The chemicals, construction, defence, electronics, energy, extractives, financial services, information, communications, and digital technologies, and transport were listed earlier this month by the UK Government as Russian sectors which will be targeted by sanctions in the event of hostilities involving Ukraine.
Some businesses in these industries are thinking about the impact which sanctions might have – whether they are suppliers or distributors, whether their contract is with a Russian business, or whether their contracts are in some way dependent on supplies from Russia.
Thoughts are likely to be at four levels, outlined below.
1. Does the distributorship agreement provide for force majeure? If so, does this cover the imposition of sanctions?
A distributorship agreement should (but will not always) provide for force majeure. But if it does, the language of the force majeure provision will determine whether the imposition of sanctions constitutes an event of force majeure.
Unfortunately, as many force majeure provisions are included in distributorship agreements with minimal thought, it is far from certain that the imposition of sanctions will be such an event. Finally, even if sanctions are a force majeure event, it is then necessary to consider what the clause provides as the consequences of the force majeure event occurring. In brief – how will the contract continue to be performed?
If, however, reliance on force majeure is not possible, consideration should be given as to whether it may be claimed that the contract for the sale of goods has been frustrated and therefore cannot continue to be performed.
Further discussion about force majeure and frustration can be found here.
2. Will export credit insurance help?
Does the business have export credit insurance in place and applicable to the relevant contract?
If it does, the next step is to determine whether and, if so, how it is affected by the imposition of trade sanctions.
3. Goods supplied for which payment is awaited
If goods have been supplied and in respect of which payment has not yet been made, the usual consideration where the distributor refuses to pay is to determine whether in the distributorship agreement or the supplier’s terms and conditions of sale (and preferably both):
- the supplier has retained title to the goods supplied; and
- if in the supplier’s terms and conditions of sale, that those terms were incorporated into the relevant contract.
But even where the supplier has included a retention of title clause, the issue will be whether:
- the words used; and
- the sequencing in which the distributor’s order is accepted,
are such as ensure that the retention of title clause is effective. The term “the battle of the forms” is well known. But unfortunately, experience tells us that, unnecessarily, on too many occasions it is a battle lost!
Finally, there is then the need to consider how a retention of title clause may be relied on in practice, not least if Russia imposes measures making it difficult, if not impossible, to rely on the legal enforcement of such a clause.
4. Attempts to cancel orders already made
In terms of orders made it would be unsurprising if, in some industries, a distributor did not give thought to trying to cancel such an order.
Whether a supplier can refuse an attempt by the distributor to cancel a placed order again depends on the distributorship agreement and the terms and conditions of sale in place between the parties and for each order.
But even where the supplier does refuse to accept a cancellation, what if the supplier is concerned that it will not be paid by the distributor? The difficulty lies in the supplier being bound to deliver the goods ordered. If the supplier fails to do so then, depending on the terms of the distributorship agreement, it may be possible for the distributor to claim that such failure amounts to a serious (or repudiatory) breach of that agreement which in turn may allow the distributor to:
a) achieve “cancellation” by the back door; and
b) depending on the terms of the distributorship agreement claim damages for the wrongful ending of the agreement!
So far as distributors – whether Russian or non-Russian distributors – whose supplies are dependent on contracts with Russian businesses are concerned, the above points can be read largely in reverse.
As a consequence, for both suppliers and distributors it can be a question of be careful what you wish for.
What are the key take home points that a supplier supplying goods into Russia or Ukraine, or a distributor operating in those countries, should take on board now in relation to their contracts?
Take home points
- Whether supplier or distributor, identification of key contracts should be undertaken as soon as possible, followed by a consideration of how the contract(s) may be affected by the imposition of sanctions.
- Where a view is taken that one or more such contracts may be affected by sanctions, the force majeure provisions in the contract(s) in question should be reviewed.
- Following this review the supplier or distributor will need to consider how it wishes to proceed in respect of such contract(s) and possibly putting other contracts in place.
Click here to read more about UK sanctions in relation to Russia.
