Force Majeure Clauses & War – Conflict In Ukraine

Due to the ongoing conflict in Ukraine, many businesses across the world are considering their continued presence in Russia due to their own ethical reasons and the severe sanctions imposed by Governments globally. Further to this, the ability of a party to perform its obligations under a contract, which has been affected by the conflict, is likely to be extremely difficult.

Where a business is unable to carry out its contractual obligations, it will need to review and consider the terms of the contract itself to try to ascertain if they are able to avoid or mitigate any breach of contract liability. If a business can’t fulfil its contractual obligations it may be possible to rely on force majeure clauses so as to avoid any liability that would otherwise constitute a breach of contract.

What is a force majeure clause?

A force majeure clause refers to the occurrence of an event that is outside the reasonable control of a contractual party that prevents or delays it from performing its obligation under a contract. It is an agreed allocation of risk between the parties on the occurrence of a specific intervening event.

The majority of commercial contracts are drafted to include force majeure provisions and “acts of war” is an event that is often listed under this heading. However, even if this is not listed in a contract, conflicts, such as what is currently taking place in Ukraine, are expected to meet the required threshold test of many force majeure clauses. Although, this on its own, may not always be enough to excuse the non-performance of a contractual obligation by a party, therefore, careful consideration is required.

A party that is considering relying on a force majeure clause will need to clearly demonstrate that the events of relevance, e.g. the war in Ukraine, are the cause for non-performance. Contracts that have a direct connection with Ukraine are more likely to be able to connect the ongoing conflict there to the root cause of the non-performance of any contractual obligations. However, ultimately, this will depend on the relationship between the events and contractual obligations of relevance and therefore, the area can be complex.

Where non-performance is argued to be a result of a secondary impact of a conflict, e.g. changes in currency valuations or commercial consequences of an existing transaction there is also an argument that these instances might be covered by a force majeure clause. However, the precise wording of the clause will need to be analysed to determine whether there is a causal link between the impact and the non-performance. This may also be the case with Government enforced sanctions against Russia, which may restrict a party from carrying out its contractual obligations.

In the main, force majeure provisions will only have a temporary excusing impact, and so once the event of relevance is no longer occurring, the contractual obligations will, in essence, recommence.

Can I terminate a contract for a force majeure event?

A party’s right to terminate a contract for a force majeure event primarily relies on the terms of the agreement between the parties and the precise wording of the force majeure provision. However, it is not uncommon for a force majeure clause to only limit a party’s liability to the extent of its failure to perform. This means it may not provide a right to instantly terminate the contract.

Frustration arising from the war as a supervening event

Unlike force majeure, frustration is a law doctrine that refers to the common law right to terminate a contract following the occurrence of a supervening event in which neither party of the contract is responsible. A supervening event is unforeseen and operates independently of anything else and becomes the proximate cause of an issue.

There are many examples of the outbreak of war leading to a contract being frustrated, predominantly in cases where performance became unlawful as a result of Government war regulations and sanctions regarding or preventing the supply of goods and services.

It is important to recognise that where contracts do not have force majeure provisions they can still be considered to be discharged by the doctrine of frustration. However, again, the terms of the contract will need to be carefully considered.

Comment

As well as considering whether force majeure applies to any contract you have, it is also important to understand whether the war could trigger any other contractual terms in your supply contract. Examples of this could be, a price acceleration clause that has been designed to ensure that a contract does not become too financially onerous for one or both parties, or resulting liquidity issues for your counterparty could have triggered an insolvency event which would therefore give you the right to a contractual termination.