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Conflict_In_Ukraine_Commentary_SOCIAL2

Conflict in Ukraine: Liability for Non-Performance Under English Law

In Short

The Situation: The conflict in Ukraine, and related sanctions imposed by governments across the world on an unparalleled scale, are causing severe impact on businesses with exposure to Ukraine and Russia. 

The Issue: Many English law contracts contain force majeure provisions that may suspend or excuse performance for acts of war or governmental actions in appropriate circumstances. It may also be possible to rely on the legal doctrine of frustration to discharge contractual obligations if the conflict or sanctions radically impact contractual performance.

Looking Ahead: Early engagement by clients to review their most valuable and strategic contracts will serve to mitigate the potential exposure to subsequent litigation. 

The ongoing conflict in Ukraine, and the severe sanctions imposed by governments globally in response to Russia's aggression, are having extreme effects on parties' legal obligations, and are drastically altering the commercial characteristic of pre-existing contracts. Many businesses also are contemplating the viability of maintaining their presence in the Russian Federation. This Commentary considers how English law approaches those issues.

Acts of War

Under English law, force majeure is an entirely contractual construct and will not be implied by the Courts (though it does not necessarily have to be labelled "force majeure" to excuse performance). Many contracts do have force majeure clauses, which excuse performance without liability, and "acts of war" is an event that is commonly listed. Even if not expressly listed, the conflict in Ukraine is likely to meet the threshold test of many force majeure provisions. However, that alone may not necessarily be sufficient to excuse non-performance. 

A party considering relying on a force majeure clause will need to demonstrate that the relevant events are the effective cause of the non-performance. This is more likely to be the case in contracts which have a direct nexus to Ukraine, where performance is more likely to be directly affected by the conflict, but ultimately will depend on the causal relationship between the events and obligations in question. 

The analysis may be even more nuanced where the performance is affected by a secondary impact of the conflict—for example extreme currency fluctuations or volatility, changes to interest rates, or drastic changes to the commercial consequences of an existing transaction. 

Whether governmental sanctions imposed in response to Russian aggression in Ukraine would be considered a consequence of an act of war, or similar, will depend on the terms of the contract. Certainly, they are more likely to fall within the scope of a force majeure clause that refers to governmental actions, but the same causal analysis is required. 

The more remote the causal link between the contractually defined force majeure "event" and the effect on performance, the more difficult it will be to rely on the clause. Every case will therefore turn on the wording of the clause in question and its requirements. Not every force majeure clause requires impossibility of performance, for example, for it to be relied upon.

Because force majeure is a contractual tool, it will often require strict compliance with contractual requirements, including as to notice and timing. Unless the contract terms provide otherwise, a force majeure clause will usually only have an excusing, or suspensory, effect, and so once the event in question abates, the contract will continue in effect.

Sanctions and Supervening Illegality 

Unlike force majeure, frustration is a legal doctrine that operates by implication into the contract—where a contractual obligation has become "incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract" (Davis Contractors Ltd v Fareham UDC [1956] AC 696). Where a contract is frustrated, the parties' obligations are discharged entirely. 

If the contract makes provision for the frustrating event (including in a force majeure clause), it is more likely that the parties will have impliedly allocated the risk of it, which would usually exclude the operation of frustration.

There are several examples of the outbreak of war leading to a contract being frustrated, particularly in cases where performance became unlawful as a result of government war regulations regulating or preventing the supply of goods and services (Denny Mott & Dickson Ltd v James B Fraser & Co Ltd [1944] A.C. 265; Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32).

However, for frustration to apply to discharge performance, the relevant event will usually (though not always) need to lead to a drastic change in the nature of the relevant obligation being performed; rather than merely a change to the commercial consequences or purpose of the transaction. Similarly, an event which merely makes performance more burdensome or commercially disadvantageous may not itself be sufficient. 

The English courts may also look to the duration of the contract and the impact of the frustrating event—a short interruption in the context of a long-term contract is less likely to cause the contract to be discharged.

Supervening illegality of performance—including under trade or other sanctions—will frequently operate to discharge the contract. The most straightforward scenario would be an English law contract where performance of the characteristic or core contractual obligation is plainly prohibited by English sanctions. The same analysis will usually apply where performance is illegal in the place of performance. However the doctrine will not always apply where the illegality arises under the laws of a third country, which may cause tensions where there is incomplete alignment between sanctions rules imposed by the UK, the European Union, and the United States. Nevertheless, illegality under the laws of a third country will often cause performance to be impossible or radically different, giving rise to a claim for discharge of the contract by frustration. 

Finally, different considerations may apply where the decision not to perform does not lead directly from a supervening frustrating event, but rather from a broader change of circumstances affecting the viability of performance. That may be relevant to many business which are considering a temporary or long-term exit from the Russian market. Those situations will require detailed consideration on a case by case basis. 

Three Key Takeaways

  1. Contractual force majeure provisions will commonly include acts of war and governmental activity as excusing events, both of which may be engaged in consequence of the war in Ukraine and the subsequent imposition of unparalleled sanctions. Even where contracts do not have force majeure provisions, contracts may be considered to be discharged by the doctrine of frustration.
  2. The analysis is highly sensitive to the contractual terms and the causal nexus between the relevant events and the failure to perform. 
  3. Companies should engage at an early stage to review their most strategic and valuable contracts to assess the extent to which disrupted performance will give rise to potential liability.

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