Since March 2014, the US and the EU have imposed a series of sanctions against predominantly Russian individuals and some corporate entities (“designated individuals” or “DIs”) in light of the recent events in the Crimean Peninsula. The most recent round of sanctions was issued by the EU pursuant to Council Implementing Regulation (EU) No.477/20141 against 13 individuals and two entities.
Whilst it is unclear whether there will be further rounds of sanctions relating to Russia, it may transpire that the sanctions currently in place lead to further and escalating sanctions being imposed in due course. These sanctions give rise to a number of questions, aside from the immediate effects of sanctions against DIs, for those individuals or companies who may have contractual relations with DIs or their businesses2.
In light of the sanctions imposed against DIs, companies should take care entering into any new engagement with a DI. However, the immediate effect of sanctions on pre-existing contractual relationships needs to be considered too. Indeed, the complexity and overlapping nature of various international, regional and national regimes renders the question of compliance with the sanctions a difficult task for those which are in contractual relations with DIs, or companies in which a DI is involved.
This Memorandum addresses whether international sanctions may give rise to a right, or opportunity, to companies or individuals, under English law, who are not themselves the subject of sanctions to terminate performance under a contract either through force majeure provisions or by reliance on the doctrine of frustration.
Can force majeure entitle a party to terminate a contract to comply with sanctions?
If drafted widely enough, a force majeure clause may entitle an innocent party to cease performing its pre-existing contractual obligations due to the potential of breaching sanctions if the contract were to be performed. A force majeure clause will typically excuse a party from performing its obligations in the event of war, riot, strike, or an „act of God‟ that renders the performance of the contract impossible. The clause, if drafted broadly enough may encompass the effects of sanctions. The scope of protection afforded by a force majeure clause is therefore a question of construction under the governing law of the contract.
In Arash Shipping Enterprises Co Ltd v Groupama Transport (2011)3 , the Court of Appeal in England held that an insurance company had validly terminated its marine insurance policy as a result of the introduction of EU Regulation 961/2010 imposing sanctions against Iran. The policy entitled the insurer by virtue of a force majeure clause to cancel the policy “where the Assured had exposed or may, in the opinion of the Insurer, expose the Insurer to the risk of being or becoming subject to any sanction4 ”. In this case, it was held that the clause was wide enough to cater for this sanctions imposed by the EU.
It is important to note that in contrast with civil law jurisdictions5 , no force majeure provision under English law will be implied in the absence of specific contractual provisions, and the extent to which the parties deal with unforeseen events will be defined in the contract between them. Thus, parties should endeavor to ensure such clauses are included in the contract and are carefully drafted to provide for the type of risks that could arise out of political instability, including the imposition of sanctions.
Does the designation of a party as a DI render a contract frustrated?
Under English law, a party in contractual relations with a DI may also consider whether its contract has been frustrated, and therefore able to be terminated, because performance of contractual obligations has been rendered impossible by reason of supervening illegality. It is a doctrine though that is not lightly applied.
In recent cases in England, the courts have been inclined to hold contracts to have not been frustrated by reason of sanctions being imposed. Recently, In Melli Bank v Holbud Ltd (2013)6 , the court held that a designation under EU sanctions alone does not render a contract incapable of performance. A customer had refused to make payment to Melli Bank, arguing inter alia that the agreement had been frustrated due to Melli Bank‟s being directly subject to sanctions. Specifically, Judge Knowles QC stated that the “designation of the Bank did not render [the agreement at issue] incapable of performance where, as here, a licence could be sought and, on the evidence, could be expected to be forthcoming”. 7 The reference to obtaining a licence is a reference to the licence or permission regime put in place that enables the Treasury to permit performance under a contract that may otherwise be a contravention of a sanction. In Islamic Republic of Iran Shipping Lines v Steamship Mutual Underwriting Association (2010)8 , the defendant insurer had argued that the insurance cover provided to a designated Iranian entity had been frustrated following the introduction of the Financial Restrictions (Iran) Order 2009 in the UK. The English Court of Appeal rejected the defendant‟s arguments, holding that the cover had not been frustrated. The judge held that on its proper construction, the licence did permit the Club to continue to provide insurance cover in respect of those risks requiring cover by virtue of the Convention. In addition, the licence also allowed the Club to meet all claims in respect of those risks.
Companies should therefore be mindful that they may have to exhaust alternative options to secure contractual performance prior to seeking to rely on frustration as a basis to terminate a contract. In particular, companies may need to establish whether they could benefit from a derogation regime (i.e. a permission or licence regime) from the relevant authority9 , or could obtain authorization from OFAC in order to continue to perform their contract.
In relation to EU sanctions, these derogations allow, for instance, national competent authorities to authorize payments due under a contract or agreement as long it was concluded before the publication of EU sanctions on 17 March 201410 . In contrast, the U.S. sanctions may apply to contracts or licences or permits granted prior to 20 March 201411.
The imposition of sanctions may mean that an innocent party in a contractual relationship that is affected by sanctions is in a position to argue that the contract is at its end through no fault of his own. The wording and nature of the affected contract, and the terms of the sanctions in each case are, of course, critical. And parties should endeavor to take the necessary steps to verify whether they are entitled to seek derogations or whether they can obtain authorizations from the relevant authorities which may permit continued performance of a contract potentially affected by the impact of sanctions.