satisfaction of claims (including under guarantees or bonds) made in connection with a contract, the performance of which has been affected by the measures imposed under Regulation 833, if the claim is made by or on behalf of a Russian entity.
The parties agreed, for the purpose of this case, to assume that the underlying construction contracts were affected by Regulation 833. The court then considered whether the claims under the Bonds were "in connection with" the affected contracts. While the claimants argued that on-demand bonds are autonomous and not connected to the underlying contracts, the court found that there was a sufficient factual connection between the Bonds and the contracts to bring the claims within the scope of Article 11. The court further found that, because the original demands under the Bonds were made by EuroChem NW2 (a Russian entity), and the Assignment of proceeds to EuroChem AG did not change the underlying nature of the claim, Article 11 of Regulation 833 operated to prohibit satisfaction of the claims under the Bonds.
Determination by the relevant NCAs
The judgment examined the role of the NCAs and their determinations in various jurisdictions regarding the application of EU sanctions to the EuroChem group and the Bonds at issue. The court noted that under Regulation 269, enforcement and interpretation are delegated to the competent authorities of each EU member state. These NCAs are responsible for making factual determinations about ownership, control, and the freezing of assets, as well as for granting or refusing derogations and licences. The judgment reviewed the positions taken by the NCAs in several key jurisdictions, including France, Italy, Switzerland, the Netherlands and Cyprus.
The judgment concluded that the determinations of the NCAs were clear and are binding on operators in their respective jurisdictions. Accordingly, since the NCAs in France and Italy had determined that EuroChem NW2 is owned or controlled by Mr or Mrs Melnichenko and that its assets, including the Bonds, are frozen, payment under the Bonds was prohibited under French and Italian domestic law.
Accordingly, it was not necessary for the court to decide the question of ownership or control, but it did so in case its decision about the role of NCAs was incorrect.
Ownership and control of EuroChem NW2 and EuroChem AG
The court held that Mr Melnichenko is the owner of EuroChem NW2 and of EuroChem AG, and of their assets including the Bonds, for the purposes of Article 2 of Regulation 269.
EuroChem group trust structure
The court noted that the structure above EuroChem AG involved a number of trusts, including the Firstline Trust. In the court's view, Mr Melnichenko at all times retained effective control over Firstline Trust (and therefore the claimants) for the purposes of Regulation 269.
Firstline Trust was said to be a discretionary trust with one discretionary beneficiary, Mrs Melnichenko. However, until March 2022 the sole discretionary beneficiary was Mr Melnichenko. The court held that a beneficiary under a discretionary trust is the owner of the trust assets (or alternatively, the person to whom the assets belong or is their holder), for the purpose of Article 2 of Regulation 269, even if that is not the case as a matter of English or Bermudian law.
In any event, under the terms of the trust deed, the court said that Firstline Trust was not properly characterised as a discretionary trust. It pointed to the control exercised over the trust by Mr Melnichenko, through Mr Fokin, who was someone that Mr Melnichenko could rely upon "to do as he wished". The court said that it was justified to characterise both Mr Melnichenko and Mr Fokin as "unscrupulous". Mr Melnichenko was therefore regarded as the "owner" of the Firstline Trust assets, including EuroChem AG and its subsidiaries, for the purposes of Article 2 Regulation 269.
Changes to the EuroChem group structure and "firewall" measures
The court also addressed changes to the group's structure following Mr Melnichenko's designation, including the transfer of assets, changes in management, and the establishment of compliance "firewalls" around EuroChem AG and its EU subsidiaries which aimed to demonstrate independence from Mr Melnichenko. In the court's view, following the implementation of EuroChem AG's firewall measures, neither Mr Melnichenko nor Mrs Melnichenko had control over EuroChem AG and its subsidiaries in the EU. However, those measures did not extend to Russian entities such as EuroChem NW2, which remained under the actual control of Mr Melnichenko. The court had "no doubt" that Mr Melnichenko continued to exercise control, at least in Russia.
Assignment
The court found that the Assignment of the proceeds of the Bonds to EuroChem AG was ineffective, as there could be no proceeds for the Assignment to operate on while the Bonds remained frozen. The court nevertheless went on to consider, if it was wrong and the Assignment was effective, whether the Banks paying the proceeds of the Bonds to EuroChem AG would be a breach of Article 2(2) of Regulation 269.
The court accepted that EuroChem AG's firewall was approved by the Swiss NCA and that this approval was acknowledged by authorities in France, Cyprus, and the Netherlands. The court noted that the Italian NCA had not said clearly whether or not it accepted EuroChem AG's firewall measures. The court inferred that this was likely to be because the Italian NCA (rightly) considered that Switzerland should make the determination. The court accepted the claimants' evidence regarding the firewall, and as a result concluded that a payment to EuroChem AG would not be a breach of Article 2(2). The presumption under Article 2(2) that funds provided to an entity will be transferred to those who own or control it, was displaced in relation to EuroChem AG. However, since the Bonds themselves were frozen, this issue was largely academic.
The court noted that the pending licence applications to the French and Italian NCAs were unlikely to affect its conclusions. These applications sought authorisation for the Banks to pay EuroChem AG in light of the Assignment. The court acknowledged that the NCAs may find such transfers acceptable in principle, given the firewall. However, the NCAs were not responsible for determining the legal effect of the Assignment under English law, particularly since the Bonds themselves remain frozen and were not assigned. If any NCA later determined that the Bonds were not frozen, the legal position might change.
Place of performance under the Bonds: the rule in Ralli Brothers
The claimants said that the place of performance was Russia, so that EU sanctions did not apply. The Banks argued that the place of performance was in France and in Italy, so that payment would be illegal because (as matters presently stand) the NCA in each country had determined that the Bonds are frozen under Article 2(1) of Regulation 269 (as explained above).
The court considered the legal principle from Ralli Brothers v Compania Naviera Sota y Aznar: This confirmed that a contract, even if valid under its governing law, is generally unenforceable to the extent that its performance would be unlawful in the country where it must be performed. The court had to decide whether the Banks would actually be carrying out the payment in a country where it would be illegal to do so, rather than just taking preparatory steps to pay. The court also looked at whether the Banks had made reasonable efforts to obtain a licence to pay.
The court acknowledged that the legal position on this issue is not entirely settled. However, it preferred the approach taken in Britten Norman and Marconi Communications (ie that the place the demand is to be made is the place of payment, unless the contract says otherwise), as it better reflects the nature of on-demand instruments, where payment is expected to follow immediately upon demand. Therefore, under English law, payment under the Bonds would have to occur in France and Italy. Since both jurisdictions prohibit such payments under EU sanctions, performance by the Banks would be unlawful, triggering the Ralli Brothers rule and rendering the Bonds unenforceable.
The court further addressed whether the Banks took reasonable steps to obtain licences or authorisations to make payment, concluding that reasonable steps were taken despite the fact that the licences were refused.
The court also confirmed that had it been against the Banks on the application of the rule in Ralli Bros it still would have dismissed the claims as a matter of public policy having regard to the grave importance of the sanctions in EU law and the fact that UK policy is precisely aligned with that of the EU.
Accordingly, the court dismissed the claimants' claims.
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