As Russian forces advanced into Ukraine, prompting further rounds of Western sanctions against Russia, an RMA Risk Readiness webinar February 24 focused on legal and compliance risk considerations for banks.
In addition to providing detailed information on sanctions enacted by the U.S. and like-minded nations, the presenters - international law experts from Debevoise & Plimpton - discussed how sanctions and wind-down licenses might give rise to contractual disputes, plus other factors that could come into play.
"Just because you have an inability or failure to perform under a contract does not necessarily mean that you are going to be liable for a breach of a contract,” said Samantha Rowe, partner at Debevoise & Plimpton.
According to the Debevoise team, an early step compliance officers and legal departments can take to prepare for possible contract breach disputes is to review express terms in relevant agreements and contracts.
- Force majeure clauses. Assess all terms and conditions in the contract. The force majeure clause may include events like the imposition of sanctions, either directly expressed or indirectly implied. In that case, your entity may need to alert the counterparty within a predetermined notification period if performance of the contract is likely to be impacted by the sanction relevant to your operations.
- General legal doctrines. General legal doctrines may also excuse nonperformance of a contract impacted by sanctions, such as illegality, impossibility of performance, or frustration. An existing contract may become illegal where performance contradicts public policy, such as sanctions, in the jurisdiction in which your business is operating.
- Each of these doctrines is typically subject to a high threshold and an obligor must provide sufficient evidence of difficulties faced to justify the impossibility of performance or frustration of an existing contract.
Previous court cases in the U.S. have dealt with nonperformance as a result of the imposition of sanctions, and can provide guidance. Examples relevant to OFAC officers include:
- Kashani et al. v. Tsann Kuen China Enterprise Co. A California state appellate court held that the non-performance of a contract requiring shipment of U.S.-manufactured computers to Iran did not give rise to a claim, because the agreement was illegal under U.S. sanctions regulations and contrary to public policy.
- Dresser-Rand Co. v. Petroleos de Venez., S.A.; Red Tree Investments, LLC v. Petroleos De Venezuela, S.A. et al . Two Venezuelan state-owned entities claimed they could not honor their payment obligations under loan and guarantee agreements, due to U.S. sanctions against Venezuela. The U.S. courts rejected the argument on two grounds: (i) payments under the agreements were valid under the applicable sanctions regime, and (ii) the Venezuelan entities had failed to show that they had taken “virtually every action within [their] powers” to perform the agreements. For example, they had not attempted to obtain OFAC clearance for the relevant payments. In conclusion, the Venezuelan entities were still liable because it was not sufficiently impossible for them to perform their debt repayment obligations as the contract required.
Sanctions may also make it difficult for certain entities to participate in legal proceedings. While most sanctions regimes contain exemptions or carve outs allowing sanctioned parties to effect payment for legal services and legal fees, prior authorization is required. Entities should consider whether this is likely to pose a difficulty to both enforcing and defending likely contract claims.
Finally, sanctions may also impact the ability to enforce a judgment or arbitral award. For example, in 2016, Canadian miner Crystallex won a U.S. $1.4 billion ICSID award against Venezuela. The U.S. courts have allowed Crystallex to attach shares belonging to Venezuela’s national oil and gas company. However, the sale of those shares is prohibited under U.S. sanctions, and OFAC has so far refused to permit the sale to move forward.
The Debevoise team added that setting up the right channels for periodic assessments with compliance teams and other stakeholders will help banks make decisions correctly and respond rapidly to the changing geopolitical situations and their impact on daily operations.