If hostilities break out between Russia and Ukraine, it is likely that trade sanctions will be imposed on Russia. This briefing examines whether the non-performance of contractual obligations due to the imposition of trade sanctions can be classified as ‘force majeure’ and key points for businesses to consider.
Contractual obligations
It is inevitable that some contracting parties will look to the imposition of trade sanctions to justify non-performance of contractual obligations. Justification is likely to be placed on what lawyers call ‘force majeure’. In broad terms, where a force majeure event occurs, then, subject to other terms of the contract, the performance of the contract will be suspended while the force majeure event continues.
Force majeure is usually treated as meaning the occurrence of an event outside of the control of the parties that prevents a party from fulfilling a contract. It is a provision often found in commercial contracts although as a matter of English law such a clause will not be implied – it must be expressly included in the contract. How it works will depend on:
1. The terms of the force majeure clause itself; and
2. The circumstances which it is said have resulted from the occurrence of the force majeure event.
The force majeure clause
“War”, “strike”, and “riot” are often listed in a force majeure clause. Their meanings are quite clear. Whilst in the case of a Russia – Ukraine conflict, there might be a “war” coming; within the terms of a force majeure clause, it could well be the case that it is the imposition of sanctions which results in non-performance of the contract.
As such would the imposition of trade sanctions come within force majeure? Will the answer to that question vary depending on the nature and extent of the sanctions themselves? What if the sanctions are imposed by the United States but are not reflected in English law?
Whether or not the imposition of trade sanctions would come within a force majeure clause will vary depending on the words used in the clause, the subject matter of the contract, and the event in question.
In contrast, it should be borne in mind that the sanctions themselves could make performance of the contract illegal. If so, then it may be possible to claim that the contract has been frustrated.
The circumstances
If the imposition of trade sanctions does come within the force majeure clause, can it be said that the circumstances flowing from it justify non-fulfilment of the particular contractual obligation? For example:
- Given the timeframe that has elapsed since the likelihood of such hostilities became public, can it be said that an event is out of the control of the parties in circumstances where the parties could have taken steps to mitigate its effects by now?
- Could it be argued that a supplier should have already lined up an alternative source of supply, foreseeing that supply lines could be impacted by sanctions?
- An event of force majeure may be outside the control of the parties, whether or not it was foreseeable.
The issues
Relying on force majeure to justify your own non-performance?
A party considering relying on force majeure to justify non-performance should give thought as to how it will be possible to demonstrate that it is legally or physically impossible for it to perform its contractual obligations, and not simply unprofitable or more difficult to do so.
Is your counterparty looking to rely on force majeure?
If a party is concerned that there is a risk that its counterparty may seek to rely on force majeure (for example, due to the location or industry that the parties are in) it may want to consider ways in which its counterparty can continue to operate. In doing so it may make it difficult for the counterparty to demonstrate that its obligations under the contract have become impossible.
Usually, the force majeure clause will provide that the occurrence of a force majeure event suspends the performance of the contract for the duration of the force majeure event.
It follows that it is possible to envisage, for example, that whilst an instalment of a production run might be affected, other production runs will not be. As such, even if reliance can be placed upon the occurrence of a force majeure event, this may provide only temporary or limited relief to a party looking to exit the contract. However, it is also likely that the force majeure clause provides for a right to terminate the agreement if the force majeure event continues past a certain period of time.
Take home points
Whether it is a delay in goods being manufactured, travel plans disrupted, or the signing of a contract being delayed, the consequences of the imposition of trade sanctions could be considerable.
Below are some key points to consider, now and in the coming weeks, in relation to the imposition of trade sanctions, force majeure and your business:
1. Check your contracts that you consider may be impacted by the imposition of trade sanctions so that you can readily point to the rights and obligations under the contract if necessary:
- Is there a force majeure clause in the contract?
- If so, would the imposition of trade sanctions come within the definition of a force majeure event?
- Is there an obligation to give notice if a force majeure event occurs?
- Is there a maximum period during which obligations of the parties are suspended? Does this apply to both party’s obligations or only the party whose actions under the contract are impacted by the trade sanctions?
- Is there a right to give notice to terminate the agreement if the force majeure event continues for a certain period? Is this a right for both parties, or only the party that is no longer receiving the benefit of its counterparty’s performance under the contract?
2. Check whether your contracts provide for certain payments to be made to you, or by you, if there is a breach of certain performance obligations. However, keep in mind the risk of such payments being categorised as unenforceable penalty payments under English law!
3. If you receive a notice from your counterparty that it is seeking to rely on force majeure, or, you give such notice, you should consider what steps you can take to mitigate your loss.
4. If you and your counterparty agree that the imposition of trade sanctions constitutes a force majeure event, whilst this may offer you an opportunity to bring an unfavourable agreement to an end ahead of schedule, be careful what you wish for. Consider what your back-up plan is:
- Do you have another counterparty in mind that can step into the contract at short notice?
- Do you need to conduct an audit on your new counterparty – if so, how long will this take?
- What onwards contractual obligations are you tied to that could be impacted by a change in your contractual relations?
Contact us
If you have any questions about these issues in relation to your own organisation, please contact a member of the team or speak with your usual Fox Williams contact.
Click here to read more about UK sanctions in relation to Russia.
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