The global political situation has tightened recently, which may lead to new or more severe sanctions between the Russian Federation and western nations. At this point, companies should take sanctions into consideration in their contractual relationships. This is because sanctions may directly or indirectly affect the availability of materials, supplies and energy.
Various types of contracts are vulnerable to sanctions. In subcontracting chains, the risks escalate. Sanctions can have direct or indirect impacts. For example, if countries suddenly restrict the export or import of natural gas and other fuels, companies in the energy sector or in various branches of the industry will have difficulties in fulfilling their obligations, and so will their subcontractors.
Force Majeure in International Agreements
International agreements typically include clauses on force majeure, or insurmountable obstacles. The purpose of such conditions is to limit the parties' liability for sudden and unforeseeable events that are beyond their sphere of influence. The essential characteristic of a force majeure is that the parties do not have control over its beginning and ending, nor can they change the situation.
In other words, a force majeure situation means that an external factor makes it impossible to fulfil a contractual obligation.
In the light of general contract law principles, an abrupt scarcity of goods or energy may constitute a force majeure even when the agreement does not contain separate provisions on it. Usually, the party facing the obstacle is entitled to, for example, an extension. However, the party also has an obligation to take action to counter the force majeure.
Legal systems can differ considerably as to when the force majeure rule is applicable. Consequently, the impacts of the law governing the agreement must be assessed as part of the whole. For example, under Russian law, the absence of commodities may not necessarily be considered as a force majeure.
Economic Sanctions as an Obstacle for Performance
Typically, agreements define force majeure by listing examples. This is completed with terms that set out the legal position of the parties in force majeure cases. In other words, the practice is to include in the agreement potential obstacles for performance that the parties are aware of and that may entitle them to deviate from the fulfilment of their obligations.
If a lack of materials, goods or energy due to international sanctions is not included in the definition of a force majeure, it can lead to difficult problems in interpretation if one of the parties cannot fulfil its obligations because of unforeseen economic sanctions imposed by politicians.
If the force majeure listing is exhaustive and does not include an exception for economic sanctions, the question whether sanctions can be accepted as an obstacle for performance must be assessed case by case. This means that the alleged obstacle is compared against the clause in the agreement. The result depends on various factors. For example, each jurisdiction has its own principles as to what can be considered reasonable, and this may affect the acceptability of sanctions as an obstacle for performance.
When defining a force majeure, it is worthwhile to go into the details. In fact, deviations from the normal duty of performance are interpreted narrowly. For example, in a case in the United States, it was deemed that changes in federal financial and fiscal policy did not constitute a force majeure even though 'acts of Government' had been included in the definition of force majeure in the agreement.
Disagreements on the interpretation of contractual clauses are ultimately settled in dispute resolution proceedings, which are costly and time-consuming. Companies should counter this risk in advance by using appropriate contract law tools.
But there is another reason why political and economic sanctions are ambiguous in terms of their interpretation in contract law. Compared to fire, flood or other obstacles for performance that are usually considered as force majeure, sanctions are different because, in case of prolonged political tension, it may be possible to predict future sanctions or their entry into force. In such cases, the parties may become liable to prevent or mitigate the impacts of sanctions in advance, for example by looking for alternative sourcing channels.
Include Political and Economic Sanctions in Force Majeure Clauses
To avoid uncertainty and manage contractual risks, companies should review their existing agreements – at least the essential ones – and try to anticipate future developments. This is especially true for companies whose operations, trade relations or industry would be directly or indirectly put at risk by tightening sanctions.
In the case of supply agreements, project agreements and other long-term contractual relationships, it is particularly important to discuss the impact of sanctions with contractual partners and, if necessary, complement the agreement. In turn, when forming new contractual relationships that may be exposed to risks related to sanctions, the parties should specifically agree on whether political and economic sanctions constitute a force majeure.
The force majeure clause serves as a safety mechanism to reduce the risk of unpredicted delays and costs. The contracting parties may separately agree that if a country restricts trade, the parties must find a replacement supply channel as quickly and efficiently as possible.
To maintain balance between the parties, agreements can also include price adjustment mechanisms. They allow the parties to account for changes in the supply channel in advance where such change would materially increase costs for one of them.
Contracting parties should also review their insurance cover carefully. For example, it is important to note that 'all risk' insurance does not normally cover damage suffered by a purchaser due to a delay.