Russia Sanctions and the Impact on Contracts – The Force Majeure Clause

Sanctions

By Rooney Nimmo Partner Tim Davis

The sanctions imposed by the US, UK, EU, Japan, and others on Russia in response to the invasion of Ukraine have caused many businesses to pause operations or withdraw completely – here’s the latest list. As a result, companies are closely reviewing their rights and obligations under contracts signed with Russian or Ukrainian parties and whether they can utilize a force majeure clause if their agreement contains one.

A force majeure clause typically excuses one or both parties from the performance of the contract in some way following the occurrence of certain events. The underlying principle is that on the occurrence of certain events outside a party’s control, that party is excused from, or entitled to suspend performance of all, or part of, its obligations. Accordingly, a company affected by the Russian sanctions must determine whether its contracts include force majeure provisions and whether the Russian sanctions are an event that excuses full or delayed performance under the contract.

Our article about force majeure during the COVID-19 pandemic pointed out that it is essential to determine which types of circumstances will be covered by the force majeure clause. That may seem like an impossible task. However, typical provisions cover natural disasters like hurricanes, floods, earthquakes, and weather disturbances (sometimes referred to as “acts of God”). Less commonly covered events may include war, terrorism, civil disorder, labor strikes or disruptions, fire or disease, or medical epidemics or outbreaks.

War and sanctions

As a global company, it may be likely that your force majeure clause refers to war, but it could be an issue in the case of Russia as it never officially declared war on Ukraine. This could affect whether the term war would be sufficient when broader words such as conflict or hostilities would be more appropriate. Of course, the Ukrainian government has stated that Russia is engaged in a war against Ukraine. Much will depend on defining the word “war” and whether a court will look at the totality of the circumstances.

The burden of economic sanctions is an even more complex issue. It could be less likely that sanctions are specifically included as a force majeure event. If they are, the definition of sanctions in the contract and the sanctions’ impact on the parties will be vital in determining whether a force majeure clause can be implemented.

If sanctions are not explicitly mentioned as a force majeure event, a broad definition of war, hostilities, or conflict could cover the consequences of sanctions. Also, consideration will need to be given as to whether your contract includes an act of government as a force majeure event and the extent of the definition of this event in the contract.

Disruption to your supply chain may also be either specifically covered or covered by more general force majeure language commonly found in contracts.

Many companies had to pause operations to ensure they were not violating the sanctions imposed on Russia. In contrast, others may have a philosophical objection to Russia’s aggression and chose to leave the country. Your counterparty may consider whether your inability to perform is due to the conflict or other reasons.

If your contract does not contain a force majeure clause or your clause is too constrained to be useful, all may not be lost since the legal doctrine of frustration or the defense of illegality may assist you.

Frustration and Illegality

A contract is considered frustrated when the law recognizes that without default of either party, a contract can’t be performed. Instead of temporarily stopping a contract (like force majeure usually does), frustration discharges a contract. If a sufficiently material event strikes at the heart of the contract, then it cannot be performed.  A contract is dismissed if its performance becomes illegal, as would be the case for many companies under the imposed sanctions, making it impossible to perform.  A good example is Russia being barred from the SWIFT global payments system, which would make it impossible to complete necessary financial obligations within a contract.

Each case would need to be considered on its own merits. The availability of the principle of frustration or the defense of illegality to assist in any case would depend on the application of an extensive body of case law and not on the interpretation of the words in the contract.

If you have any questions or need help reviewing your contracts and revising the force majeure clauses, please get in touch here. We would be delighted to help.

 

 

 

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