LLC Eurochem North-West-2 & Anor v Societe Generale SA & Ors

Performance bonds may constitute “funds” and, alternatively, “economic resources” for the purposes of Council Regulation (EU) No. 269/2014. Where the beneficiary is owned or controlled by a designated person, the bonds may be frozen under Article 2(1), preventing demands, processing and payment. “Ownership” and “control” have an autonomous and purposive EU meaning. Indirect ownership and ownership through a discretionary trust may suffice. A firewall may rebut the presumption that funds made available to a controlled entity benefit the designated person, but it must be effective and recognised by the relevant national competent authority.

Under Article 11 of Council Regulation (EU) No. 833/2014, claims under autonomous bonds may nevertheless be “in connection with” affected underlying contracts. Foreign illegality at the place where the bonds must be honoured may engage the rule in Ralli Brothers. Serious breaches of foreign sanctions law may also make enforcement contrary to English public policy.

The claimants, LLC EuroChem North-West-2 and EuroChem Group AG, sought payment under six English-law on-demand bonds issued by Société Générale and ING. The bonds secured obligations arising from contracts for the construction of a fertiliser plant in Russia. The banks refused payment after the EU designated Andrey and Aleksandra Melnichenko under Council Regulation (EU) No. 269/2014.

The central issues were whether the bonds were frozen under Article 2(1), whether payment would make funds or economic resources available to a designated person under Article 2(2), and whether Article 11 of Council Regulation (EU) No. 833/2014 barred the claims. The court also considered the effect of national competent authority determinations, the claimants’ assignment of bond proceeds, the place of performance, foreign illegality, public policy and the bonds’ expiry provisions.

1. Regulation 269. The bonds were “funds” because Article 1(g)(v) expressly included performance bonds. They were in any event economic resources. The phrase “belonging to, owned, held or controlled by” had an autonomous and purposive EU meaning. Indirect ownership was sufficient. A beneficiary under a discretionary trust could be treated as owner, or as the person to whom assets belonged or by whom they were held, even though that was not the position under English or Bermudian trust law.
2. Mr Melnichenko remained the owner of the relevant EuroChem interests for the purposes of Regulation 269. Mrs Melnichenko was his proxy, and the Firstline Trust was not in reality a true discretionary trust because Mr Melnichenko retained effective control through Mr Fokin and the trust structure. He also retained de facto control of MCC EuroChem and EuroChem NW2. The firewall measures protected EuroChem AG and its EU subsidiaries from his control, but did not extend to EuroChem NW2.
3. Determinations by the French DGT and Italian CSF that the relevant assets were frozen were determinative for the purposes of the domestic law of those states. Independently, the court reached the same conclusion. Article 2(1) prevented demands, acceptance, processing and payment under the bonds. There could therefore be no proceeds to which the assignment could attach.
4. Article 2(2) would independently prohibit payment to EuroChem NW2. The presumption that funds made available to a controlled entity would benefit the designated person was not rebutted. Payment to EuroChem AG would not have been prohibited because its firewall displaced the presumption, but that conclusion was academic because the bonds themselves were frozen.
5. On the assumed basis that the underlying contracts had been affected by Regulation 833, Article 11 barred the claims. The autonomy of an on-demand bond did not prevent a factual connection between claims under the bonds and the underlying contracts.
6. The place of performance was France for the Société Générale bonds and Italy for the ING bond. Payment would be unlawful in those jurisdictions because of the applicable sanctions determinations. The bonds were therefore unenforceable under the rule in Ralli Brothers. Alternatively, enforcement would offend English public policy because the foreign sanctions laws reflected grave and aligned public policies.
7. The bonds’ expiry clauses did not extinguish the original demands. Sanctions suspended payment rather than discharging the obligations, unless the suspension became legally frustrating. The claimants’ claims failed. ING’s Part 20 claim against Tecnimont largely fell away, subject to residual matters and further submissions on costs.