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The invasion of Ukraine - effects on contractual obligations - supply chains – force majeure

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The Russian invasion of Ukraine leads to disruptions of supply chains, delays, price hikes, issues with payment streams and claims for renegotiation of contracts, etc. As the conflict persists and escalates, delays may develop into non-fulfillment of contracts. Many commercial contracts include a force majeure-clause, but far from all. General concepts such as frustration and inequitable obligations are often claimed and may or may not apply according to the concrete circumstances. Questions also arise as to possible steps of mitigation that may be expected. In any event, the situation requires action, both at the strategic and legal level.

This newsletter will provide a general overview over the relevant requirements for establishing that the invasion of Ukraine constitutes a force majeure-event, effect on fulfillment of the contract in question, as well as the legal consequences of force majeure. We will also shortly describe legal concepts similar to force majeure.

Please note that this newsletter does not provide an exhaustive description of the theme and must not be construed as legal advice. Determining the contractual effects of unforeseen events is always a matter of interpretation of the concrete contractual relationship. Companies typically have a variety of vendors upstream and customers downstream and the effects do not necessarily have to be the same in both directions. Companies should therefore carefully consider its options and have a strategy on how to manage the various effects of the invasion, not only on its relationship with actors in Russia, Belarus and Ukraine, but also indirect effects on distribution chains.

Is the conflict considered a force majeure-event?

Force majeure clauses are typically included in commercial contracts, but their exact wording varies. We often see terms such as "war", "riot", "strike" and "other events beyond reasonable control of the Parties" included in force majeure clauses. If the contract at hand includes "war" as a relevant force majeure event, the invasion of Ukraine will constitute force majeure for direct effect of the invasion, such as deliveries from factories in Ukraine no longer able to deliver. Discontinued transport to and from areas of Ukraine directly affected by the hostilities creating high risk to personnel and goods may also be a direct effect of war. It is however uncertain exactly the extent to which transport is impossible or associated with acceptable risk, possibly in combination with alternative transport routes.

The same principle applies to trade sanctions; whether the imposed trade sanctions constitute force majeure, depends on the wording of the particular clause and the exact wording of the sanction, by whom they are passed and to whom they are addressed. The embargo on oil and gas imports are for example passed by the US and not by the EU.

If the clause itself does not define which incidents constitute force majeure, but merely refers to "force majeure", "incidents beyond reasonable control of the Parties" or similar, a more comprehensive legal assessment is required. Under Norwegian law, there is no uniform definition of force majeure. The Norwegian Supreme Court has stated that as a bare minimum, the event must be external, unexpected and extraordinary, as well as being beyond the control of the parties[1]. However, which events that constitute force majeure, will also vary depending on the nature of the relevant contract.

If the contract does not specifically include a force majeure clause, it is still under Norwegian law assumed that the principle of force majeure applies under certain conditions. When assessing whether an incident constitutes force majeure, the Norwegian Supreme Court has stated that an interpretation of the specific force majeure clause in the contract is decisive.[2]

Could the conflict have been foreseen at the time of entering into the contract?

Force majeure clauses typically contain a condition that the party could not have foreseen the event in question at the time of entering into the contract. If such a condition is not included in the contract, it is implied under Norwegian law that such condition still applies.

Whether an event could be foreseen at the formation of the contract, will depend on an individual assessment. Norwegian Supreme Court case law concerning trade sanctions during the First World War provides examples of force majeure objections being rejected when the war had lasted for some time.[3] Consequently, for new contracts entered into while the invasion persists, explicit reservations should be made relating to impediments to performance as a result of the invasion and related matters, such as trade sanctions. For contracts that were entered into prior to the imminent threat of an invasion, it will as a starting point be possible to argue that the armed conflict was unforeseeable. However, as the conflict has developed over a period of time, care should be taken when relying on force majeure arguments for contracts being entered into shortly before the invasion. 

Does the conflict affect the ability to fulfill the contract to a sufficient degree?

Some companies will likely be unable to meet their contractual obligations in the near future, due to the invasion . However, if the conflict affects a party indirectly through their supply chain, it is not sufficient to simply refer to the ongoing conflict to trigger the legal effects of force majeure. In addition to being a relevant force majeure event in the specific contract, the event must also affect the possibility of fulfillment in a significant degree. If a party could overcome the obstacle with reasonable efforts, force majeure cannot be invoked. How extensive the fulfillment difficulties must be, depends on an interpretation of the contract in question.

In many cases the clause requires that fulfillment is "impossible" or "significantly hindered". If a party for instance is reliant upon a Russian subcontractor in their supply chain, governmental sanctions prohibiting trade with Russian companies will often meet these thresholds. However, if the Russian subcontractor can be replaced with a subcontractor from another country, a closer assessment of the difficulties and costs must be made. Norwegian Supreme Court case law dating back to the 1920s suggests that the party is obliged to fulfill even if the fulfillment inflicts a significant loss on the party. If fulfillment causes a significant risk of bankruptcy, it may qualify as being "significantly hindered" or similar.[4] If a contract become more expensive to fulfil or substantially less profitable than expected when the contract was entered into, it will be difficult for a party to argue that it is impossible or it is significally hindered in the performance and in these examples it is unlikely that a party can invoke a force majeure clause.

What are the legal consequences of force majeure?

When the conditions for force majeure are met, it remains to be assess what the legal consequences may be. A specific interpretation of the clause in question is the starting point when assessing the consequences of force majeure. If the contract does not specify the legal consequences of force majeure, the contract still be interpreted it its full context and may be supplemented by relevant background law. The consequences will vary depending on the type of contract at hand. These are the most common consequences when a force majeure event occurs:

Other possibilities if not force majeure

Force majeure may not be the only relevant remedy for a party facing challenges in his contractual relationships due to the invasion of Ukraine. There may be other provisions in the contract that may be of relevance, i.e. war clauses or other clauses addressing risk sharing. In addition to express contract provisions, Norwegian background law may also be of assistance for a party finding itself in a difficult position. This can be the Norwegian doctrine of “subsequent failed contractual assumptions” (Norwegian: “læren om bristende forutsetninger”), the Norwegian contract act section 36 on inequity or the doctrine of anticipated breach.

The application of force majeure clauses, the doctrine of force majeure as well as the other contractual remedies will be subject to concrete interpretation and fact specific assessment, and care should be taken when considering a party’s position and steps that may be appropriate in the particular contract. Schjødt’s team has substantial experience in assisting clients in these legal and strategic assessments.

Schjødt has the knowledge

It should be noted that a party’s position will depend on what the governing law of the contract will be. This is of particular importance when assessing a party’s position in a force majeure situation. The assessment will be very different depending on whether the contract is governed by Norwegian or Swedish law may be very different than for contracts governed by English law. Schjødt has highly experienced lawyers in Norway, Sweden and England who can provide assistance for the relevant jurisdiction. We also have native speakers of Ukrainian and Russian who may assist in interpretation of documents such as transport documentation, local regulations and assessment of news sources from Ukraine.

[1] HR-2016-1235-A para. 40

[2] HR-2016-1235-A para. 34

[3] e.g. Rt. 1922 s. 562

[4] Hagstrøm et al. (2021) page 291-292

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