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12th Package of EU Sanctions – The “No Russia Rule” and how this affects aviation contracts24 April 2024

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1.  The No Russia Rule – what is it?

The European Union (“EU”) adopted its 12th sanctions package (the “Sanctions Package”) against Russia on 18 December 2023 (through Council Regulation (EU) 2023/2878 of 18 December 2023 (the “New Regulation”) amending Regulation (EU) 833/2014 (the “Existing Regulation”)). The Sanctions Package is broad but there is one specific provision that will have far-reaching consequences for the drafting of aviation contracts, which is set out in full in Annex 1 to this note.

What is the No Russia Rule?

When selling, supplying, transferring or exporting certain goods to certain countries, exporters must, as of 20 March 2024, contractually prohibit re-exportation to Russia and re-exportation for use in Russia. The rule is aimed at restricting the re-export of the covered goods to Russia via other countries.

Is any aircraft equipment covered by the No Russia Rule?

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"When selling, supplying, transferring or exporting certain goods to certain countries, exporters must, as of 20 March 2024, contractually prohibit re-exportation to Russia and re-exportation for use in Russia."

Yes, aircraft, engines and parts will be covered by the No Russia Rule.

“Aircraft, spacecraft and parts thereof” are included in Annex XI of the Existing Regulation. Jet fuel is also covered in Annex XX of the Existing Regulation, as are certain aviation related navigational equipment under the new Annex XL to the Existing Regulation.

What countries are caught by the No Russia Rule?

The No Russia Rule will apply to the relevant supply/export contracts with all third countries, with the exception of partner countries.

Third countries – countries that are not members of the EU as well as a country or territory whose citizens do not enjoy the EU right to free movement (Iceland, Liechtenstein and Norway).

Partner countries – USA, Japan, UK, South Korea, Australia, Canada, New Zealand, Norway, Switzerland.

Which contracts are caught by the No Russia Rule?

All contracts in respect of the sale, supply, transfer or export of the goods mentioned above to the countries referenced above. These are likely to include:

  • operating leases (and equivalents);
  • financing leases (and equivalents) including where there is a purchase obligation/option;
  • sale agreements (aircraft trading and manufacturer contracts); and
  • maintenance and support agreements/parts supply agreements/GTAs (a supply of parts with title transfer arrangements likely included).

The legislation refers to “transferring” goods as well as supplying and exporting.

When does the No Russia Rule kick in?

For new contracts being entered into, as of 20 March 2024.

For existing contracts:

  • for all contracts concluded on or after 19 December 2023, as of 20 March 2024; and
  • for all contracts concluded before 19 December 2023, as of 20 December 2024 (unless the contract expires before that date).
What provisions need to be included in the relevant contracts to comply with the No Russia Rule?

A contractual prohibition on re-exportation of the relevant goods to Russia, and re-exportation of the relevant goods for use in Russia.

Adequate remedies in the event of a breach of the above contractual prohibitions. For lease agreements, this will likely be a termination event/event of default for breach, and for sale agreements, an entitlement to seek appropriate remedies. Note however that a penalty clause may be held to be unenforceable under English law (see the EU model clause referenced below).

Are there any other requirements on the exporter?

If the third country counterpart breaches any of the contractual prohibitions included in the relevant agreement, the exporter must inform the competent authority of the Member State where they are resident or established as soon as they become aware of the breach.

To whom do EU sanctions apply?

The above will only apply where EU sanctions bite on the exporter (which is quite broad). This may be the case in respect of:

  • any acts within the EU’s territory;
  • on board any aircraft or any vessel under the jurisdiction of a Member State;
  • to any person inside or outside the territory of the EU who is a national of a Member State;
  • to any legal person, entity or body, inside or outside the territory of the EU, which is incorporated or constituted under the laws of a Member State; and
  • to any legal person, entity or body in respect of any business done in whole or in part within the EU.
Is flying leased aircraft to and from (but not within) Russia prohibited as a result of this legislation?

It does not appear that this is the case. The EU has previously issued guidance that such operations are not “for use in Russia” and so likely should not be treated as a re-exportation to Russia or for use in Russia.

Has there been guidance from the EU on the No Russia Rule?

Yes, and this is attached at Annex 2 to this Note. The guidance includes a model clause.

"There are three elements of lease agreements to bear in mind – subleasing, sale of replaced engines and parts and leases with purchase options/obligations."

2.  Does the No Russia Rule apply to a transaction?

The diagram below can be used to ascertain whether the No Russia Rule applies to a transaction.

3.  What wording is sufficient to deal with the No Russia Rule legislation?

If it is considered that the No Russia Rule applies to a transaction, what wording could be included in (a) new leases/sale agreements; and (b) existing leases/sale agreements?

Suggestions for suitable wording include:

  • new sale agreements – include specific wording to cover the issue, see items 1 and 2 in the table below;
  • existing sale agreements – it should be considered whether sufficient wording has already been included. To the extent that the relevant sales under those agreements have not occurred by the relevant date (20 March 2024 or 20 December 2024, as the case may be), agreements may need to be amended to include specific wording to cover the issue, see items 1 and 2 in the table below;
  • new lease agreement – if the sanctions wording already intended to be used is sufficient, no further wording needs to be included. See the table below for examples as to what may or may not be considered sufficient; and
  • existing lease agreement – if the sanctions wording already used is considered sufficient, no further wording needs to be included. See the table below for what may or may not be considered sufficient.

Important Note:

  1. There are three elements of lease agreements to bear in mind – subleasing, sale of replaced engines and parts and leases with purchase options/obligations.
  2. The table below contains common formulations of sanctions coverage. This will not be comprehensive and other formulations may occur in contracts and will need to be considered carefully.
Potential wording included or to be included in a contractIs wording sufficient?
1The [Lessee/Buyer] shall 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 12g of Council Regulation (EU) No 833/2014.This is the gold standard wording, reflects the EU model clause and is likely to be sufficient to cover all lease elements if included together with an event of default for breach (preferably immediate without any grace periods).

It is also likely to be sufficient for sale agreements and for parts supply agreements. However, in respect of sale agreements, termination events may not be an adequate remedy for a sale agreement and so consider including reference to the ability for the Seller to seek appropriate remedies for breach, including an indemnity for any losses incurred by the Seller as a result of any breach (which may already be covered under existing indemnity clauses).
2Inclusion of a covenant stating that the Lessee/Buyer will comply with EU sanctions/Applicable Law (where that includes EU sanctions), or alternatively, rephrased to say that the Lessee/Buyer will not violate the same.If drafted generically or by reference to sanctions (including EU sanctions) applicable to the aircraft, engines and parts, this is likely to be sufficient to cover all lease elements if included with an event of default for breach (preferably immediate without any grace periods).

Similarly to point 1, it is also likely to be sufficient for sale agreements and parts supply agreements, subject to the caveats noted above re adequate remedies.

However, if reference is made only to sanctions laws “applicable to it” (i.e. to the Lessee or the Buyer), this may not be sufficient because the EU sanctions will not apply to the third country lessee/buyer.

If the Lessee/Buyer will not agree to complying with all EU sanctions, then item 1 above focusses on just the relevant EU sanctions for the No Russia Rule and so can be proposed as an alternative.
3Restrictions on subleasing the aircraft without the consent of the LessorThis is likely to be sufficient language to cover the subleasing element of a lease if included together with an event of default for breach (preferably immediate without any grace periods). Of course, there is an implication here that the Lessor will not consent to any subleasing to Russia otherwise it would put itself in breach of the requirement to include a prohibition.

However, wording equivalent to 1 or 2 above should still be included to cover sales of replaced engines and parts and any purchase obligations / options contained in the lease.
4Restrictions on subleasing the aircraft to sublessees incorporated in or based in a state, country or jurisdiction which is subject to EU sanctions (this could be to jurisdictions defined as Excluded Countries, Prohibited Countries or Restricted Countries).This is likely to be sufficient language to cover the subleasing element of a lease if included together with an event of default for breach (preferably immediate without any grace periods).

However, wording equivalent to 1 or 2 above should still be included to cover sales of replaced engines and parts and any purchase obligations/options contained in the lease.
5Restrictions on operating or using the aircraft in any manner contrary to applicable sanctions.The No Russia wording should cover export of the aircraft (i.e. subleasing, not just operation) and onwards treatment of replaced engines and parts, as well as any purchase options/obligations. Therefore, this wording on its own may not be sufficient and so wording equivalent to 1 or 2 above should still be included.
6Geographical restrictions – the Lessee shall not cause or permit the Aircraft to proceed to or remain at any location which is for the time being the subject of sanctions issued by…the European Union.The No Russia wording should cover export of the aircraft (i.e. subleasing, not location) and onwards treatment of replaced engines and parts, as well as any purchase options/obligations. Therefore, this wording on its own may not be sufficient and so wording equivalent to 1 or 2 above should still be included.
7The Lessee/Buyer will not do or omit to do anything in a manner that results in the Lessor/Seller being in contravention of its sanctions obligations/obligations under Applicable Law.The obligation of the Lessor/Seller under the No Russia Rule legislation is to include an obligation to prohibit the Lessee/Buyer from exporting to Russia. If the Lessee/Buyer then goes ahead and exports the aircraft or any part to Russia, this does not result in the Lessor/Seller breaching their EU obligations, because that obligation was merely to include a covenant.

Therefore, this wording may not be sufficient and so wording equivalent to 1 or 2 above should still be included.
8The Lessee will not cause or knowingly permit the Aircraft to fly to any airport or country, or operate in any country which would cause the Lessor to be in violation of any law applicable to it.Similar analysis as item 7.

This briefing note does not cover all issues relating to this matter and is not intended to provide legal or other advice.

If you require further information regarding any of these matters, please speak to your usual contact at WFW.

ANNEX 1

Article 12g Council Regulation (EU) 2023/2878 of 18 December 2023

The New Regulation adds a new Article 12(g) into the Existing Regulation which states the following:

  1. When selling, supplying, transferring or exporting to a third country, with the exception of partner countries listed in Annex VIII to this Regulation, goods or technology as listed in Annexes XI, XX and XXXV to this Regulation, common high priority items as listed in Annex XL to this Regulation, or firearms and ammunition as listed in Annex I to Regulation (EU) No 258/2012, exporters shall, as of 20 March 2024, contractually prohibit re-exportation to Russia and re-exportation for use in Russia.
  2. Paragraph 1 shall not apply to the execution of contracts concluded before 19 December 2023 until 20 December 2024 or until their expiry date, whichever is earlier.
  3. In application of paragraph 1, exporters shall ensure that the agreement with the third-country counterpart contains adequate remedies in the event of a breach of a contractual obligation concluded in accordance with paragraph 1.
  4. If the third-country counterpart breaches any of the contractual obligations concluded in accordance with paragraph 1, exporters shall inform the competent authority of the Member State where they are resident or established as soon as they become aware of the breach.
  5. Member States shall inform each other and the Commission of detected instances of a breach or circumvention of a contractual obligation concluded in accordance with paragraph 1.”

ANNEX 2

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