Force Majeure in International Contracts & Sanctions against Russia

 

March 17, 2024

BRACE Law Firm ©

 

In light of recent international developments, force majeure clauses have acquired significant importance and broad practical application in international contracts.

The need to regulate so-called circumstances of extraordinary force arises particularly often in international trade. Frequently, after the conclusion and commencement of such contracts, situations arise where, due to circumstances beyond the control of the parties — such as imposed restrictions and supply suspensions — the performance of contractual obligations becomes impossible. This leads to issues regarding the practical application of force majeure clauses and the burden of proving that specific circumstances qualify as force majeure.

This article examines the primary features related to the legal regulation of force majeure in international trade and foreign economic activity. Specifically, it focuses on how international private law regulates the occurrence of force majeure circumstances.

Extraordinary Force and Force Majeure

Under the general rule of Article 401 of the Civil Code of the Russian Federation (the "Civil Code"), unless otherwise provided by law or contract, a person who fails to perform or improperly performs an obligation while conducting entrepreneurial activity shall be liable unless they prove that proper performance became impossible due to extraordinary force, i.e., circumstances that are extraordinary and unavoidable under the given conditions. Such circumstances do not include, in particular, a breach of obligations by the debtor's counterparties, the absence of goods on the market necessary for performance, or the debtor's lack of necessary funds.

Current Russian legislation does not contain the term "force majeure." This terminology developed in business practice to denote extraordinary force or circumstances of extraordinary force (force majeure circumstances). The word "force majeure" was likely borrowed from the transcription of the English or French phrase "force majeure" (extraordinary force). [1]

Typically, force majeure terms are included in all contracts but are often not applied in practice. However, given the constantly changing foreign policy environment, the consequences of the pandemic, and other shifts in international relations, the regulation of extraordinary force has become especially relevant in international trade.

Force majeure conditions hold a special place in foreign trade contracts, as their performance is impacted by sanctions, prohibitions, and other factors affecting cooperation between counterparties from different countries.

Impediments Beyond Control

The primary document regulating extraordinary force in international law is the United Nations Convention on Contracts for the International Sale of Goods dated April 11, 1980 (the "Vienna Convention"). This Convention uses the term "impediments beyond control." Specifically, under Article 79 of the Vienna Convention, a party is not liable for a failure to perform any of its obligations if it proves that the failure was due to an impediment beyond its control and that it could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences.

If a party's failure is due to the failure by a third person whom it has engaged to perform the whole or a part of the contract, that party is exempt from liability only if it is exempt under the circumstances mentioned above and if the person it engaged would also be exempt if the provisions of that paragraph were applied to them.

Such exemption from liability has effect for the period during which the impediment exists.

The party who fails to perform must give notice to the other party of the impediment and its effect on its ability to perform. If the other party does not receive the notice within a reasonable time after the party who fails to perform knew or ought to have known of the impediment, the latter is liable for damages resulting from such non-receipt.[2]

Similarly, according to the UNIDROIT Principles of International Commercial Contracts: "A party's non-performance is excused if that party proves that the non-performance was due to an impediment beyond its control and that it could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences. When the impediment is only temporary, the excuse shall have effect for such period of time as is reasonable having regard to the effect of the impediment on the performance of the contract.

The non-performing party must give notice to the other party of the impediment and its effect on its ability to perform. If the notice is not received by the other party within a reasonable time after the non-performing party knew or ought to have known of the impediment, it is liable for damages resulting from such non-receipt."[3]

Thus, both legal acts contain similar rules regarding the regulation of force majeure circumstances.

ICC Force Majeure Clause

In addition to the aforementioned documents, the International Chamber of Commerce (the "ICC"), a non-governmental international organization that unites chambers of commerce from various countries and business organizations and facilitates the resolution of commercial disputes, offers its own formulations for force majeure circumstances.

In March 2020, the ICC updated its force majeure clauses. According to these formulations, "force majeure" means the occurrence of an event or circumstance that prevents or impedes a party from performing one or more of its contractual obligations under the contract, if and to the extent that the party affected by the impediment proves:

• that such impediment is beyond its reasonable control;
• that it could not reasonably have been foreseen at the time of the conclusion of the contract; and
• that the effects of the impediment could not reasonably have been avoided or overcome by the affected party.

Therefore, in all cases involving the determination of whether force majeure exists, the burden of proof rests on the party invoking such circumstances.

It is further clarified that, in the absence of proof to the contrary, certain events affecting a party are presumed to satisfy conditions 1 and 2 (event beyond control and unforeseeability). In such cases, the party affected by the impossibility of performance must only prove that condition 3 is met (that the party could not reasonably avoid or overcome the consequences of the impediment). In other words, the party does not need to prove conditions 1 and 2 but must prove facts confirming the existence of condition 3.

The ICC includes the following events among those that are presumed to be unavoidable:

• war (whether declared or not), hostilities, invasion, act of foreign enemies, extensive military mobilization;
• civil war, riot, rebellion and revolution, military or usurped power, insurrection, act of terrorism, sabotage, or piracy;
• currency and trade restrictions, embargo, sanctions;
• act of authority whether lawful or unlawful, compliance with any law or governmental order, expropriation, seizure of works, requisition, nationalization;
• plague, epidemic, natural disaster, or extreme natural event; explosion, fire, destruction of equipment, prolonged break-down of transport, telecommunication, information system, or energy;
• general labor disturbance such as boycott, strike and lock-out, go-slow, occupation of factories and premises.

The clause may include these events in whole or in part.

For example, the following wording is suggested for the clause: "If the duration of the impediment relied upon has the effect of substantially depriving the contracting parties of what they were reasonably entitled to expect under the contract, either party has the right to terminate the contract by notification within a reasonable period to the other party. Unless otherwise agreed, the parties expressly agree that the contract may be terminated by either party if the duration of the impediment exceeds 120 days."

Another important point noted by the ICC is that the party affected by the impossibility of performance must immediately notify the other party of the event. If notice is not given without delay, the relief takes effect from the moment the other party receives the notice. The other party may suspend the performance of its obligations from the date of the notice, if applicable.

This condition prevents a party from invoking force majeure only at a later stage (for example, when the other party claims non-performance). If the notice is not sent timely, the effect of force majeure is postponed until the notice is received. Upon receiving the notice, the other party may suspend the performance of its obligations to the extent that these obligations arise from the obligations impeded by force majeure and can be suspended.

Furthermore, if the effect of the impediment or event is temporary, force majeure consequences apply only as long as the impediment prevents the affected party from performing its contractual obligations. Such a party must notify the other party as soon as the impediment ceases to prevent the performance of its contractual obligations. [4]

It follows from these rules that the existence of force majeure circumstances and the impossibility of performing contractual obligations must be proven.

This raises the question of how to certify the occurrence of force majeure. We will examine this issue in more detail below.

How are Force Majeure Circumstances Certified?

Based on the Law of the Russian Federation dated July 7, 1993, On Chambers of Commerce and Industry in the Russian Federation, this organization certifies force majeure circumstances in accordance with the terms of foreign trade transactions and international treaties of the Russian Federation.

The procedure for certifying such facts is approved by the Regulation on the Procedure for the Chamber of Commerce and Industry of the Russian Federation to Certify Force Majeure Circumstances, approved by Decree of the Board of the CCI RF No. 173-14 dated December 23, 2015. This document classifies the following as force majeure: natural disasters (earthquake, flood, hurricane), fire, mass diseases (epidemics), strikes, military actions, terrorist acts, sabotage, transport restrictions, prohibitive measures of states, prohibition of trade operations (including with individual countries due to international sanctions), and other circumstances beyond the will of the parties to the contract. It is explicitly noted that these circumstances do not include entrepreneurial risks, such as a breach of obligations by the debtor's counterparties, the absence of goods on the market necessary for performance, the debtor's lack of necessary funds, as well as financial and economic crises, exchange rate changes, devaluation of the national currency, or criminal actions by unidentified persons — unless the contract expressly provides otherwise or the parties have excluded other circumstances from being considered force majeure.

It is important to note that a force majeure certificate serves as weighty evidence in court; however, even with such a certificate, a court may either recognize the fact as extraordinary force or refuse to do so. Moreover, if a circumstance was not certified by the CCI in the established manner, the court may still recognize it as extraordinary force at its own discretion. [5]

For example, the Arbitration Court of the Moscow District in its decision dated January 21, 2021, in Case No. A40-28151/2020, having found that no force majeure certificate confirming the impossibility of timely delivery was submitted, concluded that the delayed delivery of necessary goods by the defendant's counterparties due to sanctions imposed by the European Union does not constitute extraordinary force under Part 3 of Article 401 of the Civil Code of the Russian Federation. [6]

In another case, the Arbitration Court of the Moscow Region, in its decision dated February 28, 2024, in Case No. A41-103633/2023, concluded that extraordinary force existed even without a force majeure certificate. The court based this on the finding that, due to the Canadian Government's decree on special economic measures against Russia, equipment received could not be returned to Russia until the Canadian Government lifted the restrictions, while the defendant had taken all necessary steps to fulfill its warranty obligations under the contract. [7] Thus, the CCI of Russia certifies circumstances of extraordinary force (force majeure) occurring within the territory of the Russian Federation. The CCI of Russia also has the right to certify force majeure circumstances in cases where:

• a foreign state imposes prohibitions and restrictions on entrepreneurial activity or currency operations, as well as other restrictive and prohibitive measures acting against Russia, if such measures affected the performance of obligations under foreign trade transactions;
• it is documented that in a foreign state, the competent authority confirming the event or certifying force majeure has ceased its activities.

The certification of force majeure circumstances is carried out through the execution and issuance of a force majeure certificate.

To obtain such a certificate, an application is submitted to the CCI of Russia, specifying:

• the name, details, and subject of the concluded contract;
• the applicant's obligations under the contract, and the procedure and terms for their performance;
• the event the applicant considers extraordinary force preventing the performance of obligations;
• the start and end dates of such an event;
• the applicant's contact details;
• other additional information related to the force majeure.

The following information and documents are attached to the application:

• the applicant's constitutional and registration documents, as well as a copy of the payment document for the application review fee;
• documents confirming the origin of obligations under the foreign trade transaction. These include the contract, its appendices and specifications, a statement on the volume of obligations performed under the contract, and other information regarding the conditions for exempting parties from liability in the event of force majeure.

The decision to issue a force majeure certificate is made in each specific case based on the contract terms and the submitted documents and information. The following criteria are considered when evaluating the application:

• the existence of obligations under the foreign trade transaction (contract) and the deadline for their performance;
• the existence of circumstances that could not have been reasonably foreseen by the party, are extraordinary and unavoidable, and documents issued by competent authorities confirming such events;
• a causal link between the occurred circumstances and the impossibility of fully or partially performing the contractual obligations, taking into account the performance deadlines;
• the period during which the extraordinary force circumstances remain in effect;
• other facts necessary for issuing the Certificate.[8]

Other states also have organizations that issue force majeure certificates. For example, in China, whose economy was significantly affected by the pandemic, the China Council for the Promotion of International Trade (the "CCPIT") operates. In 2020, this organization published a Guide to Obtaining a Force Majeure Certificate, according to which the CCPIT issues certificates related to quarantine measures, delayed resumption of work, restricted entry, flight cancellations, port restrictions, travel agency tour cancellations, requisition of medical supplies, health emergency response levels, and other governmental measures.[9]

Based on the above, a force majeure certificate is vital evidence in court. However, other evidence may be presented to the court that, even without a certificate, may indicate the presence of extraordinary force. This may include the adoption of legal acts by the authorities of Russia or another country that prevent the performance of obligations under concluded contracts.

Is the SMO Force Majeure?

Currently, in addition to general rules regarding the certification of extraordinary force, many questions arise as to whether the Special Military Operation (the "SMO") and the sanctions imposed in connection with it constitute force majeure. We will attempt to address this issue.

We believe it is possible to diverge slightly from the main topic and, as an example, look at the situation of Russian athletes recently. Order of the Ministry of Sport of Russia No. 1255 dated December 19, 2022, On Approval of the Regulation on the Unified All-Russian Sports Classification provides that if a sports rank expires while a serviceman is performing duties in the Special Military Operation, the rank is extended for 12 months from the date participation in the SMO ends. However, this regulation does not state that participation in the SMO is a force majeure circumstance.

Additionally, Decree of the Government of Russia No. 1838 dated October 15, 2022, established the possibility of amending contracts concluded through state procurement. Specifically, it allows changing the essential terms of a contract concluded for federal needs if circumstances beyond the control of the parties arose during performance that entail the impossibility of performance due to mobilization in Russia.

Thus, in some cases in current legislation, the conduct of the SMO may indirectly influence the occurrence of circumstances that can be viewed as force majeure.

As some authors note, the primary characteristic of extraordinary force is its temporary nature. For instance, the coronavirus lost its force majeure properties after the first lifting of sanitary restrictions. Similarly, the Special Military Operation possessed force majeure traits only initially; today, there is no longer a basis to consider it as such. The same can be said about sanctions, especially since Western countries announce them actively and in advance. Moreover, events such as partial or general mobilization, as well as the introduction of martial law in border regions of the Russian Federation, are now of an expected nature. Thus, the main features of force majeure are its evaluative nature, a causal link with the obligation, and its limited duration. Furthermore, the causal link must be direct, not mediated or indirect. Foreseeable events cannot be considered force majeure. Specifically, the impossibility of performance does not require regulatory specification, since any event is subject to assessment "here and now" in relation to specific persons and their obligatory relations with each other. [10]

In judicial practice, courts hold various positions on whether international supply issues related to sanctions imposed by Western countries in connection with the SMO constitute extraordinary force.

For example, the Arbitration Court of the City of Moscow, in its decision dated February 2, 2024, in Case No. A40-143967/23-118-1164, sided with a supplier that failed to make several deliveries of goods produced in another state, while the buyer attempted to recover penalties. The plaintiff argued that the defendant had guaranteed delivery and confirmed the readiness of part of the goods in a letter dated after the start of the SMO. However, the goods were not delivered. The plaintiff did not accept the defendant's arguments regarding supply restrictions due to the situation in Ukraine, citing the lack of a force majeure certificate from the Chamber of Commerce and Industry and the fact that the delivery was coordinated after the SMO began. The defendant argued it acted in good faith, maintained constant correspondence with the buyer and the manufacturing plant in Germany, and immediately returned the advance payment upon the buyer's termination of the contract.

The court concluded that after the specification was signed, EU Council Regulation 2022/1269 dated July 21, 2022, was adopted, introducing new restrictive measures against Russia (the seventh sanctions package). Article 3k of EU Council Regulation 833/2014 prohibits persons in EU jurisdiction from supplying, transferring, or exporting specified goods, directly or indirectly, to any person in Russia or for use in Russia. These circumstances are common knowledge, published in print and online versions of leading Russian media, and require no additional proof. Consequently, the plaintiff's claims were denied. The case is currently being heard by the appellate court, and no ruling has been issued yet. [11]

Additionally, the Ninth Arbitration Appellate Court, in its decree dated October 17, 2023, in Case No. A40-235865/22, found it possible to exempt a contractor from penalties for breaching contract terms but ordered the return of equipment transferred for warranty repair.

The contractor stated that the manufacturer, New England Research, notified it of the impossibility of repairing the BenchLab 7000 device in the US due to the temporary suspension of business contacts with Russian legal entities caused by economic sanctions imposed by the US Government against the Russian Federation. Due to these circumstances, it became impossible to perform the repair, which required exporting the device from Russia and subsequently re-importing it.

The court stated that the imposition of prohibitions and restrictions by a foreign state in the field of entrepreneurial activity, as well as other restrictive and prohibitive measures against Russia, constitute extraordinary force. Due to these force majeure circumstances, the contractor was unable to fully perform its warranty obligations on time. Based on this, the court held that the claim for penalties for failure to perform warranty obligations should not be satisfied. Meanwhile, the claim for the return of the equipment was granted. [12]

However, in some cases, courts do not recognize the suspension of supplies due to the SMO as force majeure. For example, the Arbitration Court of the Sverdlovsk Region, in its decision dated August 15, 2022, in Case No. A60-25036/2022, granted the claims of a Nizhny Tagil city children's hospital to terminate a contract with a supplier. The court rejected the supplier's arguments that the food supply contract was not being performed because manufacturers increased prices or suspended the release of products due to the SMO. The court noted that these essential goods were necessary for the nutrition of children in inpatient care. The plaintiff is the only treatment facility for children in the city of Nizhny Tagil and the Prigorodny District. The supplier should have exercised due diligence and taken actions to prevent the disruption of supplies, which it failed to do. Therefore, the supplier's arguments could not be accepted as extraordinary force. Increasing food prices is an entrepreneurial risk, and these risks can be minimized by maintaining a stock of necessary food products. [13]

As noted by several specialists in foreign economic activity, circumstances that are extraordinary and unavoidable but do not create an impossibility of performance cannot be considered extraordinary force. Circumstances of this kind (including the epidemiological situation, restrictive measures, self-isolation regimes, and the special military operation in Ukraine) may be discussed in light of the theory of clausula rebus sic stantibus (the preservation of a contract's force while the general environment remains unchanged) if they meet the criteria of Article 451 of the Civil Code.

A change in circumstances should be considered significant if it affects the essence of the obligatory link — the rights and obligations caused by the underlying legal fact and necessary for the performance of the obligation. From the moment of a significant change in circumstances, performing the obligation to achieve the legal purpose of the transaction becomes extremely disadvantageous from an economic standpoint. Had the parties been in such a situation, they would either not have entered into the transaction at all or would have done so on significantly different terms. [14]

Based on the cited practice, one can conclude that the SMO itself cannot be interpreted as a force majeure circumstance. However, several consequences related to the SMO — such as mobilization, the imposition of sanctions, the suspension of supplies, etc. — must be assessed comprehensively for the presence of signs of extraordinary force.

If the parties to a contract or a court establish the extraordinary and unavoidable nature of an event and a causal link between the event and the impossibility of performance, the following resolutions to the dispute regarding the performance of obligations are possible:

• concluding an agreement to suspend the contract until the extraordinary force circumstances change or end;
• modifying or clarifying the contract terms to facilitate its performance;
• terminating the contract while exempting the non-performing party from penalties.

In conclusion, it should be noted that the presence or absence of extraordinary force circumstances is subject to individual assessment depending on the facts of the case and the actual good faith of the non-performing party, requiring proof of circumstances that could not have been foreseen with due diligence and that truly make performance impossible.

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References

[1] Force Majeure: Current Issues, Case Law, and Selection of Contractual Terms. V. Yarovenko. Zakon Portal. July 27, 2020.

[2] United Nations Convention on Contracts for the International Sale of Goods dated April 11, 1980.

[3] UNIDROIT Principles of International Commercial Contracts. January 1, 1994.

[4] ICC Force Majeure Clause (the "Clause"). International Chamber of Commerce (ICC). ICC Publication No. 650. March 1, 2020.

[5] How to Prove Force Majeure for Your Business? P. Selyunin. Zakon.ru. April 17, 2020.

[6] Decision of the Arbitration Court of the Moscow District dated January 21, 2021, in Case No. A40-28151/2020.

[7] Decision of the Arbitration Court of the Moscow Region dated February 28, 2024, in Case No. A41-103633/2023.

[8] Regulation on the Procedure for the Chamber of Commerce and Industry of the Russian Federation to Certify Force Majeure Circumstances, approved by Decree of the Board of the CCI RF No. 173-14 dated December 23, 2015.

[9] How to Confirm Force Majeure in the PRC? Kaliningrad Chamber of Commerce and Industry Union. June 15, 2020.

[10] Belyaeva O. Force Majeure Transformation of Procurement Relations and Its Consequences // Progoszakaz.rf. 2023. No. 4. P. 6–11.

[11] Decision of the Arbitration Court of the City of Moscow dated February 2, 2024, in Case No. A40-143967/23-118-1164.

[12] Decree of the Ninth Arbitration Appellate Court dated October 17, 2023, in Case No. A40-235865/22.

[13] Decision of the Arbitration Court of the Sverdlovsk Region dated August 15, 2022, in Case No. A60-25036/2022.

[14] Gruzdev V.V. Transformation of the Obligatory Link Due to a Significant Change in Circumstances // Bulletin of Arbitration Practice. 2022. No. 2. P. 44–53.