The fertiliser business is rarely front-page news, yet it sits close to the centre of the war in Ukraine, global food security, and, in the past few months, our understanding of how sanctions regimes can be applied in practice.

At ITFA’s Year-end seminar Akshay Misra, Managing Associate, Penningtons Manches Cooper LLP, and Alexandra Shipulina, Legal Counsel, ABC International Bank plc, discussed the case and the implications arising from the court’s decision.

Russia is one of the world’s largest fertiliser exporters. Over the past decade, it has accounted for around 15 per cent of global exports of nitrogen fertilisers and close to one-fifth of trade in the three main fertiliser types. As a result of the sanctions placed on Russia by the West following the country’s invasion of Ukraine in 2022, one particular fertiliser company, EuroChem, found itself fighting a €212 million court case with a pair of European banks.

The EuroChemcase

In 2020, EuroChem North-West-2, a Russian project company, hired Italian contractor Tecnimont to build a large fertiliser plant in Kingisepp, a town in Russia about 25km from the country’s border with Estonia. To secure Tecnimont’s performance, Société Générale and ING issued six on-demand bonds (governed by English law) with a combined value of just over €280 million. After Russia’s invasion of Ukraine in 2022, the EU placed EuroChem’s founder, Andrey Melnichenko (in March), and later his wife (in June), under asset-freeze sanctions.

Given the circumstances, Tecnimont suspended work, which EuroChem treated as a default, leading them, in August 2022, to demand payment under the bonds. The banks declined to pay, arguing that any payment would be prohibited under EU sanctions because it would make funds available to a listed individual. 

EuroChem sued in London, assigning the proceeds of the bonds to its Swiss holding company, EuroChem Group AG, under a pre-agreed assignment clause in December 2022. The claim value was around €212 million (note: different case summaries quote between €212-€217 million, depending on interest calculations). 

The case (EuroChem North-West-2 and EuroChem Group AG v Société Générale and ING) is already being treated as a landmark on how sanctions rules interact with on-demand bonds, how far courts will stretch the idea of “control”, and when foreign illegality makes an English law contract effectively unpayable.

At the heart of the dispute were three questions.

1. Is EuroChem “owned or controlled” by Mr or Mrs Melnichenko for EU sanctions purposes, even though the group itself is not designated?
2. If so, are the bonds “frozen” and is payment prohibited under EU law?
3. If payment would be illegal in France or Italy, can an English court still force French and Italian branches of the banks to pay under English law?

The Commercial Court answered all three in ways that will ripple through cross-border finance.

Ownership and control

A central question in the dispute was whether EuroChem should be treated as “owned or controlled” by Andrey or Aleksandra Melnichenko for the purposes of EU asset-freeze rules, even though the EuroChem group itself has never been designated. Under EU Regulation 269/2014, funds must be frozen if they belong to, or are controlled by, a listed person, and no funds may be made available to them, directly or indirectly.

EuroChem’s position was that the group was not a sanctioned entity and should not be treated as one. The company pointed out that ownership had been transferred into a trust structure and later to Mrs Melnichenko, and that the founder had stepped back from formal roles. They argued that these steps meant neither founder nor spouse exercised control in the sense required by the EU regime. EuroChem also noted that EU and UK authorities had never added the company to their sanctions lists, which, in their view, confirmed that the group operated independently.

Supporting the company’s case, the United States’ Office of Foreign Assets Control (OFAC), the agency that administers and enforces sanctions in support of US objectives, issued public guidance stating that EuroChem Group AG is not considered blocked property because it is not majority-owned by listed individuals. Under OFAC’s 50 per cent rule, EuroChem fell outside the scope of US asset-freeze measures.

The banks preferred the EU’s broader view of what classifies as a sanctioned organisation. They said that, in substance, Mr Melnichenko continued to control EuroChem despite the restructuring of ownership. They relied on evidence showing his ongoing influence over strategy, the speed with which ownership changed hands immediately after his designation, and that key decisions still appeared to follow his direction. In the banks’ view, the transfer of shares to his wife did not break that influence. As a result, any payment under the bonds would ultimately make funds available to a listed individual, which EU law prohibits.

The Commercial Court accepted the banks’ view. It took a purposive approach to the EU rules, meaning it applied them in the spirit of preventing sanctioned individuals from accessing funds through corporate structures. The judge examined how the business operated in practice, considering such things as who could influence decision-making, how ownership shifted after sanctions were imposed, and whether the arrangements genuinely limited the founder’s involvement.

On that evidence, the court found that Mr Melnichenko continued to exercise de facto control over the relevant EuroChem entities. As a result, the bonds were treated as funds controlled by a listed person, and paying them would breach the asset-freeze provisions of Regulation 269/2014, even though EuroChem itself had never been designated. 

Ultimately, the court decided that formal ownership structures and company registers may matter less than the reality of who directs the business.

Place of performance

A second issue focused on where the bonds were legally “performed”. Although the bonds were governed by English law, Société Générale and ING issued them through their branches in Paris and Milan. The text required demands to be delivered to those offices. Any payment would also have been processed from those locations.

French and Italian regulators had already informed the banks that the bond proceeds were frozen under EU sanctions and that payment would be unlawful. If France or Italy were the places of performance, the bonds could not be enforced since English law will not compel performance if doing so requires a party to break the law in the country where the act must occur.

EuroChem, therefore, had a strong incentive to argue that France and Italy were not the places of performance. Their position was that, unless the contract expressly fixes a place of payment, the obligation should be treated as performable wherever the beneficiary is located. Under the English law principle that “the debtor must seek the creditor”, payment could be made in Russia, where no local law prevented the banks from honouring the demand. If that were correct, the banks could not rely on French or Italian sanctions restrictions to avoid payment, and the bonds would remain enforceable.

The banks pointed to the wording of the bonds, which required demands to be sent to specified addresses in France and Italy, and to the fact that payment would be made from accounts in those jurisdictions. They also relied on guidance from the French and Italian authorities, who had already told them that any proceeds under the bonds were frozen and that payment would breach EU sanctions law. On that basis, the banks said the place of performance was France and Italy, and that performance there was illegal.

The court agreed with the banks. It held that, for on-demand bonds of this kind, the place of performance is where a compliant demand must be presented and where the bank is required to pay. Because those places were in France and Italy, and because payment there was prohibited under EU sanctions as interpreted by the local authorities, the bonds were treated as unenforceable under English law. Even though English law governed the contract, the court would not order performance that would require the banks to commit an offence in the jurisdictions where payment had to be made.

The outcome

In effect, the ruling meant the banks had no obligation to pay the €280 million secured under the bonds. Even though EuroChem issued its demands within the bond validity period and even though the instruments were designed to pay “on demand”, the proceeds were frozen by French and Italian regulators and could not be released. The court accepted that reality and held that the bonds were unenforceable for as long as payment in those jurisdictions was unlawful.

For EuroChem, the protection against contractor default that it thought it had secured (before these sanctions were ever put in place) simply never materialised, meaning that the financial risk of Tecnimont’s suspension (and the wider project disruption) remained entirely with EuroChem. The company was forced to absorb a loss equivalent to the value of the unpaid bonds, while the banks faced no liability for withholding payment because sanctions restrictions shielded them from performance.

EuroChem has appealed, but for now the outcome shows how geopolitical developments can override even tightly drafted security arrangements, shifting risk back onto the beneficiary at the very moment the instrument is meant to respond.

Possible implications

This judgment is a sign of change to come in how sanctions risk will be assessed in cross-border finance. Although EuroChem itself is not designated, the court’s willingness to treat it as controlled by a listed individual may be a sign that the UK is adopting more of an EU-style interpretation of ownership and control.

A second implication concerns the location of contractual performance. Even though the bonds were governed by English law, payment would have been processed through France and Italy, where regulators had already concluded that the proceeds were frozen. The court accepted that this made performance unlawful and therefore unenforceable. For banks, this shows that governing law cannot insulate an instrument from sanctions exposure if the payment mechanics rely on jurisdictions with stricter interpretations.

There may also be a wider market effect. Many institutions had already been cautious around Russia-adjacent transactions, but since the judgment, some have stopped engaging altogether. In their view, the risk now extends beyond EuroChem. Even without designation, counterparties may be viewed as too complex to handle.

These legal and commercial dynamics coincide with increasing divergence between sanctions regimes. OFAC maintains that EuroChem is not blocked, while EU materials describe its founder as continuing to control the group. UK guidance has taken a different tone again. The English court’s reasoning adds another layer, leaving operators to navigate inconsistent signals from the three main authorities. The result is more complexity, not less.

Finally, the case is not settled. EuroChem has appealed, and both EU and UK regulators continue to refine their sanctions frameworks. Uncertainty will persist for some time. But it is clear to see that list checks are no longer sufficient. The path from contractual promise to lawful payment now depends as much on regulatory interpretation as on the words of the contract itself.