The ongoing legal saga: Court bans Finland’s Wartsila from suing a Russian plant abroad

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A court in St. Petersburg has forbidden the Finnish company, Wartsila, from pursuing or continuing arbitration proceedings abroad against a Russian plant. This decision follows the court’s earlier rejection of Baltic Plant’s €7.6 million claim against Wartsila for non-compliance with six independent guarantees.

Background facts

The guarantees were related to a contract with the Russian Federal Unitary Enterprise “Atomflot” for the construction of icebreakers. Although initially dismissed, the 13th Arbitrazh Court of Appeal reinstated the case, emphasizing the impact of EU sanctions on a Russian entity involved in international commercial arbitration.

In a surprising twist, the court ruled in favor of Wartsila, asserting that the Finnish entity, being a legal entity registered in an EU member country, could not legally fulfill the claim due to Baltic Plant’s EU sanctions status.

Injunction procedings

On February 20, the Arbitrazh Court of St. Petersburg and the Leningrad Region ruled in favor of the Baltic Plant, prohibiting the Finnish engineering company Wartsila from initiating or continuing arbitration proceedings with the Russian enterprise at the Arbitration Institute of the Finnish Chamber of Commerce (Case No. A56-8866/2024):

“In the context of the current sanctions regime in Finland against a Russian entity, the court agrees that Wartsila Oyj Abp is placed in a preferential position compared to the Russian entity in the event of a dispute being heard in a foreign court.

This is because, under the existing sanctions, the ability of the Russian entity to protect its rights and economic interests is significantly restricted. In effect, the defense of the rights and interests of the Russian legal entity can currently only be carried out within the territory and jurisdiction of the Russian Federation.”

Previous proceedings: Acknowledging Western sanctions court ruled against the Baltic Shipyard

Earlier, the same court dismissed the Baltic Plant’s €7.6 million claim against the Finnish engineering company, a debt for non-performance of obligations under six independent guarantees. The Russian plant had contracted with Wartsila to supply equipment for a project with the Federal State Unitary Enterprise “Atomflot.” Although Wartsila issued independent guarantees for the return of advance payments, it failed to fulfill its obligations.

Initially, the court halted proceedings on the claim, citing an arbitration clause. The first instance rejected the Baltic Plant’s reference to EU sanctions as evidence of the exclusivity of Russian court jurisdiction, stating that the EU does not aim for the “complete cessation of all economic and other relations between countries.” However, the 13th Appellate Arbitrazh Court later overturned the decision and remanded the dispute to the first instance.

On February 14 the first instance ruled that Wartsila could not fulfill its guarantee obligations since the plaintiff was under sanctions, and the respondent was a foreign legal entity. The respondent will be criminally liable if it makes a payment under the guarantees in favor of the claimant.

This judgment was an extremely rare example of a Russian court openly acknowledging and respecting Western sanctions. A positive development since Russian courts have established a consistent practice asserting that foreign sanctions contradict the public order of Russia and should not be applied. In this case however the Russian court invoked the argument that the contract between the parties is subject to Finnish substantive law. As a result, the court concluded that EU sanctions are part of Finland’s legal system and, therefore, should be applicable in a dispute involving a Russian company. Considering itself bound by foreign law, the court ruled against the Baltic Shipyard.

Disputes with Wartsila
In May 2023, the same court ordered Wartsila to pay €5.1 million to the Baltic Plant for non-delivery of equipment due to EU sanctions (Case No. A56-58393/2022). The legality of this decision was later confirmed by the appeal and the district court. On February 16, Wartsila filed a complaint with the Supreme Court. The question of its transfer to the economic collegium has not yet been resolved.

Various enterprises within the United Shipbuilding Corporation (OSK) including the Baltic Shipyard, Admiralty Shipyards, and Northern Shipyard, are engaged in disputes with Wartsila:

In September 2023, Admiralty Shipyards successfully claimed €2.37 million from Wartsila Solutions Oy for unreimbursed advance payments related to undelivered equipment for four ST-192 fishing trawlers. Contract terms were agreed upon in September 2021, but by March 2022, Wartsila unilaterally suspended its obligations due to EU sanctions against Russia. Six months later, Admiralty Shipyards terminated both contracts and demanded a refund, which Wartsila did not fulfill. The Finnish company attempted to appeal the decision in the appellate court, but in January, the 13th Arbitration Appellate Court upheld the ruling.

Northern Shipyard is also seeking to recover an excessive advance payment from Wartsila Solutions Oy, amounting to €3.8 million. In August 2023, the Arbitrazh Court of St. Petersburg and the Leningrad Region accepted the application for consideration, with the next hearing scheduled for May 2024.