Could your business be affected by Russia-related sanctions? Key contractual issues to consider

The recent economic sanctions imposed by the West against Russia (and Russian businesses and individuals) have caused significant disruption to global trade and commerce. Australian businesses and supply chains are no less affected. Aside from sanctions issued by Australia, Australian businesses might be restricted by sanctions issued by other countries or political or economic unions (such as the EU). This is because some sanctions have long-arm, extra-territorial effects.

Therefore, Australian businesses who trade with a Russian counterparty (directly or indirectly) should consider whether any sanctions affect them and the implications for any contractual rights and obligations. For example, the impact of the sanctions might mean that the Australian party cannot make a contractual payment to the Russian counterparty or that it cannot or will not fulfil an order. Financial investments and products involving Russian counterparties might also be affected. Failure to perform a contract can give rise to the liability of the breaching party.

As a guiding rule, if a sanction prevents compliance with a contract – comply with the sanction. Failure to do so may amount to a criminal offence. 

Key contractual issues to consider

When considering the impact of the sanctions on contracts (and the inability to comply with their terms), regard should be had to:

1. The doctrine of frustration of contract (which includes supervening illegality), which applies where the parties are discharged from all their future obligations because the contract has become incapable of being performed through no fault of either party. If a contract is frustrated, it will automatically terminate. All future obligations cease, and no party is entitled to damages.
2. The terms of the contract itself:
   • Force majeure clauses – clauses providing a large range of extraordinary (potentially frustrating) events that prevent one or both parties from fulfilling the contract (eg war). Generally, when a situation specified in the contract transpires, both parties are discharged from all their obligations.
   • Material adverse change clauses – clauses that generally allow a transaction to be cancelled if a specified event that has a detrimental impact on the value of the transaction (ie a “material adverse change”) occurs.
3. Whether there has been a “total failure of consideration”, in which case, both parties may be discharged from all their obligations, even though one (or both) parties incurred performance costs.
4. Whether the parties may be able to rely on a quantum meruit claim, which may allow them to claim payment for work done in fulfilment of the contract (even if, for example, the contract is otherwise frustrated).
5. The governing law of the contract (choice of law). This is because, in most cases, the law which the parties choose to govern the contract will be relevant to understanding the rights and obligations under that contract.
6. Any jurisdiction clause in the contract. A jurisdiction clause usually determines which court or arbitral tribunal will hear any dispute under the contract. This said, even though the parties may have expressly agreed on a specific jurisdiction, the courts may not always uphold that choice.

Caution

Before refusing to perform or purporting to terminate a contract, legal advice should be taken on the legality of that act and the consequences that may arise. For example, a party may have taken action to terminate a contract thinking it has been frustrated. If that analysis is incorrect, the termination might amount to wrongful termination (and therefore repudiation) of the contract, exposing the breaching party to a claim in damages.

Sanctions

The following resources can be used to find further information about the most common Russia-related economic sanctions:

AU: Department of Foreign Affairs and Trade

UK: Foreign, Commonwealth & Development Office

US: Department of the Treasury

EU: European Council