Supply Disruptions, Sanctions and Export Bans – Navigating the legal minefield of the Ukraine crisis and beyond

Russia’s invasion of Ukraine and the resulting sanctions have put commodities supply chains under considerable stress at a time when commodities were already at inflated pricing levels. Both Russia and Ukraine are important suppliers of essential raw materials in energy, metals and agriculture and the conflict has brought disruption on several fronts. Production facilities may be physically impacted, supply may be restrained on account of disruptions and the transportation artery of the Black Sea may be blocked. Sanctions might also further reduce the availability of materials as parties shun Russian-origin goods. These effects are impacting contractual obligations of not only the direct users of raw materials but also of players in a wide array of industries, ranging from food products to hi-tech goods. While the conflict might have been the tipping point, the remedies available for non-performance are fact and contract specific, and require a critical assessment of the causes of the non-performance.

Supply disruptions– physically impacted or just more expensive?

The conflict has produced or exacerbated constraints in the production, supply and transportation of materials. Force majeure (FM) relief is often the knee jerk response to supply constraints but careful analysis is required to assess if your contract is directly impacted by an express FM event such as the outbreak of hostilities. For contracts involving Russian/Ukrainian sourced raw materials such as wheat or sunflower oil, FM relief may very well apply on account of the conflict. The most common mistake with FM is to assume that FM declared in one supply contract can necessarily result in FM declarations further down the chain. FM clauses are not identical in every contract (they may not even exist in some) and more critically, what is an FM event under one contract does not automatically translate to an FM event under other contracts down the chain – examining the definition of FM events in the contract, causation and compliance with contractual protocols is key.

A Russian supplier of wheat might be able to declare FM on its immediate buyer, but that buyer’s obligation to deliver wheat down the chain may not impacted in the same way. A wheat distributor in Singapore is unlikely to be able to rely on FM when dealing with its local retailers as its obligation to deliver may not be confined to Russian produced wheat. While the conflict would undoubtedly affect the availability of materials and increase prices, the distributor is required to demonstrate causation in accordance with the FM clause: that it had been prevented or hindered from performance, bearing in mind that the law does not view an increase in costs of performance to satisfy such causation. A more expensive contract does not in itself satisfy the requirements for FM relief.

Shipping in the Black Sea – has the contract been frustrated?

Shipping produces a different vertical set of obligations to the horizontal supply chains. An FM clause in a supply contract will not necessarily apply to a charterparty contract concerning the carriage of cargo. The conflict has however directly impacted the shipping market with port closures, safe port concerns and delays arising from restrictions on port accesses. Such events arising from the conflict may very well constitute FM events under a charterparty but even if they are absent, the doctrine of frustration may come to the aid of owners and charterers unable to perform their voyages. Frustration discharges a contract where an unforeseeable event occurs that renders it physically, legally or commercially impossible to perform e.g., a voyage charter to a Ukrainian port that is not in operation or is destroyed due to the conflict. Frustration isn’t easily invoked and is often seen as a measure of last resort where parties have failed to contractually provide for the risk that renders performance impossible. FM, deviation or war risks clauses may therefore negate the need for invoking the doctrine of frustration.

Sanctions – are you sanctioned from performing or is non-performance self-induced?

While the sanctions regime is quite narrow, its effects can be wide-ranging as traders and more importantly financiers, take a more conservative stance, choosing to self-sanction against any Russian related trade out of reputation concerns. By removing Russian origin from the available pool of commodities, sharp prices increases are inevitable, which by itself cannot excuse non-performance. Fitting a fact scenario into a sanctions clause may also be tricky: sanctions regimes are precision tools that can have the effect of blanket restrictions as parties distance themselves for reputational or regulatory reasons – but doing so requires careful deliberation because a wrongful non-declaration of non-performance on account of a misconceived reliance on sanctions, could pave the way for termination. This is further complicated by the role of banks in international trade, who may refuse to finance or even transfer payments, exposing a buyer to a default for not paying for the cargo. As you can see, sanctions are a messy tool because they don’t have uniform application: some buyers or sellers may not see themselves as bound by sanctions; those that are bound might take an overly-expansive view of what applies; and then there are third parties needed to facilitate a trade – banks, carriers and insurers – all of whom may have differing views and risks appetites impacting the performance of the supply contract.

Export Bans – are you following the right procedure?

Food shortages have also resulted in a recent wave of export bans of various raw materials with some form of national bans of wheat in India, of palm oil in Indonesia and soybean oil in Argentina.  Export bans are typically included as FM events in contracts but as noted above, invoking an FM clause requires strict adherence to contractual protocols and satisfaction of the contractual requirements on causation and mitigation. Export bans tend to be temporary, so a close eye needs to be kept on the lifting of export bans and what the continued performance of the contract requires. It may not for instance be possible to exit a term contract which specifies annual quantities to be delivered despite a short export ban, as a seller may be required to increase deliveries to make-up for shortfalls during an export ban.

Price Renegotiating – are you renegotiating or declaring an unwillingness to perform?

The commercial reality is that prices have and will continue to increase, forcing parties to look for ways to renegotiate price. Long term contracts of some commodities like LNG may have price review clauses triggered when price moves beyond a certain range. The general terms of oil majors also contain clauses entitling the buyer or seller or both to seek renegotiation of contract terms affected by changes in regulations which have an effect on contractual performance, e.g. section 64 of the BP GTCs, Article 11 of the Exxon GTCs, and section 16 of the PTT GTCs. The effect of such clauses will depend on the precise language but once again, an objective understanding of causation will be required to understand if such clauses have indeed been triggered.

In the absence of provisions allowing for renegotiation, setting the path for such an exercise can be a delicate balancing act. In seeking to convince counterparts of difficulties in performing, it is important to avoid language or behaviour that conveys an intent not to perform the contract as this may amount to stepping on the termination landmine, entitling your counterpart to terminate.

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