WIND

Who wins in Russian sanctions dispute?

Fortum has launched a €200m arbitration claim against Vestas over orders in Russia that Vestas said it couldn’t fulfil due to EU sanctions. But this very public dispute has broader lessons for companies.

RICHARD HEAP

April 22, 2023

  • Fortum has launched a €200m arbitration claim against Vestas
  • Vestas said EU sanctions on Russia meant it couldn’t fulfil order
  • Case will be heard by international arbitration court in Sweden

Who wins from the €200m arbitration claim launched by Fortum against Vestas last week? It’s a week since the dispute hit the headlines and we’re still none the wiser.

Let’s start by separating the alleged facts of the case from the rhetoric.
 

What happened?

The claim relates to payments associated with planned wind farms in Russia, which were derailed by the country’s invasion of Ukraine. The projects have not been able to proceed due to the knock-on effects of Russia’s invasion of Ukraine in 2022.

On 12th April, Vestas, announced that Fortum had started arbitration proceedings in the International Chamber of Commerce in Sweden that could be worth over €200m.

Fortum claims Vestas has breached contracts related to the supply of 50 turbines for wind projects that the utility was planning in Russia. Fortum said the two companies agreed a contract before Russia’s invasion of Ukraine, and that it made big advance payments to Vestas. However, Fortum said Vestas hasn’t delivered on its contractual obligations, and is also refusing to repay the advance payments to Fortum.

“Fortum engaged in multiple discussions and negotiations with Vestas during several months with the goal to find a mutually acceptable solution. As the negotiations were not successful, Fortum was left with no other option than to resort to arbitration,” the utility said in its public statement about the proceedings on 12th April.

Vestas disputes these claims. The Danish turbine maker said it has been prevented from delivering and installing wind turbines ordered by Fortum in Russia due to the economic sanctions and export control regulations levied by the European Union on Russia following the Ukraine invasion. Vestas said it was within its rights to end the contracts with Fortum because of clauses in the contract related to the imposition of international sanctions, with specific reference to sanctions against Russia.

“These clauses explicitly included sanctions against Russia,” Vestas said in its public statement on 12th April. “After months of negotiation between the parties in an effort to find an agreement, Vestas terminated the contracts in late June 2022.”

Both sides appear to have valid arguments and, while we are not arbitration lawyers, it appears this should be a relatively easy case for the ICC. Either the firms agreed to deals that would let Vestas terminate and keep the advance payments, or they didn’t. This would have generated headlines but journalists would quickly have moved on.
 

Public statements

However, the case may yet be complicated by the rhetoric that surrounds it.

Henrik Andersen, president and CEO of Vestas, came out with a strong statement: “We strongly believe the arbitration to be without merit, and we are astonished and dismayed a state-owned company from a fellow EU country would openly question the sanctions against Russia and thereby the unity of EU countries. Member states and companies were aware from the outset that the sanctions would have financial consequences, also outside of Russia, and questioning whether sanctions apply can only benefit the interests of Russia and its sympathisers,” he said.

Only he and Vestas will know the intention of making such a statement, but it seems designed to encourage politicians in Finland to apply political pressure on Fortum to ditch the arbitration case. The suggestion that Fortum is damaging EU sanctions on Russia and helping Russian sympathisers can only inflame the situation, and ensure this argument gains publicity beyond what a normal contractual spat should merit.

This led to a strong reaction from Fortum, which took issue with the “false claims… that it flouted sanctions against Russia”. Nora Steiner-Forsberg, general counsel at Fortum, said she believed that arbitration at the ICC was the “fair way to settle this contractual dispute based on the facts”.

She added: “We are at a loss to understand why our long-standing business partner Vestas would suddenly question our adherence to EU sanctions in this case. There is absolutely no doubt about Fortum’s commitment to upholding and defending EU laws, EU sanctions and ultimately EU unity.”

In addition, she said Fortum had complied with all applicable laws, including the EU’s sanctions against Russia, and has a sanctions compliance programme. The firm also said it has been undertaking a controlled exit from Russia since May 2022.

Andersen has the right to express his views and yet, from a communications perspective, there seems little to gain from sharing them in such a public forum. Vestas may have been seeking to gain the moral high ground and apply political pressure, but it is an approach that also guarantees to make a front-page story of an arbitration case that would otherwise have passed with little more than raised eyebrows.

Other businesses would be well-advised to note some broader principles too.

The pressure on energy companies, especially those with operations in Russia, has been immense over the last year – but we cannot recall any firm in Europe’s wind industry publicly questioning the need for EU sanctions. Companies should be careful about making such allegations as they can only inflame otherwise run-of-the-mill disputes, and are also potentially libellous if they do reputational damage to the alleged sanction-infringers.

For both sides in this case, and in the name of ongoing EU unity against Russian aggression, we must hope that calm heads prevail.

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