Caution When Rescinding Contracts with Countries Subject to Embargoes

In recent years, various companies have been unable to fulfill their contractual obligations to their Russian counterparties because the Russia embargo (Regulation (EU) No. 833/2014) prohibits such performance.  

Many of these contracts were retroactively terminated, whether through termination clauses in the contracts, statutory rights of termination – for example, due to default or impossibility of performance – or as a result of (foreign) court decisions.  

What happens now to the down payments that have already been made? In particular, can companies based in the EU refund these payments to their Russian contractual partners?  

The Frankfurt Higher Regional Court (Case No. 26 Sch 12/24) has confirmed the legal position consistently held by Baker Tilly, namely that such refunds are generally not permitted. A repayment violates the embargo regulations if the underlying transaction is prohibited under the Embargo Ordinance. Repayment, even the repayment of a down payment, is therefore impermissible and punishable by law.   

Brief overview of the Higher Regional Court proceedings 

Through a company based in Kazakhstan, a German company indirectly sold goods to Russia that were subject to the sales ban under Article 3k of Regulation (EU) No. 833/2014. The German company received a down payment for this directly from the Russian company. The delivery did not take place due to the embargo. As a result of the sales ban, the managing director of the German company had already been prosecuted. The Russian company obtained an arbitral award in Russia ordering the repayment of the down payment. 

The Higher Regional Court’s decision mentioned above was issued as part of the proceedings for the declaration of the arbitral award’s enforceability: Recognition and enforcement of the arbitral award were denied because the award violates public policy – in this case, foreign trade law (the Russia embargo).  

In conclusion: “The repayment of a down payment made under a purchase agreement sanctioned pursuant to Article 3k of Regulation (EU) No. 833/2014 is itself subject to the prohibition on performance under Article 11(1)(b) of Regulation (EU) No. 833/2014.” 

Higher Regional Court ruling: rescission also prohibited  

The ruling has far-reaching consequences, not only for cases involving Russia. Rather, the ruling sets a fundamental precedent regarding the rescission of contracts with counterparties in countries subject to embargoes.  

The following applies: If the underlying transaction – such as the sale of a specific good – is prohibited under foreign trade law (at the time of rescission), the rescission of the contract is also subject to this prohibition, meaning that the payment may not be refunded. 

Recommendations for action before or after a contract rescission  

If you currently have or have had business relationships with countries subject to an embargo, you should consider the following: 

• Before agreeing to and carrying out a contract rescission, verify whether it is permissible under foreign trade law: 
  • Is the contracting party located in a country subject to an embargo?  
  • Is the end user or the end use located in a country subject to an embargo?  
  • Is the contracting party subject to personal sanctions?  
  • Is the underlying transaction covered by an embargo regulation? 

If there are indications that an embargo regulation might be applicable – for example, in the case of a Russian contracting party – we strongly recommend having the matter reviewed by legal counsel before agreeing to or carrying out a contract rescission.  

• Review your past transactions to determine whether they could be subject to embargo regulations. 

If you have already made repayments in the past that are now suspected of violating sanctions, contact a lawyer immediately to determine what steps can be taken in order to mitigate the damage.  

Our experts will be happy to provide an initial consultation!