Armed conflict and force majeure

On February 25, 2022, following the invasion by the armed forces of the Russian Federation, the Swiss commodity trading and mining company Ferrexpo, operating mainly in Ukraine, suspended exports from the port of Pivdennyi in southwestern Ukraine. The company said it has sent force majeure notices to some customers waiting to receive products that were scheduled to ship. Given the events unfolding in the region, such notices are likely to multiply in the coming days, significantly disrupting the operation of many contracts.

Force Majeure Claims in Situations of Armed Conflict

The doctrine of force majeure exonerates liability for non-performance, when an unforeseeable, insurmountable and irresistible event makes this performance impossible.[1] Although force majeure is a general principle of law applicable in most legal systems, there are significant differences between national laws regarding the application of the doctrine, including:

  • the nature of events that may qualify;
  • the degree of impossibility that may be required; and
  • the extent to which liability can be excluded.

In common law, for example, there is no extra-contractual application of force majeure, it must therefore appear in a contract to be invoked in defense by one of the parties. In cross-border contracts for the sale of goods, the United Nations Convention on Contracts for the International Sale of Goods (“CISG”) will govern force majeure conditions, unless the application of CISG is contractually excluded, provided that the places of residence of the parties the companies are located in the Contracting States.

Nevertheless, cross-border contracts for the supply of goods or services almost invariably include force majeure clauses. These generally include a list of events, which may or may not be exhaustive, which are presumed to qualify as unforeseeable, insurmountable and irresistible. These qualifying events generally include:

  • natural disasters;
  • fires or explosions;
  • epidemics;
  • acts of terrorism;
  • acts of governmental authority (such as sanctions and similar governmental measures that interfere with performance); and
  • an armed conflict.

However, the presumption that such events are unpredictable, insurmountable and irresistible can be overturned on the basis of evidence to the contrary. In the case of an armed conflict, contracts concluded at a time when the conflict in question is reasonably foreseeable cannot – unless expressly stated otherwise in the contract – allow a party to successfully invoke force majeure by reason of the foreseeable conflict.

In addition, for a party to successfully assert force majeure, it must demonstrate that the conflict has made it impossible to perform its contractual obligations. While the presumption of irresistibility regarding armed conflict can facilitate such a demonstration, documenting attempts at enforcement – ​​and how they were frustrated – can ensure that liability is excluded in the event of litigation.

Force Majeure Claims for Downstream Parties in the Supply Chain

Armed conflicts can significantly disrupt entire supply chains. The extent to which non-performance by a third-party provider can be relied upon by a party as the basis of force majeure is generally determined by contract. [2]

However, in the absence of such specific clauses, a case-by-case analysis will determine whether liability can be excluded. Depending on the law of the contract, the parties may be required to find another supplier – even at a significantly higher cost – to perform their obligations. This makes the invocation of force majeure much more difficult where the supplies affected are freely traded commodities, whereas disruption of supplies of non-fungible goods may provide greater justification. Indeed, the party invoking force majeure must demonstrate that it is legally or materially impossible for it to perform its contractual obligations, and not simply unprofitable or more difficult to perform.

Force Majeure Claims Due to the Imposition of Sanctions

Armed conflicts often result in the imposition of sanctions or restrictions on one or both belligerents, extending the collateral economic impact of the conflict beyond the immediate area affected by hostilities. These measures could suddenly:

  • make the sale of specified goods or services illegal;
  • restrict payment methods; Where
  • prohibit transactions with certain parties;

all of this could greatly disrupt the normal operation of a contract. Whether or not penalties constitute a force majeure clause will vary depending on:

  • the wording of the clause;
  • the object of the contract; and
  • the effect of the sanctions in question.

Where the contract itself has been rendered illegal due to the imposition of penalties, in most legal systems the appropriate remedy would not be force majeure, but rather a termination of the contract following an allegation of wrongdoing. impossibility or non-execution.

Even if the imposition of penalties falls under a force majeure clause, the party invoking force majeure still has to demonstrate that the penalties were not foreseeable at the time of the conclusion of the contract. If penalties were foreseeable, it could be argued that a supplier should have sought another source of supply, in advance.

Takeaways

  • Disruptions due to armed conflict are generally assumed to be unpredictable, insurmountable and irresistible.
  • The party opposing a force majeure action may reverse these presumptions if it can demonstrate that the conflict was not unforeseeable at the time of the conclusion of the contract, or that the conflict did not in fact render the performance of its counterparty’s obligations.
  • A party seeking to invoke force majeure in situations of armed conflict should document its attempts to fulfill its obligations and the obstacles it has encountered.
  • Unless otherwise provided by contract, disruption of third-party suppliers will generally not be considered force majeure if such goods can be obtained from another source.

The capacity or not of sanctions to constitute a case of force majeure depends on their foreseeable nature and on the analysis on a case-by-case basis of the impact of the sanctions on performance.