When sanctions preclude payment or performance of a contract: Key points to consider

The many sanctions against Russian businesses imposed by governments across the globe have, by design, prevented numerous companies from paying for goods or services that had previously been contractually agreed. Others have taken similar decisions not based on the requirements of sanctions laws and regulations, but through practical, reputational or other concerns. 

In many cases, companies are therefore examining any civil liability that may flow from the requirement (or decision) not to meet those contractual obligations. This analysis can be complex and nuanced. Set out below are some of the key factors to consider when assessing that potential civil liability. 

Contractual considerations

A critical first step is to analyse what rights exist under the contract. Key considerations include:

• What law governs the contract? this may sound obvious, but where a particular contractual agreement includes numerous contracts or interconnected arrangements, it may not be. Do not assume the answer to this without checking! And even then, the answer can be complex.
• What is your choice of forum? this can also have a significant impact on the eventual dispute and arguments that may be run (or may succeed). A one-solution-fits-all approach cannot be taken.
• Careful analysis of the relevant contractual terms: depending on the governing law, do not assume that the only relevant information as to the meaning of a particular clause is to be found in that clause itself. Often there is significant ambiguity within the drafting of clauses – particularly when tested in unforeseen and potentially litigious situations – and, depending on the governing law, other aspects of contract (or, sometimes, the factual matrix) can provide clues to the proper interpretation. See in particular below in relation to force majeure provisions.
• What do the force majeure, MAC clauses and/or change in law provisions say: it is important to remember that in common law jurisdictions such as England, the scope of force majeure relief will be determined by the express provisions of the contract. Therefore, for force majeure provisions with a list of specific events, any “catch-all” wording such as “any other unforeseeable event” may only be interpreted in light of the terms that have been expressly included in the contract. And even if an event such as “war” is expressly stated, it might not be the case that this extinguishes liability all together, or at all, in particular if it is not the “war” itself that prevents performance, but the impact of the war (i.e. the sanctions) which legally prevents performance. In civil law jurisdictions, such as France, force majeure relief may also be available under the civil code, typically where the event is: (i) not the responsibility of either party, (ii) unforeseeable, and (iii) incapable of being overcome. Therefore, a different analysis would be needed dependent on the law of the contract.
• Important considerations before relying on force majeure:
  • Does the force majeure provision excuse all performance or are payment obligations carved out?
  • Are you required to mitigate the effect of the breach of contract? For instance, if payment is precluded by sanctions, should an application be made for a licence for permission to pay?
  • Can you engage an alternative contractor/supplier, who is not sanctioned?
  • Did the sanctions cause the failure to perform? Or were there existing or alternative reasons for failure to perform?
  • Have all contractual conditions precedent and notice provisions been followed?
  • When will the event of force majeure be over?
  • What are the timescales and notice requirements?
    
• Are there alternative contractual remedies? does the contract have suspension rights, such that the parties can suspend obligations for the duration of the sanctioned period, and would this be a viable commercial solution in any event, or would it be preferable to seek to terminate?

Non-contractual considerations 

• Sanctions compliance: consider whether applicable sanctions restrict or prohibit termination of agreements in addition to other dealings with a sanctioned party.
• Non-contractual remedies: depending on the law of the contract, it might be that non-contractual remedies apply, such as frustration/ impossibility, where the contractual obligation has become incapable of being performed, or relief from obligations due to unforeseen hardship. 
• Strategic considerations beyond strict compliance with contractual notice provisions: there are broader strategic considerations when terminating or claiming force majeure beyond strict compliance with the contractual notice provisions. While in some cases it may be necessary to provide detailed justification alongside the relevant notice, be cautious as it risks being a hostage to fortune if challenged. Mis-steps in drafting notices can lead to significant issues down the line.
• Legislative relief: there may be provisions under national legislation (such as under EU law) which relieve parties from any civil liability for compliance with sanctions legislation.
• Russian countermeasures: it may be necessary to consider the ways in which Russian counterparties may protect their own interests and seek to rely on either the provisions of the contract, or non-contractual remedies to their own advantage. For instance, could they seek to rely on force majeure themselves?
• Dispute resolution procedures: consideration will need to be given to whether (where arbitration is the dispute resolution mechanism) arbitral institutions can handle cases involving sanctioned parties, for instance whether it has a relevant licence, and if not, what alternatives are available.  

Careful consideration is required

Terminating a contract without due basis risks being characterised as a repudiatory breach or otherwise as an unlawful termination. This can attract significant civil liability, and costly consequences. 

There are clearly a range of different considerations to bear in mind, and it might not be possible to consider them all in depth in a fast-moving situation. However, it is important so far as possible to understand the range of considerations, and the potential implications, before taking significant contractual steps, such as non-payment or termination.