City council to reverse decision to break gas contract with previously Russian-owned supplier

Portsmouth City Council is set to reverse a decision to break its contract with a gas supplier after being told the company’s ownership had changed from Russian to German.

It was also warned that a termination payment or damages - both as yet uncalculated - could arise if it broke the contract.

The council in March resolved to end the contract on 30 June, in line with a notice date in the contract conditions, because of sanctions imposed over Russia’s invasion of Ukraine.

But a report due to go to the cabinet next week said Gazprom Marketing and Trading was now owned by Gazprom Germania and was not directly buying Russian gas.

Gazprom Germania was, it said, under the control of the German Federal Network Agency, the German government having taken over the original Russian company. 

The report said: “Gazprom Germania is not directly placing orders for Russian gas and is prevented from doing so, should it wish to, by Russian sanctions.”

It said the cabinet should reverse its decision both because of the change of ownership and legal and financial issues.

If the cabinet still wanted to end the contract this month Portsmouth would face a termination payment of as yet unknown size.

The report said: “Legal cannot quantify the costs of termination payment at this stage due to the basis of the reality of the unknown factors such as Gazprom's loss of costs.

“Negotiations as to such costs would begin with the contractor via legal upon issuing of the notice.”

Any decision to terminate the contract outside the annual anniversary notice date would be deemed wrongful termination resulting in liability for damages for breach of contract based on common law principles.

“This would not be regulated or limited by the contract,” the report said. “Legal cannot comment or assess the potential quantum at this stage (due to this being based on common law statute) but it is highly likely to exceed the termination payment liability under the break clause.”

German law permitted the government to take control of Gazprom Germania for six months but this could be extended indefinitely, and “it is considered extremely unlikely that control would be ceded back to Russia”, the report noted.

Mark Smulian