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ConflictinUkraine_NonPerfomanceofContracts2

Conflict in Ukraine: Excuses for Non-Performance of Contracts Governed by German Law

In Short

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

The Issue: Performance of German law contracts may be affected by the ongoing conflict and sanctions. Contracts may contain force majeure provisions enabling suspension or excused performance for acts of war or governmental actions. The doctrines of subsequent impossibility, or clausula rebus sic stantibus under § 313 BGB to amend or invalidate the underlying contract, may also come into play, as may defenses of uncertainty or termination for good cause. 

Looking Ahead: A review of contracts with the affected regions will serve to mitigate losses and subsequent exposure to potential litigation and arbitration.

Traditionally, industry in Germany has enjoyed close commercial ties with Russia and Ukraine. The ongoing conflict in Ukraine and the resulting sanctions imposed on Russia—and by Russia—will inevitably affect these business relationships. This Commentary considers possible legal remedies under German law when addressing these circumstances. 

Force Majeure 

German law contracts frequently include force majeure clauses ("höhere Gewalt"). These clauses may permit suspension of contractual obligations without liability for non-performance while the force majeure event persists and some may even permit termination under certain circumstances such as a prolonged force majeure event. 

The wording of such clauses will often relate expressly to acts of war, armed conflicts, or sanctions. In addition, German courts' interpretation of force majeure provisions typically involves an extraordinary, external event caused by elementary forces of nature or the actions of third parties, which is unforeseeable according to human insight and experience and cannot be prevented or rendered harmless by economically acceptable means.

A party relying on a force majeure clause must demonstrate that the relevant events are the effective cause of the non-performance or termination. This is more likely to be the case in contracts that 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. Whether sanctions imposed in response to the conflict in Ukraine would be considered as a force majeure event, will again be influenced by the wording of the contract. But the same causal analysis will typically apply. 

Extraordinary and Unforeseen Circumstances

Parties may also sometimes avert contractual performance in extraordinary and unforeseen circumstances based on the doctrine of clausula rebus sic stantibus ("Wegfall der Geschäftsgrundlage") under sec. 313 of the German Civil Code (BGB). If the circumstances that were the basis for the contract significantly changed after its conclusion, and if the parties would not have concluded the contract or would have concluded it with different terms if they had foreseen this change, modification of the contract may be demanded to the extent that one of the parties cannot reasonably be expected to perform without modification. If this is impossible or unreasonable, the disadvantaged party may revoke or terminate the agreement.

German courts generally apply a strict standard to their analysis of these requirements. Recent precedents from the German courts in connection with the COVID-19 pandemic confirm this. The German Federal Court for Civil Matters (BGH) held recently that a tenant of a retail building that was subject to a temporary closure order by the authorities due to the pandemic does not generally have a claim to adjust the contract by reducing the rent under sec. 313 BGB, but only subject to a case-by-case analysis on the basis that none of the parties is responsible for the pandemic (BGH, XII ZR 8/21, judgement of 12 January 2022). A further decision concluded that even where a contract can be terminated under sec. 313 BGB the terminating party may be obliged to pay the other party a share of the losses caused by its termination (OLG Celle, 2 U 64/21, judgement of 2 December 2021). These findings are likely also relevant for contract adjustments under sec. 313 BGB based on the conflict in Ukraine or related sanctions.

Subsequent Impossibility 

Parties may also rely on the doctrine of subsequent impossibility ("nachträgliche Unmöglichkeit") to excuse non-performance of contractual duties. Under this doctrine, parties need not perform if performance is legally or factually impossible. Sanctions are likely to qualify as impossible in this sense to the extent they prohibit the performance of the contract. 

Uncertainty Defense 

A right to suspend performance or even to withdraw from the contract may arise from the uncertainty defense under sec. 321 BGB ("Unsicherheitseinrede") if it becomes apparent that one party's entitlement to consideration is jeopardized by the contractual partner's inability to perform. This may for example become relevant in cases where the fulfillment of payment obligations by Russian contract partners is jeopardized or impossible due to Russian counter-sanctions in the financial sector. However, if the contracting party fulfills its counter-performance or provides sufficient securities, such right to suspend performance may be forbidden. 

Termination for Good Cause 

German law permits either party in exceptional situations to terminate a contract for good cause ("Kündigung aus wichtigm Grund") if they cannot reasonably be expected to continue performance when taking into account all of the circumstances and weighing the interests of both parties (sec. 314 BGB). 

Two Key Takeaways

  1. Contractual force majeure provisions commonly include acts of war and governmental activity as excusing events, both of which may occur as a consequence of the war in Ukraine and the subsequent imposition of sanctions. Even where contracts do not have force majeure provisions, performance may be excused under German law in exceptional circumstances under sec. 313 BGB or sec. 275 BGB, and contracts may be terminated for good cause.
  2. Determining the appropriate recourse depends greatly on a contract's precise terms and the causal nexus between the relevant events and the failure to perform or termination. German companies should engage in a detailed review of their contractual portfolio to assess the extent to which disrupted performance will give rise to potential liability. 

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