Following the Russian invasion of Ukraine, there will be many commercial and charitable entities who will need to consider the impact of sanctions on their contractual relationships.
This may not only be if a sanctioned entity is party to a contract but also where other parties might be impacted along their supply chain and therefore be unable to meet their contractual obligations.
The question arises as to what liability there may be for parties who cannot perform due to the impact of sanctions. In this article we consider whether sanctions are a potential "force majeure" event and whether contractual failure as a result of sanctions could mean that a contract is terminated on the basis of frustration.
In normal circumstances, commercial contracts will contain a "force majeure" clause which in general terms provides for a party affected by an unforeseen external event to escape liability for breach of contract. Ordinarily after a given time period the counterparty can terminate. Force majeure can include any circumstance not within a party's reasonable control and in many contracts the clause will specifically name trigger events including an “act of God”, act of terrorism, war, explosions, civil disturbance and rebellion. Some may even name imposition of sanctions. The clause will normally also determine the impact of those events on a party's ability to perform their obligations and set out the effect of such events on the contract.
So when imposition of sanctions is not specifically named in the contract, could this still be interpreted as force majeure? An "act of God" would generally relate to events due to natural causes without human intervention. In Transco plc v Stockport Metropolitan Borough Counsel [2003] UKHL 61 the Court endorsed case law dating from the 19th century that an act of God is an event which involves no human agency, is not realistically possible for a human to guard against, is directly and exclusively due to natural causes and could not have been prevented by any amount of foresight, pains and care. One could expect that imposition of sanctions would fall outside of this.
The Covid-19 case of Dwyer (UK Franchising) Ltd v Fredbar Ltd [2021] EWHC 1218 (Ch) found that the outbreak of Covid did constitute a force majeure event on the basis it was an unforeseeable circumstance beyond the control of the parties that prevented a party from performing its obligations under the contract.
In considering an event such as the Covid-19 outbreak against the imposition of sanctions, Russian sanctions may be less likely to be viewed as unforeseeable by the Court. Sanctions applied to some extent after the annexation of Crimea by Russia and there have been ongoing tensions between Russia and Ukraine since then, including in separatist areas. As a result, one could interpret sanctions against Russian entities as something which was foreseeable although the current raft of sanctions go much further than those put in place in 2014.
So there is certainly a possibility that sanctions, where not specifically named as a trigger event, could be found by the Court to satisfy force majeure but ultimately this will be down to the facts of the case and the drafting of any force majeure clause.
The recent judgment of MUR Shipping BV v RTI Ltd [2022] EWHC 467 (Comm) looked at a force majeure clause in the context of sanctions (albeit those which applied prior to 2019). The force majeure clause was subject to the affected party using reasonable endeavours to overcome the relevant event. In this case, the sanctions imposed meant that a party (a charterer of cargo) could not pay the other party (the shipowner) in US dollars as required by the contract. The Court found that reasonable endeavours would not extend to requiring the shipowner to accept payments in another currency (here Euros) which would mean a variation or non-performance of the contract. The clause was held to cover sanctions as it contained the wording "any rules or regulations of governments or any interference or acts or directions of governments" and "restrictions on monetary transfers and exchanges". This case may give some comfort to those who are contracted with a sanctioned party in that they may have stronger grounds to rely on the clause, though again this is subject to the drafting.
As for the issue of a disrupted supply chain and non-performance by third parties, this might involve more argument between the parties (and more risk that the Court may not find force majeure) as even if the supply chain fails due to sanctions, there is still a duty to mitigate and so there could be a dispute around actions that could be taken by the affected party so that they be able to meet their contractual obligations in whole or in part. This stems from considering whether the breach of the current contract is really beyond the affected party's reasonable control.
Frustration applies where force majeure cannot be relied upon and where performance has become impossible. An event of frustration would need to be entirely beyond what was contemplated by the parties when they entered into the contract, not be due to the fault of either party and render further performance impossible, illegal or make it radically different from that contemplated by the parties at the time of the contract. Illegality could apply to ongoing relationships with a sanctioned entity and in addition is it easy to imagine circumstances where performance of contractual obligations is no longer possible.
Frustration also normally requires the contract to be frustrated permanently. This may apply here on the basis that the depth of isolation we have already seen and continue to see of the Russian economy will carry on well into the future. It may be that the economy will only re-open to pre-invasion levels once there has been regime change in Russia and at present that is not on the horizon.
Parties will need to review their agreements carefully to see whether sanctions could potentially be relied upon as a reason for contractual failure. As the impact of sanctions widens and the conflict continues this may be a wide ranging issue that businesses and other entities will be dealing with more and more.
