Page & Page: Russia’s invasion of Ukraine has led to the U.S., the EU, and the UK imposing wide-ranging sanctions and significant retaliatory measures by Russia. As a result, commercial parties with operations or contracts involving Ukraine or Russia are having to consider the impact of these events on their contractual rights and obligations. In this blog post, we set out a framework to help parties navigate the legal complexities involved.

I. Does the contract include an illegality / force majeure / material adverse change clause and, if so, has it been triggered?

This is a question of interpretation, so the usual rules apply: a close analysis of the relevant events and the language of the clause will be needed. Specifically:

What, exactly, is the relevant event? The event may be a legal one (such as whether payment would be a criminal offense) or a factual one (such as supplies not being able to get through, or a factory being shelled).

Is the event within the scope of the clause, either expressly or by implication? Most force majeure clauses contain a list of events that will constitute force majeure. An illegality clause may specify the laws under which performance must have become illegal. Material adverse change clauses often do not list out what is in scope, relying instead on the general meaning of the words. Work out whether the event being relied upon as the basis for invoking the clause is caught. Where there are lists of events, you can get into arguments about whether the event you are relying on needs to be of the same type. It may be more difficult to show that an event is force majeure or that a change is material if it was foreseeable.

Has the event affected the ability to perform in the way required by the clause? Most force majeure clauses require a party to show that, as a result of the event, performance has become physically or legally impossible, and not just more difficult or unprofitable. This is a high bar. A change in the market conditions that renders performance more expensive is not likely to be a force majeure event where impossibility is required. For a MAC clause, you will want to focus on the specific and not the general; “material” is also a high bar and the event will need to be on a more than temporary basis. Similarly, to rely on an illegality clause, it may be necessary to show that the illegality makes performance impossible. Some clauses may have lesser requirements (such as that performance has become “impracticable” or been “hindered”).

The devil will be in the detail. In some cases, the position will be clear, but in others, it may be difficult to say whether the event has had the effect on the ability to perform that is required by the clause.

What are the mechanics for invoking the clause, and what are the consequences of doing so? A failure to follow the mechanics for invoking a clause—for example, by not complying strictly with notice requirements—could prevent reliance on it. Understanding the consequences of triggering the clause is also key. Does it allow you to terminate the contract or suspend obligations? Does it explain how the relationship is unwound (if indeed it is)? Are these consequences consistent with public policy (see the discussion on frustration below)? Insured parties may find their insurers requesting that they invoke certain clauses if that would result in any loss being mitigated.

Is it lawful to invoke the clause? In some cases, the steps involved in invoking a clause, or the consequences that flow from doing so, may themselves amount to a breach of sanctions.

II. Has the agreement been frustrated? It is important to consider whether the agreement has been frustrated before deciding whether to invoke express provisions. The following factors should be considered:

• Has performance become impossible or radically different?

• Does the agreement address the consequences of the event?

• What are the consequences of frustration?

III. Do you benefit from statutory protection? The Sanctions and Anti-Money Laundering Act 2018 provides protection for those who act in compliance with UK sanctions.

Navigating the complex legal issues arising from the disruption caused by the invasion is challenging. However, with careful consideration and analysis of the contract, the right framework can be established to ensure that the interests of all parties are protected.