Supply chain disputes following the war in Ukraine and Russian sanctions

Published: 22/3/2022

As the situation in Ukraine continues to deteriorate, and the consequences of unprecedented packages of Russian sanctions and sanctions against Belarus from the UK, EU, US and other nations multiply, it is inevitable that – in addition to the humanitarian crisis – businesses, the region and the world will be forced to “grapple with disrupted trade, supply chains, and remittances”, as IMF officials have highlighted.

As during the heights of the coronavirus pandemic, companies may once again find themselves in a situation where they or their counterparties are unable to perform their contracts, either as a direct consequence of supply chain disruption caused by the Russia-Ukraine conflict, or due to the restrictions imposed by Russian sanctions or other regulatory changes (including counter-sanction legislation in Russia). While it will hopefully be possible to resolve many such difficulties through (re)negotiation, or by consensual termination, that will not always be the case.

When the potential for supply chain disputes arises, ultimately the specific terms of the contract will be key; however, there are a number of concepts that parties should bear in mind (particularly where English law applies):

  1. Frustration. In broad terms, a contract (and the parties’ obligations under it) may be discharged by frustration when an event, which was unforeseen by the parties at the time of contracting and for which none of them is to be blamed, has made performance impossible, or radically different from what the parties understood themselves to be agreeing to do at the time they entered into the contract. While the outbreak of war, and the impact of sanctions, have previously been considered by the courts as grounds for frustration, careful regard needs to be had to what, precisely, performance of one’s contractual obligations requires, and whether that performance has been rendered impossible or radically different. For example, a contract may not be frustrated if performance is still possible through alternative arrangements (as in Melli Bank plc v Holbud Ltd [2013] EWHC 1506 (Comm), where the possibility of obtaining a licence to perform meant a contract was not frustrated, notwithstanding the imposition of sanctions) or if the contract makes provision for what should happen in the events that have occurred. Indeed, contracts entered into in recent years with a nexus to Russia and Belarus may contain provisions which provide for the eventuality of sanctions being imposed, and what would happen in such a scenario.
  2. Force majeure clauses. Contracts may also contain force majeure clauses dealing specifically with supervening events that prevent the performance of contractual obligations (we have considered such clauses previously in the context of the coronavirus pandemic). While the outbreak of war is not infrequently included as an event giving rise to force majeure in commercial contracts, whether current events or their consequences will fall within a given force majeure clause will ultimately depend on the specific wording of the clause. Where it does, and any contractual stipulations are met, the effect of the clause may be to relieve a party from the consequences of failing to perform – provided that failure is in fact caused by the force majeure event.

    In a case from earlier this year, which arose out of an earlier round of US sanctions against Russia, the Commercial Court considered the impact of a provision that a force majeure event had to meet a number of criteria, including that "it cannot be overcome by reasonable endeavours from the Party affected". In MUR Shipping BV v RTI Ltd [2022] EWHC 467 (Comm), the Court held that the "reasonable endeavours" provision did not require Owners to accept non-contractual performance by accepting payment in Euros when the contract required Charterers to pay in US dollars, which the sanctions had prevented, and so the force majeure provision applied.
  3. Other clauses. The effects of the war or the application of sanctions could also engage other clauses in commercial contracts, such as "Material adverse change" (MAC) clauses (which the High Court recently considered in the context of the pandemic in Travelport Limited v WEX Inc. [2020] EWHC 2670 (Comm)), or give rise to an "Event of Default", that may permit one party to terminate (or otherwise affect the rights and obligations of the parties).
  4. Illegality. Where regulatory changes introduced in response to, or as a result of, the conflict in Ukraine render one party’s performance of a contract illegal (and not merely more burdensome or difficult), that contract may be discharged. This is potentially true both of changes to English law (where it is the applicable law or the law of the forum), but also – where performance is required abroad – the relevant foreign law.

As always, parties should also pay careful attention to the provisions in their agreements setting out what law governs the parties’ relationship, and the mechanism – typically litigation or arbitration – by which any dispute is to be resolved.

For more information or to discuss any of the issues raised in this article, please contact Tim Elliss, Evgeniya Rubinina, Boris Telyatnikov or Jonathan Pagan.

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