Supply Chain Disruption: Do Russian Sanctions Constitute Force Majeure? | Denton


As the UK and EU continue to expand their sanctions lists, a recent decision by the English Court of Appeal provides reassurance to companies trying to understand how international sanctions regimes affect their supply and service contracts. sale. As many businesses did when COVID-19 prevented them from operating, carrier MUR looked to its force majeure clause. The court considered that it was entitled to do so: it was reasonable to take the time to examine the situation and the shipper was not obliged to mitigate the effects of the sanctions by accepting payment in euros instead of dollars.

What was the argument about?

The dispute in this case (MUR Shipping versus RTI) is not about the current conflict in Ukraine, but about the sanctions imposed by the United States in April 2018 against a number of Russian individuals and entities. The transport company MUR had an ongoing contract with RTI, which was a subsidiary of one of the entities that had been sanctioned. As a result of the penalties imposed, MUR refused to ship RTI’s goods, citing a force majeure clause that excused the party that notified its obligations under the contract.

The relevant clause defined an event of force majeure as an event which prevented the loading or unloading of the goods, by reference to various categories of events, including war, embargo, restrictions on money transfers or “any rule or government regulation or any act of interference or act or direction of governments.” The relevant event would only be considered a Force Majeure Event if it could not be overcome by the reasonable efforts of the party concerned.

MUR claimed that the sanctions prevented it from doing business with RTI, especially since RTI would not be able to make the dollar payments required under the contract. RTI denied that the US sanctions prevented MUR, a Dutch entity, from doing business with it and argued that the wording of reasonable efforts in the force majeure contract required MUR to accept payment in euros instead of dollars. The parties submitted the dispute to arbitration and when the court awarded damages to RTI, MUR appealed to the English courts.

Reasonable efforts

The Court of Appeal ruled in favor of MUR. Regarding the acceptance of payment in another currency, the force majeure clauses include an implicit obligation, which in this case has been made express, to take reasonable measures to avoid or mitigate the effects of the event. concerning. However, this does not obligate a party to perform or accept performance outside the terms of the contract. Even when the contract provides for alternative modes of execution, if a party has chosen one mode, it cannot be forced to accept another to compensate for a case of force majeure.

Here, there was no alternative: the contract required payment in dollars. It did not matter that MUR’s Dutch bank, receiving a payment in euros, credited it with an equivalent in dollars, since the actions of a third party intervener were not to be taken into account.

The situation would have been different if MUR had been an English company. There is a specific rule which allows a party to pay an amount due in England in sterling, even if the contract provides for payment in another currency. The court did not consider this to extend to other jurisdictions, allowing payments to be made in the local currency of the receiving party.

Causality

The judge also rejected the argument that the delay or failure to pay escaped the force majeure clause because the goods could still have been physically loaded and unloaded. The references to money transfers and government regulations in the list of force majeure events made it clear that the clause was intended to cover not only physical prevention, but also other means by which performance of the contract could be rendered impossible.

To the extent that the inability to perform resulted from MUR’s reaction to the force majeure event, rather than the event itself, this did not break the chain of causation. A reasonable decision made in response to a force majeure event should not disqualify the use of the clause.

The tribunal and the Court of Appeal also considered whether, in addition to arguments regarding payment, MUR was entitled to suspend trade with RTI due to sanctions. According to the expert evidence, as a non-US entity, the sanctions did not in fact prevent MUR from dealing with RTI. Nevertheless, the court had found it reasonable for MUR to “take the time to consider the position and err on the side of caution”. The judge agreed: “situations may arise where it is reasonable for a party to delay performance of a contractual obligation when a difficult and uncertain situation exists”. This may be the case even when the contract does not contain a force majeure clause.

Comment

A large number of companies, in various sectors, have suspended their business activities in Russia or with Russian companies. Sanctions compliance is often cited as a key risk, particularly given the challenges posed by the separate sanctions regimes of the US, UK and EU, which can differ in scope and depth. impact on “primary” and “secondary” targets.

For those in a difficult position, this case is helpful in that it recognizes that beyond the strict legal effect of sanctions rules, the imposition of sanctions can lead to practical difficulties, with banks taking time to review transactions and transmission lines being closed. disabled. It is reasonable for the parties to take a cautious approach while you assess your position, although continued delay or refusal to perform without a legal basis may expose you to a substantial damages claim.

The nationalities of the parties involved, the nature of the performance and the wording of force majeure and other clauses will all feed into what can be a complex analysis. If you believe your contracts may be affected by sanctions, it is important to seek legal advice on both regulatory compliance and your contractual rights, in order to navigate an increasingly difficult international business landscape.

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