Pre-existing contracts and EU sanctions: legal challenges and practical implications

The European Union – particularly the Council of the European Union – has come to rely increasingly on international sanctions (known in EU law as 'restrictive measures') as a key strategic Common Foreign and Security Policy ('CFSP') instrument. Although their effectiveness has repeatedly been called into question, the EU has adopted a wide range of these measures over the past decade, aimed at weakening Russia's military capability in response to its invasion of Ukraine.

To approve restrictive measures, the Council must adopt both a unanimous decision within the framework of the CFSP, pursuant to Article 29 of the Treaty on the European Union, and a legal act in the form of a regulation adopted by qualified majority under Article 215 of the Treaty on the Functioning of the European Union (i.e. within the framework of the EU's common commercial policy). The measures are implemented jointly by the EU and its Member States.

The EU's regime of restrictive measures in response to the war in Ukraine is structured around two main legislative acts that share the ultimate goal of pressuring Russia to cease military action, but have different immediate objectives. The first, Council Regulation 833/2014,^[1] targets specific economic sectors deemed essential to the Russian economy. The aim is to weaken the Russian economy in the medium term as the intensity of these measures increases. The second, Council Regulation 269/2014,^[2] is designed to restrict access to financial resources for legal and natural persons who are considered key actors in the conflict. The aim is to impede these specific individuals as much as possible so that they push for a change in the target's policy direction.

Pre-existing contracts present a particular challenge in the context of restrictive measures, as they give rise to tension between the principle of legal certainty and the interest in ensuring adopted measures are effective. On the one hand, parties to contracts signed before sanctions became effective may legitimately expect their agreements to be honoured. On the other hand, allowing such contracts to be executed unrestrictedly could undermine the objectives and effectiveness of the restrictive measures imposed. 

As mentioned, both Regulation 833/2014 and Regulation 269/2014 share the same overarching objective – namely, to undermine Russia's capabilities – but they approach it from different perspectives. As a result, the logic and structure of each regulation are aligned with their specific focus (i.e. the respective sectoral and personal approaches). This divergence in approach is also reflected in the way each regulation addresses pre-existing contractual relationships, leading to such contracts being treated differently under each regime.

Under Regulation 269/2014, placing an individual or entity on the sanctions list essentially results in the freezing of all funds and economic resources belonging to, owned, held, or controlled by the listed persons. In addition, the regulation imposes a broad prohibition on making funds or economic resources available, directly or indirectly, to or for the benefit of those listed. These measures apply automatically and with immediate effect from the moment a person or entity is added to the list; there is no general transitional period provided for their implementation – this was a deliberate move by the Council to increase the impact on specific individuals.

The Regulation also sets out case-specific exceptions to the above general rule under the authorisation framework, allowing for payments to be authorised under certain conditions. 

If a third party owes a payment to a listed person or entity under a pre-existing contract, the Regulation states that the payment may be made into a frozen account without the need for prior authorisation, provided that the funds remain frozen and cannot be freely accessed by the listed person or entity.

However, a listed entity may be required to make a payment under a pre-existing contract. In that case, the Regulation permits Member States to authorise the release of specific frozen funds or economic resources where the payment in question is due under a contract or agreement entered into before the relevant person or entity was included within the scope of the Regulation. However, this authorisation must not result in a breach of the prohibition on making funds or economic resources available to or for the benefit of the listed person or entity (under some circumstances this could be the case if the payment leaves the listed entity in a better position than before). In addition, the general prohibition on participating in any action whose object or effect is to circumvent the Regulation also applies.^[3]

According to the territorial scope defined in Article 17 of Regulation 269/2014, the asset freeze and related prohibitions apply only within the European Union and its airspace, and to persons and entities under EU jurisdiction. As a result, funds held by a listed person or entity in financial institutions located outside the EU are beyond the direct reach of the Regulation. Extending the asset freeze to such funds would amount to an extraterritorial application of EU law, which the Regulation does not envisage, and is generally avoided in the EU's sanctions practice. While this limitation is consistent with established jurisdiction principles, it also highlights a significant weakness in the effectiveness of the restrictive measures, as listed persons may retain access to assets held beyond the Union's jurisdiction. 

Turning to Regulation 833/2014, this instrument targets specific sectors of the economy that are considered particularly important to Russia's military activities with prohibitions. Over time, the scope of these sectoral restrictions has evolved, with a growing number of targeted sectors and new prohibitions introduced in response to developments on the ground. In addition to the initial restrictions, the Regulation has progressively incorporated complementary measures, such as bans on providing financial assistance or related services connected to the affected sectors. This has strengthened the overall effectiveness of the sanctions regime.

Regulation 833/2014 is sector-specific when it comes to the regulation of pre-existing contracts. In other words, to determine how a pre-existing contract is treated in a sector subject to the Regulation, we must refer to the specific article governing the relevant prohibition, as there are no overarching general rules. The specific article may include transitional provisions that exempt contracts entered into before a certain date,^[4] sometimes subject to the fulfilment of particular conditions and authorisation.^[5] Moreover, the relevant date is typically when the contract was signed, but there are also instances where the exemption is conditional upon the express authorisation of the competent authority, and such authorisation itself must have been granted before a specified deadline.^[6] Where authorisation is required, the Regulation simply states that this is the responsibility of the competent authorities, effectively placing the burden on the Member States. However, for products subject to the dual-use regime (as set out in Article 2 and subsequent provisions), the Regulation contains a cross-reference to the EU dual-use legislation, stating that it will apply mutatis mutandis, ensuring (or at least attempting) a harmonised approach to authorisations across the Union. In regulating pre-existing contracts, Regulation 833/2014 not only refers to contracts in general terms, but also to 'ancillary contracts necessary for the execution of such a contract'.^[7]

However, the Regulation itself does not provide a definition or clear demarcation for this concept. To clarify its meaning, one must refer to the Frequently Asked Questions ('FAQs') published by the European Commission, which offer practical guidance on interpretation.

Firstly, the FAQs specify that, as a general rule, framework agreements that do not set out quantities or pricing are not considered contracts for these purposes. As for ancillary contracts, the FAQs describe them as agreements necessary for the execution of a principal contract, such as an insurance or financing agreement. The FAQs also emphasise that executing an ancillary contract must not circumvent the Regulation; for instance, a transport contract would not be considered ancillary if transport activities were specifically prohibited.

Furthermore, the FAQs clarify that annexes signed after the entry into force of the relevant prohibition, that merely specify the price and quantity under a contract signed before that date, as well as extensions and renewals, are excluded from the scope of pre-existing and ancillary contracts for the purposes of the Regulation.

Turning to the issue of claims, both Regulation 833/2014 and Regulation 269/2014 contain specific provisions governing claims arising from contracts or transactions affected by the restrictive measures. Notably, neither regulation draws a distinction between contracts entered into before and after the entry into force of the sanctions. Instead, the general rule is that no claims – such as those for compensation, indemnity, or the enforcement of guarantees – may be satisfied if the performance of the contract or transaction is affected, directly or indirectly, by restrictive measures.

The scope of protection against claims is broad, covering not only those brought by listed persons and entities, but also those brought by any other Russian person, entity, or body. According to the European Commission's FAQs, a 'Russian person' should be understood to include not only Russian nationals, but also Russian residents who are nationals of other States. This interpretation ensures that EU operators are protected against claims from any person resident in Russia, regardless of their nationality. This strengthens the potential effectiveness of the sanctions regime.

This prohibition applies regardless of when the contract was signed or became effective. The burden of proof lies with the claimant, who must demonstrate that the claim is not prohibited under the relevant regulation. However, both regulations expressly safeguard the right to judicial review, allowing affected parties to challenge the legality of the non-performance of contractual obligations before a competent court, although this does not guarantee that the claim will ultimately be satisfied as this could undermine the effectiveness of the sanctions regime.

In conclusion, the way pre-existing contracts are treated under the EU's restrictive measures regime against Russia highlights the delicate balance between the need for legal certainty and for effective sanctions. Both Regulation 833/2014 and Regulation 269/2014 pursue the same overarching objective of undermining Russia's capabilities, but they do so through different regulatory logic and mechanisms. In both cases, the regulations make it clear that the mere existence of a contract that predates the sanctions does not guarantee its performance or the satisfaction of related claims, as the overriding interest is to prevent the circumvention of restrictive measures. As the EU's sanctions regime continues to evolve, economic operators must remain vigilant and proactive in assessing their contractual relationships and compliance obligations, paying special attention to designing contractual clauses that anticipate the changes arising from this dynamic legal environment.

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^[1] Regulation 833/2014 of the European Union Council of 31 July 2014 concerning restrictive measures in view of Russia's actions destabilising the situation in Ukraine. 

^[2] Regulation 269/2014 of the European Union Council of 17 March 2014 concerning restrictive measures in respect of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine. 

^[3] CJEU, Case C-117/06, Ilse Möllendorf and Bernd Möllendorf-Niehuus v Germany (11 October 2007), ECLI:EU:C:2007:596. The Court of Justice of the European Union has interpreted, in the context of a different restrictive measures regime but with prohibitions analogous to those at issue here, that the freezing of funds resulting from the inclusion of a person on a sanctions list does not permit actions under contracts entered into prior to the listing date to be carried out. In that case, the Court held that the definitive registration of the transfer of ownership of an asset in the relevant public register – despite the underlying contract having been entered into before the person was listed – was not allowed once the person had been designated as subject to restrictive measures.

^[4] E.g. Art 3b (3).

^[5] E.g. Art 3c (6).

^[6] E.g. Art 2a (5). 

^[7] For example, the typical wording used by the Regulation to govern the transitional window for the execution of pre-existing contracts can be illustrated by the provision relating to software products subject to the prohibition set out in Article 3: '3a. The prohibitions in paragraph 1a shall not apply to the sale, supply, transfer, export or provision of software that is necessary for the execution until 26 May 2025 of contracts concluded before 25 February 2025, or of ancillary contracts necessary for the execution of such contracts'.