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Russia sanctions and contractual non-performance

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Patrick W. Pearsall

Partner

Washington, D.C.

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Gaela Gehring Flores

Partner

Washington, D.C.

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Pensyl Bradley
Bradley Pensyl

Partner

New York

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04 March 2022

In light of recent international economic sanctions imposed by the United States, the European Union, and other bodies against Russia, commercial actors should review their contracts with great care.

Disputes are already arising as parties terminate, fail to perform, or restructure contracts in response to the recent suite of sanctions.

Many complex commercial contracts have provisions stating that the parties must comply with applicable sanctions regulations and other similar restrictions, such as anti-money laundering and anti-corruption measures. For that reason, the contract is the first destination to begin to determine the rights and remedies of the parties. Whether performance is required or excused depends first on the contract. Contractual doctrines that may apply, include (i) supervening illegality, (ii) impossibility of performance and frustration, or (iii) force majeure or material adverse effect. These concepts differ significantly by jurisdiction and applicable law. They may be freestanding doctrines that a court or tribunal is bound to apply – or they might not exist at all.

A party facing a potential contractual issue arising from a change in sanctions law should take several steps:

First, the party should look to the contract to determine its rights and remedies. A court or tribunal will review both parties’ conduct to determine whether they exercised all available options under the contract to allow performance. For example, a court or tribunal may decide a party that declines to exercise an alternative course of action available to it under the contract has failed to mitigate or failed to act in good faith.

Second, the party should be sensitive to the law governing the contract. This applicable law – in addition to attending regulations – may impose (or negate) compliance requirements. By reviewing the governing law in addition to the express contractual language, the party can better identify in advance the legal issues it will later need to address and adjust its pre-dispute strategy accordingly. 

Finally, and for similar reasons, the party should pay attention to the venue or legal seat specified in the contract’s dispute resolution clause. A venue located in, or subject to the laws of, a jurisdiction different from the law governing the contract may expose the party to further regulation.

An ounce of prevention is worth a pound of cure. Despite the ever-shifting legal framework, parties can and should review their contracts to ensure that they protect their interests in anticipation of a later dispute in this dynamic environment. The steps taken prior to undertaking or refusing performance can make all the difference in a subsequent dispute.

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