European Council Issues Guidance on Recently Imposed ‘No Russia’ Clause for EU Exporters

EU-based aircraft owners and lessors, among other exporters, will soon have to incorporate a “No Russia” clause in their contracts with non-EU counterparties for the sale, supply, transfer, or export of aircraft and aircraft parts. The obligation to include the clause will vary depending on a contract’s date of conclusion, with the first implementation dates coming as soon as March 20, 2024. The European Council has released guidance and a template for the clause, part of a larger package of sanctions on Russia, to guide impacted EU exporters.

Since February 2022, America, Europe, and their allies have introduced various sanctions to curb Russian oil revenues, ban the export of sensitive goods to the country, freeze the central bank’s reserves, and cut some Russian banks off from the global financial system.

On December 18, 2023, the European Council approved the 12th package of sanctions against Russia in reaction to the country’s ongoing operations in Ukraine, which included additional import and export bans and measures to combat sanctions circumvention and close loopholes that allow Russia to route exports via third countries.

Notably, Article 12(g) of Regulation (EU) 833/2014 (the Regulation) imposes a “No Russia” clause, which compels EU exporters to contractually prevent the re-exportation of specified restricted goods to Russia in dealings with third-country business partners. This obligation only applies to specific types of goods, including aviation goods, jet fuel, weapons, sensitive goods and technology, and dual-use goods.

IMPLEMENTATION DATE

The obligation to include the “No Russia” clause depends on the contract’s date of conclusion:

IMPACT OF ‘NO RUSSIA’ CLAUSE ON AIRCRAFT LESSORS AND OWNERS

The “No Russia” clause is required to be included in every contract executed by EU-based aircraft owners/lessors with a counterparty based in any non-EU country concerning the sale, supply, transfer, or export of aircraft and/or aircraft parts. This restriction excludes the partner countries listed in Annex VII to the Regulation: the United States, Japan, the United Kingdom, South Korea, Australia, Canada, New Zealand, Norway, and Switzerland (Partner Countries).

To ensure the effectiveness of the “No Russia” clause, the contract must also include “adequate” remedies that can be enforced in the event of a breach of the clause. Such remedies should be robust enough to serve as a strong deterrent, discouraging non-EU operators from violating the clause.

While the precise nature of those remedies is not prescribed in the Regulation, the termination of the contract would be considered an adequate remedy. While the European Council has suggested that contractual penalties may be considered adequate remedies, caution should be exercised as penalty clauses are unenforceable under English law.

Another key aspect of Article 12(g) is the obligation of an exporter to promptly report any breaches to the competent authority of the member state where they are resident or established.

Ordinarily, one would expect an aircraft lease agreement to contain compliance/restrictive covenants preventing a lessee from operating the aircraft in a manner that would result in a breach of applicable law or sanctions. However, these clauses may be too generic and may not be sufficient to meet the specific obligations of Article 12(g).

There is no specific language requirement for the “No Russia” clause so long as it meets the requirements of Article 12(g). In any event, the European Council has recommended that the clause be identified as an essential element of the contract. In other words, the “No Russia” clause should be treated as a condition (as opposed to a warranty), which would entitle the innocent party to treat the breach of such clause as a repudiation of the entire contract.

TEMPLATE ‘NO RUSSIA’ CLAUSE

Recent FAQ guidance issued by the European Council contains a template “No Russia” clause, which can be accessed here, that suggests the inclusion of the following undertakings by the non-EU counterparty:

• Not sell, export or re-export, directly or indirectly, to the Russian Federation or for use in the Russian Federation any goods supplied under or in connection with this Agreement that fall under the scope of Article 12(g)
• To ensure that the purpose of the “No-Russia” clause is not frustrated by any third parties further down the commercial chain. This should include potential re-sellers or sub-lessees
• Set up and maintain an adequate monitoring mechanism to detect conduct by any third parties further down the commercial chain, that would frustrate the “No-Russia” clause
• To inform the exporter of any potential breaches of the “No-Russia” clause and to provide any relevant information concerning compliance with the “No-Russia” clause

As a precautionary measure, any EU-based aircraft lessor/owner should review its contracts for sale, lease, supply, transfer, and export of aircraft/aircraft parts to non-EU counterparties (excluding Partner Countries) to ensure that its sanctions and/or compliance provisions meet the requirements of Article 12(g). Any sale, conditional sale, transfer, lease, sub-lease, wet-lease, or charter would fall under the ambit of Article 12(g). If necessary, the existing provisions in the contracts should be amended to comply with Article 12(g)’s requirements.

PRACTICAL NOTE

The requirements of Article 12(g) undoubtedly add significant compliance responsibility for lessors and airlines alike. From a practical perspective, lessors should be kept abreast of the items that are prohibited for supply to Russia as Article 12(g) only applies to a specific set of sensitive items. As the Russian operations in Ukraine enter a third year, the list of restricted export items may eventually expand. As part of compliance due diligence, it may be prudent for the “No Russia” clause to have blanket coverage over all sanction items.

HOW WE CAN HELP

Given the firm’s breadth of experience with the ongoing Russian conflict, Morgan Lewis is well positioned to assist in supporting lessors with their exposure as a result of this legislative change. To learn more about this offering or discuss any specific questions, please reach out to the authors or your Morgan Lewis contacts.