Are sanctions force majeure or ordinary commercial risk?
- Author: Irina Onikienko
- Date: 12.09.2014
The Ukrainian crisis and the sanctions war between the Russian Federation, US and EU that ensued have raised a number of legal issues. Lawyers of each country involved are analyzing the situation and are trying to understand the economic consequences for their clients doing business in Russia and how to support such clients.
As a result of mutually imposed sanctions parties are now unable to perform their contractual obligations. So what are the consequences for the parties?
The answer to this question requires a brief analysis of the current Russian legislation releasing a contractual party from liability in the event of force majeure. We would like to discuss whether and under what conditions the sanctions can be classified as such force majeure.
Force majeure is defined by the Civil Code of the Russian Federation as circumstances beyond the parties’ control which are extraordinary and unavoidable under the existing conditions. It should be noted that almost every agreement contains a standard force majeure clause, and court disputes associated with such a clause are rather rare.
The court practice has established a number of criteria for declaring certain circumstances to be force majeure. There are three main traits of a force majeure event: unavoidable, unforeseeable, extraordinary. “Extraordinary” means that it was impossible to foresee the occurrence of the force majeure under the existing circumstances and “unavoidable” means that it is impossible to avoid the force majeure using available resources. Similar criteria are established by the rules of international law (e.g. United Nations Convention on Contracts for the International Sale of Goods (1980) and the UNIDROIT principles).
It is obvious that the above criteria are taken into account subject to actual circumstances associated with the time and existing/related conditions under which the parties entered into agreements. In particular, it is important whether force majeure circumstances are in force at the time of entering into an agreement; when the parties became or could have become aware of the force majeure; why the force majeure turned out to be beyond the parties’ control; whether the force majeure directly affects or renders impossible the performance of certain obligations.
Therefore, a party referring to the force majeure must prove that at the time of entering into the agreement and assuming obligations there was no indication of the potential occurrence of force majeure, that the occurred circumstances cannot be eliminated or mitigated, and that such circumstances render reasonable performance of contractual obligations absolutely impossible
As an example, we could refer to the position of the Supreme Commercial Arbitration Court of the Russian Federation, declaring that a regulatory act adopted by government authorities may be deemed a force majeure event, provided the parties, subject to all objective circumstances, did not and could not anticipate and consider such act when entering into an agreement. This means that if such act was publicly discussed or its draft was published on the Internet, the mass media or other resources, it cannot be classified as force majeure because the parties could have reasonably foreseen its adoption and as a result could have provided for options on preventing consequences. It also should be noted that the crisis of 2008 was likewise not classified as force majeure on grounds of the cycling of economic events, ensuring, in the court’s opinion, certain transparency and predictability of the economic development.
It is worth to note that the Civil Code of the Russian Federation specified that the lack of the goods necessary to fulfill obligations of the supplier does not constitute force majeure. However, taking into account the provision of the law and court practice, Regulation of executive authorities of the Russian Federation, which already came into the force and which banned the supply of certain groups of goods into Russia from certain countries, still can be considered force majeure.
Thus, for example, in the event that scope of the supply contract is cheese, then sanctions against import of cheese would not constitute force majeure as supplier can still deliver cheese and fulfill the contract. On the other hand, in the event that scope of the supply contract is cheese made in country X, then imposing sanctions against cheese from country X shall be deemed as force majeure, because supplier can not import cheese from country X and fulfill its obligations (provided that other above requirements are in compliance and the supplier can prove that cheese from country X can not be obtained in another way).
However, the following question is still evidence of a direct relationship between force majeure (the ban on the importation of products) and failure of obligations under the contract. As we say earlier in each case, the presence of the link is found out by the court in conjunction with the actual circumstances of the case.
As for the prospects of the imposed sanctions being classified as force majeure events, we believe that the following factors, in addition to those described above, will be of essence. Firstly, no sanctions have previously been imposed on or by the Russian Federation, which, in general, meets the criterion of being unforeseeable. Secondly, in the event the parties entered into an agreement before the Ukrainian crisis, the sanctions becomes even more unforeseeable and as a result the chances of the existence of force majeure circumstances being admitted and releasing the party from liability increase.
At the same time, the sanctions war is not over and more sanctions imposed on or by the Russian Federation are expected. In such circumstances companies express concern regarding the possibility to protect their interest in the contracts concluding now. This poses the question if the parties of the contract can expand the understanding of the force majeure events by listed sanctions as such in the contract.
Provision of the law regulating force majeure is dispositive, therefore, the contracting parties is entitled to expand the list of force majeure and act in compliance with the such provision. However, in the event of dispute between the parties of the contract in relation to sanctions listed as force majeure in the contract, the court in each case will still declare sanctions as force majeure only if it satisfy all above-mentioned criteria of force majeure event.
Another question, which has arisen in current circumstances, is what companies can do in the event when sanctions do not directly influence the fulfillment of their obligations, but influence companies indirectly, causing them to breach their duties under a contract.
Pursuant to the sanctions imposed by the EU, the import of equipment used in the oil sector in Russia is prohibited. At the same time, there are goods, such as pipes and pumps, that are used not just in the oil sector, but in other industries as well, and during customs clearance they fall within the same category. The customs authority of the exporting country puts on hold all the goods falling within such category, until the exporter provides documented consent from the relevant authorities and proof of purpose for the goods being exported.
For instance, the supplier is obliged to deliver goods manufactured outside the Russian Federation, which fall in such a category, but are not intended for the oil sector. These goods will still be put on hold by the customs authority of the exporting country. Such suspension can last for a month or even longer. Consequently, the company is still able to deliver goods, but most probably will be breaching the delivery timeframes, and will be liable for such delay.
In the described situation, sanctions will not be declared as force majeure circumstances because the company is obliged to deliver goods which are not prohibited from being exported. However, liability of the party for breach of the contract due to sanctions imposed on or by the Russian Federation can be declined in another way - the provision of the contract-regulated liability of the performer can be adjusted. Thus, parties shall agree that supplier is not liable in the event of delay of delivery due to the sanctions imposed on or by the Russian Federation. We believe that such provision can not be recognized invalid by the court as liability of the parties provided by the contract are left for the discretion of the parties itself. However, the performer will be still obliged to pay damages provided by Russian law in comparison to force majeure event when party will be absolutely discharged from the liability.
In conclusion, we would like express the hope that politicians will hear the calls of the business community and will stop engaging business in resolving issues which should be resolved solely by diplomatic means.
Irina Onikienko, Partner Capital Legal Services