22 March 2022

In an attempt to put pressure on Russia to back out of its attack on Ukraine, both the UK government and the EU have recently implemented a range of new sanctions. These sanctions include widening the number of individuals and organisations whose assets have been frozen and/or seized, preventing the export of certain luxury goods and the provision of certain services, and adding significant tariffs to specific goods imported from Russia. What is the position, however, for UK businesses that wish to cease trading with Russian entities that are not caught by the sanctions regime?

Many businesses simply do not want to do business with organisations and entities which are Russian based, or which have links to Russia, and which are not directly caught by the formal sanctions regime. Many UK businesses have concerns about the reputational damage which could result from continuing to do business with Russia and the commercial benefits they are providing to Russian entities and, ultimately, the Russian economy. In some cases, businesses are worried that they have contractual arrangements in place with entities which are not currently caught by the sanctions regime but which might be caught in the future. The Russian sanctions landscape is changing on a weekly basis at the moment and what is lawful this week may not be lawful next week. So what can UK businesses do to mitigate their position? 

Contract review

A full review of potentially affected contracts is important to ensure that you are not already caught by new sanctions and to ascertain where any risks might lie. For the purposes of this article, we will assume that your contract is governed by English law.

Step 1: Know who you are contracting with. Review any contracts (up and down the supply chain) where you think there may be a Russian connection and check the ownership structure of the party you have contracted with. World check searches can be carried out where necessary.

Step 2: Run a check against the UK sanctions list (and, where relevant, EU or other jurisdictional lists) to establish whether you are caught by existing sanctions. If you are caught, speak to your lawyer for advice on contacting the relevant authorities and reviewing your contractual position. It is likely you will need to suspend trading with that entity immediately and ringfence any relevant funds that you hold.

Step 3: If you are doing business with an entity which concerns you and you are contemplating withdrawing from the contract, carry out a full review of your terms of business to establish whether you have any contractual grounds on which this could done.

Contractual terms

Where a counterparty to a contract is not subject to sanctions but you wish to cease doing business with them in any event, the position is more complicated. In some cases, you may be able to terminate or suspend business with a Russian counterparty on specific contractual terms. Contracts sometimes include provisions which allow this where there is a risk of reputational or commercial damage to a party in circumstances where the counterparty is not directly responsible for that damage. Usually, however, such a clause only takes effect where the damage is caused by the actions of the counterparty. Unless the counterparty is the Russian government, that is unlikely to apply to most businesses simply by virtue of them being linked to Russia.

You may be fortunate enough to have a break, termination or ‘force majeure’ clause which is worded in a way that allows you to suspend or terminate trading for reasons which would apply in connection with the war in Ukraine. However, terms of this nature can usually only be relied upon where a party is unable to perform its obligations under a contract, not where it is undesirable for performance to take place. So unless you can demonstrate that the war is affecting your ability to deliver goods or services, or is otherwise impacting performance in practical terms, reliance on contractual terms to get a business out of its obligations may be limited or non-existent. 

In some cases it may be possible to invoke an implied term where written terms don’t assist. The courts are generally reluctant to imply terms into commercial contracts, however. Again, therefore, unless it can be demonstrated that a party is unable to perform its contractual obligations, it is likely to be very difficult to rely on implied terms to assist.

What’s the alternative?

In short, if you wish to suspend trading with a Russian entity which is not currently caught by sanctions, you may have to accept that doing so will put you in breach of contract. Before taking any steps, therefore, it is important to review your terms of business to establish what, if any, losses you may be responsible for if you do go ahead. You may find that losses are specifically capped or limited. If they are not, you will need to consider how wide a claim for losses might be and therefore how financially exposed you are. Take time to consider what profits you think the counterparty might have made from trading with you over the remaining term of the contract and what losses/risks/claims they will be facing further down the supply chain if they are unable to perform due to your breach. 

Also consider what steps you might be able to take to mitigate your position and your counterparty’s losses in the event that you do decide to terminate. Might you be able to give a ‘reasonable’ period of notice to your counterparty, in order to give them time to source goods from an alternative source, for example? Before acting, also consider the legal costs implications of your actions. Could your counterparty apply to the court for an order for specific performance of your obligations under the contract? The court will usually only order this in circumstances where it is persuaded that damages would not be an adequate remedy for the party seeking performance, but it is sensible to check the likely position in relation to your specific contract and be aware of the potential costs involved. Otherwise, what practical steps would your counterparty need to take in order to make a claim against you for damages, how quickly could that happen and what are the likely costs involved?

Above all, as World events move and change rapidly, keep your contracts under review.

Key contact

Mark Paterson

Mark Paterson Partner

  • Defence
  • Business Transformation
  • Central Government

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