EU sanctions update for the aviation sector: No re-export to Russia clause

The European Commission has recently issued FAQ Guidance (“Guidance”) on the “no re-export to Russia” clause obligation which was introduced on 18 December 2023 as part of the 12th sanctions package against Russia. This is a response to the broadly drafted Article 12g (“Article 12g”) of Council Regulation 833/2014 (“Regulation”). 

In this article we outline who this concerns in the aviation sector, what they need to be aware of, when action is needed and how to take that action.

Who?

Article 12g imposes a legal obligation on EU based aircraft lessors, airlines and manufacturers to ensure that any contracts with a third-country counterparty will need to include a “no re-export to Russia” clause in relevant contracts (see ‘What?’, below).  

A third-country counterparty is any person or entity from outside the EU unless it is a person or entity from a partner country as listed in Annex VIII of the Regulation.  As of today’s date, those Annex VIII partner countries are Australia, Canada, Japan, New Zealand, Norway, South Korea, Switzerland, the  United Kingdom and the United States of America. 

Parties should be mindful of any sale structures where the seller is an EU entity and the buyer is a third-country counterparty even if those structures provide for title transfer to a buyer nominee which is an EU entity.  If the buyer is a third-country counterparty then a “no re-export to Russia” clause would need to be included as it is the buyer which is the primary obligor for performance under the sale agreement, not the buyer nominee.

What?

Article 12g is concerned with contracts relating to the export, sale, supply and/or transfer of aircraft, engines or parts and, as such, EU lessors and sellers should be aware that this will include both new and existing aircraft sale agreements or lease agreements.  It will also include lease agreements which would otherwise have terminated prior to 20 December 2024 but which are extended beyond such date by way of  lease extension or novation; for such extended leases whether there is a requirement to include a “no re-export to Russia” clause should be considered when those extensions or novations are being negotiated.

It is likely that many existing leases will already include sanctions provisions and/or prohibitions on subleasing which satisfy the criteria required by Article 12g, however these provisions should be assessed in light of the risk profile of the third-country counterparty (the Guidance indicates that the template clause provided, and discussed further below, is most likely to be required in respect of  “jurisdictions seen as posing a high risk of circumvention” which indicates that not all third-countries are created equal when it comes to the likelihood of action to circumvent sanctions provisions).

When?

On and from 20 March 2024, a “no re-export to Russia” clause must be included in any new contracts for the export, sale, supply and/or transfer of aircraft, engines or parts from an EU entity to a third-country counterparty.  

In addition:

• for contracts entered into on or after 19 December 2023 and which are ongoing as of 20 March 2024, the deadline to include a “no re-export to Russia” clause is 20 March 2024; and
  
  
• for contracts entered into before 19 December 2023, the deadline to include such a clause is 20 December 2024 if those contracts remain ongoing on such date. 

How?

The Guidance provides template language for a “no re-export to Russia” clause which forms a good starting point for further negotiation by the parties.  It is clear that the parties are free to choose the appropriate wording for the “no re-export to Russia” clause provided that the final language fulfils the requirements of Article 12g.

A key element of Article 12g is that the “no re-export to Russia” clause must include provision for “adequate remedies” for any breach of such clause.  Whilst it remains to be seen what is considered as adequate, the Guidance provides that the remedies should operate to deter third-country counterparties from any breaches and indicates that appropriate remedies could include termination of the contract (and we assume, in a leasing context, the termination of the leasing) and the payment of a penalty.

Of course, English law has its own rules around penalty provisions so care must be taken that any proposed penalty does not fall foul of those restrictions making it unenforceable in and of itself and, therefore, entirely inadequate.

One option could be that the “no re-export to Russia” clause provides for appropriate indemnities in the event of a breach by the third-country counterparty, such that the breaching counterparty will be required to indemnify the lessor/seller for the full cost of any enforcement penalties imposed as a result of their breach and for any other related losses. 

Article 12g also imposes an obligation on the EU entity to inform their national competent authority as soon as they become aware of a breach or circumvention of a “no re-export to Russia” clause.  Other than this reporting obligation, there are no consequences applicable to the EU entity for a breach by its third-country counterparty although we would anticipate there may be scrutiny on the EU entity’s ability to enforce its adequate remedy.

Whilst it is too early to see a ‘market standard’ clause, we are seeing third-country counterparties pay close attention to and negotiate these clauses carefully, particularly in respect of the remedies element.

EU entities need to carefully consider their existing agreements with third-country counterparties to ensure they are amended where needed. As to the consequences of non-compliance, individual EU Member States are required to lay down the rules on penalties which become applicable to exporters (e.g., sellers or lessors) who fail to include the required clause when needed.  These penalties must be effective, proportionate and dissuasive. EU entities entering into relevant contracts with third-country counterparties should therefore consider the precise penalties that are applicable to them by reference to the relevant Member State’s laws concerned.

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Please don’t hesitate to contact the authors of this article, Leo Fattorini, Hannah Moran-Ellis and Carey Tang, if you would find it helpful to discuss this further.