[co-author: Ollie Beel]*
Russia’s invasion of Ukraine continues to cause havoc for supply chains worldwide, both directly (through sanctions or the war making business impossible), or indirectly (through the economic turmoil that ensues). From a contractual perspective, this can cause unfulfilled obligations, resulting in an increased likelihood of disputes arising. Whether or not it is worth bringing a dispute in those circumstances depends on a number of factors.
Pre-dispute considerations
Faced with a supplier or customer that has not fulfilled its obligations, the starting point will always be the provisions of the contract. Does interest accrue on late payment? Can deductions be made for late delivery? If the situation persists, do you have the right to terminate the contract?
Timing can also be crucial. When faced with delay, the position will be stronger for the non-breaching party if the contract specifies that “time is of the essence” for the relevant obligation. You may also have a limited time within which to act on the breach before you can be taken to have waived the breach or affirmed the contract. A non-waiver clause can help in this regard, as can reserving your rights in correspondence, but you will not generally be able to preserve those rights indefinitely.
Alongside the express terms of the contract, two major pillars of contract law may be applicable where the disruption has been caused by unexpected events outside the parties’ control:
- Frustration: Frustration is a common law doctrine, which relieves a party from its contractual obligations when something unforeseen by the parties renders performance impossible or radically different. War and sanctions have been held to frustrate contracts in certain circumstances, but it is always fact dependent. For instance, long contracts may not be frustrated if performance is only prevented for a comparatively short time. The legal test for establishing frustration is also a very high bar. The fact that performance has simply been made more difficult will not suffice.
- Force majeure: In England, force majeure rights only exist if they are set out in the contract. Such clauses allow performance to be suspended temporarily following certain identified supervening events. War is often included as a force majeure event, but whether failure to perform has actually been caused by a force majeure event will often be up for debate, and regard must be had to the specific wording of the contract.
Is arbitration the answer?
Arbitration is a popular method of dispute resolution for cross-border supply contracts, particularly in areas such as energy. One reason for this is the comparative ease of enforcing awards in most territories. Nevertheless, the war in Ukraine and resulting actions present particular challenges – in relation to the practicality of initiating arbitration in the first place, as well as the enforcement of awards if successful:
- Initiating arbitration: If arbitrating against a sanctioned entity or individual, difficulties may be presented by specific sanctions blocking provision of services to the sanctioned entity or individual. This is because the sanctions would likely cover the services provided by the arbitral institution and arbitrators themselves, and indeed tribunals tend to act cautiously and assume that this will be the case. Another common issue encountered occurs in instances where arbitrators or institutions require payment from a designated entity or individual. There are often carve-outs in sanctions packages for provision of, and payment for, legal services, but the prevalence of these can depend on which country has issued the relevant sanctions.
- Enforcement: Although the 1958 New York Convention is a powerful tool for enforcing arbitral awards, there are certain grounds on which enforcement can be refused, including public policy. This may be a consideration, for instance, in a sanctioned country if the award gives effect to that sanction, or in a sanctioning country with the opposite occurrence. In jurisdictions in which arbitration is often used, however, awards are likely to continue to be recognised and enforced, albeit possibly with qualifications such as performance being required pending lifting of sanctions.
Where the counterparty is Russian, enforcement may also be complicated by Russian countermeasures to sanctions imposed by the West. A range of measures have been implemented or proposed that purport to extend the jurisdiction of Russian courts in relation to parties or disputes affected by sanctions.
What should you do?
Our clients and other businesses facing cross-border supply contract issues should remain alive to the above issues, and can do so through the following practical measures:
- Review your contracts and business relationships (if you have not already done so) to assess their risk profile and the impact it would have if your counterparties can no longer fulfil their obligations. What would be the contractual position if the contract became impossible to perform or uneconomic – is the force majeure clause likely to be triggered? How feasible would it be to re-negotiate or terminate the contract to switch suppliers?
- Stay on top of all export controls and sanctions regimes. These sanctions lists develop often, sometimes daily, so knowing which counterparties are covered, the extent to which they are sanctioned and how they (or you) might be affected directly or indirectly is vital.
- Conduct a specific Russia risk assessment. Russia has been hit very hard with an unprecedented barrage of sanctions from countries worldwide, so understanding your exposure to these sanctions and the resulting impact on the Russian economy (and any further knock-on effects of this) will place you in the best position possible when considering how to react.
- If you are considering initiating a dispute, take early advice from your lawyers. Do you need to take action swiftly to preserve your rights, or do you run the risk of putting yourself in breach if you do so: for example, by withholding payment or seeking to terminate the contract in circumstances that might not be justified? Do sanctions create a barrier to initiating arbitration? And whichever method of dispute resolution you pursue, what are your chances of successfully enforcing any award? Dispute resolution is an inherently expensive and time-consuming process –; i if any victory would likely be pyrrhic, all the more incentive to find a commercial or practical resolution instead.
*This article was written with the assistance of Ollie Beel, trainee solicitor at Dentons.
