Impact of EU sanctions on commercial contracts governed by Cyprus law

Cyprus legislation incorporates the sanctions regime promulgated by the United Nations and the European Union through the Law on the Implementation of Provisions of Resolutions orDecisions of the Security Council of the United Nations Organisation (Sanctions) and the Decisions and Regulations of the Council of the European Union (Restrictive Measures) of 2016.

In the European Union, sanction laws are adopted in a two-step process and are then implemented in national laws. First, the Council of the European Union (the Council), which represents the EU governments, takes a political decision to impose sanctions on a specific country or in relation to a particular region or group. Second, the Council adopts a Regulation that implements the Council Decision (the Council Sanctions Regulation). Except for travel bans and exports of arms, which are only provided in Council decisions, Regulations detail the specific sanctions (i.e. freezing of assets and export bans) and persons listed under them.  EU sanctions are enacted as Regulations (for Russia, e.g. Council Regulation (EU) 269/20144, Council Regulation (EU) 833/2014, both as amended). Thus, such sanctions have immediate effect in all member states of the European Union under Art. 289 TFEU as soon as they are published in the Official Journal of the EU. They are legislative acts and thus are directly effective as laws in all EU member states and for all EU institutions. That means that any citizens of EU member states, any legal entities and national authorities as well as any EU institutions are required to comply with them. In the legal hierarchy, they are ranking immediately below the TFEU, itself. In case of contradiction with other EU regulations, it is necessary to interpret the different regulations in light of each other. In case of unsolvable contradiction, the lex posterior rule applies.

Because of the effet utile, EU Regulations (including sanctions Regulations) rank higher than Cyprus law. In case a subject is governed by a national law and a Regulation is in place as well, the Regulation is effective while the national law is considered ineffective. In case a national law touches the subject of a Regulation, the national law needs to be interpreted in a way that it does not in any way contradict the Regulation. In case such national laws are implementations of EU Directives (which are also legislative acts of EU but only have direct effect on member states but not individuals), in case a Directive contradicts a Regulation, a harmonised interpretation of both the national law implementing the Directive and the Regulation is required. If this is not possible, the lex posterior rule applies.

As a general rule, EU sanctions Regulations apply: (a) within the territory of the European Union, including its airspace; (b) on board any aircraft or any vessel under the jurisdiction of a Member State; (c) to any person inside or outside the territory of the Union who is a national of a Member State; (d) to any legal person, entity or body, inside or outside the territory of the Union, which is incorporated or constituted under the law of a Member State; (e) to any legal person, entity or body in respect of any business done in whole or in part within the Union. Though EU sanctions are expected to produce effects in third countries through pressure on listed persons, they do not apply extraterritorially. In other words, they do not create obligations for non-EU persons or entities, unless the business is conducted at least partly within the EU. In parallel, and as a matter of principle, the EU does not recognise the extraterritorial application of laws adopted by third countries and considers such effects to be contrary to international law.

US and UK sanctions in Cyprus

US and UK sanctions do not have an immediate legal effect in member states of the EU. There are no international agreements in place that would provide them with legal effect in the EU or any of its member states. However, as long as this is not a breach of an EU Blocking Statute (the only Blocking Statute in place, currently, relating to Cuba, Iran, and Libya only is Regulation (EC) 2271/96 as amended), EU citizens and entities are not generally prohibited to comply with them. In case compliance would lead to breach of contract etc., the claim of compliance with US or UK sanctions is not a valid defence. Still, with regard to some sanctions, especially US sanction rules claim extraterritorial effect: US sanction rules often require that subsidiaries of US entities or even anyone in the world comply with US sanctions rules, they prohibit doing US$ transactions with certain persons and countries, etc. While such sanctions do not have legal effect in EU member states, the US have a history of enforcing such extraterritorial sanctions by ordering excessive financial penalties to non-compliant entities doing business in the US, jailing and imprisoning C-suites and other employees of non-compliant entities when entering the US, and listing non-compliant foreign entities as sanctioned persons, themselves, which prohibits any US entity from doing business with such person (and in case of extraterritorial sanctions, even requiring anyone in the world to not do business with such sanctioned person or otherwise facing the same penalty).

Impact of EU sanctions on commercial contracts governed by Cyprus law

Cyprus did not enact any specific legislation in Cyprus to regulate restrictive measures or sanctions. In addition, Cyprus Courts do not seem to have issued any judgements in relation to issues pertaining to the validity, extent and interpretation of the EU sanctions regime. Given that common law precedents are a source of law under Cyprus law, it is likely that Cyprus Courts would adopt decisions issued by English Courts or other Commonwealth countries on the issue, although a note of caution would apply on any post-Brexit case law that may focus on UK legislation rather than EU instruments.

For instance, one issue that may arise is the meaning of ownership or control of assets.  In the recent judgement in PJSC v. Mints, English Courts took the view that, whilst fact-specific, these concepts are directed towards individuals (as opposed to the institutions) and that sanctions applicable to specific persons may not affect companies which are within the designated person’s power or control. It would be, therefore, unusual that large institutions could be subject to sanctions intended to cause personal financial troubles.

Another point of contention is whether a designated persons could exercise active rights of access to justice, such as in order to initiate litigation or pursue a cause of action. Whilst accepting the fact that a cause of action constitutes an economic resource, the English Court in PJSC v. Mints upheld the common law principle that legislation must explicitly authorise restrictions to basic human rights, such as access to justice, in order for the Court to be able to give effect to a prohibition of exercise of such rights. Therefore, absent specific legislation providing otherwise, designated persons must be seen to remain able to access courts and seek judgement for their claims.

Another difficult point is the issue of how courts will approach the enforcement of commercial contracts in case that any of the parties is affected by sanctions.  In the recent case of Gravelor Shipping Ltd v. GTLK Asia M5 Ltd & Anor, sanctions materially impacted the ability of one party to pay under the contract, which required specific payment in US dollars to a certain bank account. The English Court allowed a request for the revision of the contract which changed the bank account and switched the currency of the payments. The fundamental of the judgment advocates that, even if it deviates substantially from the original terms, English courts in the proper case will interpret contracts liberally in order to preserve the contractual deal and accommodate in a fair and equitable manner the actions of the parties impacted by sanctions.

Conclusion

The unknowns surrounding the impact of sanctions in commercial contracts highlight the need for careful consideration of specific circumstances, ideally at a pre-contractual stage. The cases discussed demonstrate that Courts would adopt a pragmatic and liberal approach, which will seek to preserve considerations of justice and equity in contractual deals, yet the limits of this approach are yet to be specified. Cyprus Courts are yet to show any specific trends on the issue and it would be interesting to see how Cyprus Courts would approach matters related to sanctions and restrictive measures.