Sanctions imposed by the United States, United Kingdom, European Union, Japan and others on Russia in response to the horrific invasion of Ukraine have already had profound impacts and raised questions about these impacts.

These sanctions include financial restrictions imposed by the Office of Foreign Assets Control (OFAC) of the United States Treasury Department prohibiting United States nationals from carrying out transactions with the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation and the Ministry of Finance of the Russian Federation, thereby effectively immobilizing all assets of the Central Bank of the Russian Federation held in the United States or by United States nationals, wherever find.

Sanctions were also imposed on exports to Russia. Notably, the U.S. Department of Commerce, Bureau of Industry and Security (BIS) issued a final rule, “Implementation of Sanctions Against Russia Under Export Administration Regulations (EAR).” This final rule adds new licensing requirements for all Export Control Classification Numbers (ECCNs) in categories 3 through 9 of the Trade Control List (CCL). These items include microelectronics, telecommunications items, sensors, navigation equipment, avionics, marine equipment and aircraft components. Under the strict licensing review policy that is being implemented, requests to export, re-export or transfer (within the country) items requiring a license for Russia will be reviewed, with some exceptions. , for example., humanitarian needs, government space cooperation. The BIS also has in place a Foreign Direct Product Rule (the Russian FDP Rule), which establishes control over foreign-produced items that are (i) the direct product of certain U.S. software or technology subject to the ‘EAR; or (ii) produced by certain factories or major components thereof that are the direct product of certain US software or technology subject to the EAR. This control applies when the item produced abroad is destined for Russia or will be incorporated or used in the production or development of any part, component or equipment produced or destined for Russia. The restrictions imposed by the BRI are intended to have a significant impact on Russia’s ability to acquire items it cannot produce itself.

Conduct of business

While international companies have been present in Russia for many years, in today’s global market, smaller companies are also doing business directly or indirectly in Russia. As a result, Russian sanctions pose immediate problems for these companies.

First, companies that manufacture products or supplies that are sent to Russia directly or through another entity will have to analyze whether they can continue to legally export their products and supplies to Russia given the rules imposed by the BRI. In particular, companies need to determine (i) whether certain licenses will be required, (ii) the actions needed to obtain those licenses, and (iii) the timing and likelihood of obtaining them. Significantly, companies must determine whether their products and supplies that they supply to an entity that is not in Russia will be exported by that entity to Russia. In other words, companies may not be able to do, even indirectly, what they cannot do directly.

Second, if sanctions prevent a company from exporting its products and supplies to Russia, the company will need to review its sourcing contacts to prepare for potential non-performance claims. As part of this review, companies should be aware of and analyze the possible defenses they might have against such claims. In addition, these companies should be aware of the possibility that their suppliers will raise the same defenses if the companies bring suits against these suppliers.

force majeure

Contracts often include force majeure provisions, which state reasons excuse a party’s performance under a contract as a result of specified events. These events generally include wars, invasions, insurgencies, riots, acts of God, other causes beyond a party’s control and orders, and possibly regulations or restrictions imposed by governmental authorities. . Accordingly, a company affected by Russian sanctions should check whether its supply contracts contain force majeure provisions and whether the Russian sanctions constitute an event justifying full or late performance of the contract. The provisions may also provide that performance is excused only for the period during which force majeure event exists, or that a party must engage in efforts to mitigate the effects of the event force majeure Event. This analysis may require, for example, determining whether the Russian invasion, which is an undeclared war against Ukraine, can excuse the execution, or whether the sanctions fall within the scope of other provisions of the force majeure provisions, thereby excusing performance or delay in performance.

(Second) restatement of contracts

Although it is determined that force majeure is not a viable defence, several sections of the contract (second) restatement, including sections 261, 264 and 265, should also be reviewed and analyzed for possible applicability.

  • Section 261 covers discharges by impracticality occurring. This article provides that when, after the conclusion of a contract, the performance of a party is rendered impossible without its fault by the occurrence of an event, and the non-occurrence of this event was a basic assumption on which the contract was entered into, the party’s obligation to make such performance is discharged unless the language or the circumstances indicate otherwise.

  • Section 264 covers prevention of performance by regulation or government order. This article provides that if the performance of an obligation by a party is rendered impracticable by reason of the obligation to comply with a domestic or foreign governmental regulation or order, and the non-occurrence of the regulation or the order was a basic assumption on which the contract was made, his obligation to make such performance is discharged unless the language or the circumstances indicate otherwise.

  • Article 265 covers discharge from execution by the occurrence of frustration. This section provides that where, after a contract has been entered into, a party’s primary purpose is materially frustrated through no fault of the party by the occurrence of an event, and the non-occurrence of that event was a basic assumption on which the contract was concluded, the remaining obligations of performance are fulfilled unless the language or the circumstances indicate otherwise.

Impracticality and frustration of purpose

In analyzing the applicability of the defense of impracticability of performance, the examination turns to the question of whether the non-fulfilment of the circumstance was a basic assumption on which the contract was concluded. If a party’s performance under the contract remains feasible, but performance exceeds the party’s ability, the party is generally not released from its obligations under the contract. If the prevention of performance is a government regulation or order, the regulation or order must prevent the party from complying with the regulation or order and performing the contract.

To establish a defense of object frustration, the object that is frustrated must have been the primary object for which the party entered into the contract, so that without that object, entering into the contract would be of little value. senses. Moreover, the frustration must be substantial and the non-occurrence of the event must have been a basic assumption on which the contract was concluded.

With respect to the defenses of impracticability and defeat of purpose, a party has a duty to make reasonable efforts to overcome the obstacle to performance. In addition, if the impossibility of performance or the impossibility of achieving the objective is only temporary, the obligation to perform may only be suspended temporarily, and when the impossibility or impossibility of performance ceases to exist, the party may then again be bound to perform the contract.

The above clearly raises questions as to whether the Russian sanctions render the performance of a contract impracticable or have frustrated the primary purpose of the contract. Answering these questions can be daunting given that the extreme nature of Russian sanctions and their impact on companies’ ability to manufacture products for export to Russia may be unprecedented in recent history.

©2022 Norris McLaughlin PA, All Rights ReservedNational Law Review, Volume XII, Number 63