Ukraine Crisis – the contractual risks of withdrawing from Russia

Russia’s invasion of Ukraine has prompted many western companies to stage a mass commercial exodus from Russia, as businesses have decided that, even if they are not caught by sanctions, it is no longer appropriate or desirable to maintain a presence there.

The winding up of commercial operations in a territory would, ordinarily, be a long and drawn out process.  Typically this may involve a company having to run down and/or negotiate the early termination of its contracts and/or divest itself of its business in the territory. 

In the present circumstances however, there has simply not been time to work through the legal, commercial and strategic niceties that would usually apply.  As a result, it is likely that many of the companies that have announced their withdrawal from Russia (or suspension of operations) have effectively ceased performing contractual obligations owed to Russian counterparties and/or unilaterally terminated their contracts. 

Most commercial contracts will specify the circumstances in which a contract can be terminated early, and an attempt to terminate outside those parameters is likely to be challenged, and could lead to a significant claim for damages, including for loss of profits from the full expected term of the contract.  Businesses have been forced to rapidly weigh the risks of breach of contract against the moral and public pressure to exit.

Although it is likely that it will be some time before such claims reach the English courts, we expect that defendants to such claims will need to give careful consideration when framing their defences, particularly in circumstances where the relevant contractual wording may not (on its face) work in their favour.

In this alert, we have considered the types of arguments that defendants may consider running, if they are faced with such claims.

1. Force Majeure

Where contractual performance is delayed or prevented by an event outside of the control of the contracting parties, a party may be able to rely on force majeure.  Under English law, force majeure does not arise by implication or standalone doctrine (as it does in some other jurisdictions) and will only be relevant if the contract in question contains an express force majeure provision.  The specific wording of that clause will then govern the scope of the right exercisable in defined circumstances.

A force majeure clause typically suspends future performance of the contract (either in whole or in part) if the party seeking to rely on the clause can show that the act or event which has caused performance to be delayed or prevented is a “force majeure event” (as defined in the contract).

Although it is commonplace for force majeure clauses to list “war” as a force majeure event, the relevant hurdle to overcome is whether it can be shown that the act of war has delayed or prevented performance.  The position may be relatively straightforward in circumstances where (for example) a key plant or factory has been damaged or destroyed during the course of a war (such that the relevant goods can no longer be manufactured), but the position is less certain where the war is taking place in a third country – in this instance, Ukraine.

Parties seeking to rely on force majeure would therefore need to consider how they intend to argue that performance of contractual obligations in Russia is being delayed or prevented by a war taking place in Ukraine. Parties should also carefully consider timely notification of force majeure in the context of their specific circumstances and any process required under their contract.

2. Material Adverse Event ("MAE") or Material Adverse Change ("MAC")

Such clauses are designed to protect parties against the risk that an unforeseen event or change  materially adversely impacts one or more of the contracting parties and their ability to perform. Whether they will be of any assistance to parties in the current context will depend on the specific wording of any such clause in their contracts.

Such clauses are rarely considered by the English courts and it may be difficult to take guidance from the cases where they have been, given the varied wording of the clauses and the highly specific factual circumstances in which they were exercised. However, it is rarely straightforward to establish that a MAE/MAC has occurred and parties should not assume it will apply in these circumstances.

3. Frustration

The doctrine of “frustration” allows a party to treat itself as discharged from its obligations and the contract as at an end if, through no fault of the parties, it is impossible (not merely more difficult or uneconomic) to perform its obligations or transforms the obligation to perform into a radically different obligation from that undertaken at the moment of entry into the contract.  Parties should be prepared to demonstrate that all possible solutions have been considered and found to be unworkable.

The application of the doctrine of frustration is highly fact specific and tends only to apply in quite limited circumstances.  Whether and in what circumstances the courts would accept that the impact of the Russian invasion of Ukraine on the performance of the contract is sufficient is unclear.  Parties should therefore exercise caution in seeking to rely on this doctrine.

4. Illegality

Illegality may arise where the performance of a contract becomes unlawful as a consequence of a supervening change in the law or as a result of a supervening change of circumstance which renders a previous lawful contract unlawful.

This may be relevant where, for example, a company has agreed to supply goods into Russia which have since become subject to UK and/or international sanctions – meaning that the contract can only now be performed by committing an illegal act.

5. Section 44 of the Sanctions and Anti-Money Laundering Act 2018

Pursuant to Section 44 of the Sanctions and Anti-Money Laundering Act 2018, a party will not be liable in respect of any civil proceedings in relation to an act or omission done in the reasonable belief that the act or omission is in compliance with sanctions regulations. This provision is as yet untested.

The essential element of this defence is whether or not a party can show that it reasonably believed that it was acting in compliance with the applicable sanctions regulations.  This will likely depend on the nature of the contract in question (specifically the obligations to be performed under the contract), the relative sophistication of the party seeking to rely on this provision, and the basis upon which that party believed that the obligations could no longer be performed as a result of sanctions regulations.

Parties considering availing themselves of this protection should be prepared to both: (i) demonstrate that the belief was held at the relevant time; and (ii) support the assertion that it was reasonable.

Comment

At this stage, we do not yet know whether there will (in due course) be an influx of English law governed damages claims brought by Russian-based entities against companies which have withdrawn from Russia.  The risk of such claims arising cannot, however, be discounted.

It is also difficult to predict whether or not the English courts will (if faced with such claims) take a sympathetic view with regard to the types of arguments we have set out above – particularly given the specific circumstances in which the claims arise.  The question of whether or not such defences are likely to succeed will depend on the specific facts of each case, and the arguments that can be made in support of the relevant defence(s).

In order to minimise the risk that such claims do arise in the English courts, as part of any withdrawal strategy, parties will need to ensure that they take advantage of any contractual or other rights they may have that may assist in framing their defences so as to seek to provide a court with a credible route through which to arrive at “the right decision”, without offending basic and well-established principles of English contract law.