On-demand payment bond obligations suspended by sanctions (LLC Eurochem North-West-2 and another company v Société Générale S.A. and other companies)
Banking & Finance analysis: This case involved an action by the owner of a construction project to enforce the obligations of two banks under on-demand bonds. The banks issued the bonds to secure performance of a contractor’s obligations under a construction contract to build a fertiliser plant in Russia. The contractor had suspended its services under the contract after the EU imposed sanctions against the ultimate beneficial owner of the construction project. The project owner terminated the construction contract and issued demands against the banks under the bonds. The banks refused to pay on the basis that EU sanctions prohibited payment. The court agreed that the banks were prohibited from making payments under the bonds, as those bonds had been frozen by applicable EU sanctions. In reaching its decision, the court relied heavily on the rule in Ralli Brothers and the determination of the place of performance of the bonds. In making its decision, the court determined that the place of performance of the bonds was in the jurisdiction of the relevant banks, rejecting the owner’s argument that the place of performance was Russia, where the owner’s account was located. Written by Robert Aulsebrook, senior counsel at Akin Gump LLP.