Bird & Bird wins arbitration case on EU sanctions rules

Aalborg Forsyning was justified in cancelling framework agreement with Russian coal supplier

The case was brought before the Danish Institute of Arbitration and concerned the question whether Aalborg Forsyning's cancellation of a framework agreement for the supply of coal was justified.

Aalborg Forsyning can finally breathe a sigh of relief as the international arbitration tribunal ruled that Aalborg Forsyning was justified in cancelling the supply of coal from the Russian coal company as a result of the EU sanctions against Russia.

The case is particularly important as it is one of the first cases concerning the enforcement of the sanctions rules against Russia after the sanctions rules came into force. The decision also means that other companies and public authorities can feel confident that the sanctions regime is working as intended.

The case began before Russia's invasion of Ukraine when Aalborg Forsyning entered into an agreement with the Swiss company Siberian Coal Energy Company (SUEK) for the supply of coal. The invasion prompted a need for an EU response which is why the EU imposed sanctions on a number of prominent Russian businessmen, including the ultimate owner of SUEK.

Cancellation of framework agreement due to EU sanctions against Russia

The addition of SUEK's owner to the sanctions list resulted in Aalborg Forsyning's payment to SUEK being frozen. Aalborg Forsyning then chose to suspend and subsequently terminate the framework agreement. The reason for the cancellation was that the Swiss-owned coal company was ultimately owned and controlled by a Russian citizen. It was deemed that there was a person on the sanctions list for Russia who was closely related to SUEK - the owner.

SUEK challenged the cancellation of the framework agreement and claimed that it was unjustified, after which SUEK filed an arbitration case with a claim for several hundred million Danish kroner.

The question to be decided by the international arbitration tribunal was whether the coal company had sufficiently distanced itself from its Russian owner. A unanimous arbitral tribunal accepted Bird & Bird's views and ruled in favour of Aalborg Forsyning whereas SUEK was ordered to pay the costs of the case.

Bird & Bird's comment

The decision of the arbitration court emphasises the importance of having a solid agreement that anticipates even the scenario where a contracting party may be subject to sanctions.

Bird & Bird's procurement team works strategically and purposefully to ensure compliance with sanctions at all stages of the procurement processes. We thoroughly organise and implement processes to ensure that all agreements commercially support the relevant regulations. This is essential to maintain the integrity of sanctions and ensure that our clients' procurement business is compliant with applicable legislation.