UK: Crisis in Ukraine – Implications for contracts under English law
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The crisis in Ukraine will increase pressure on global supply chains, which are already under strain due to the continued impact of COVID.
We anticipate that companies will need to review their supply contracts as a matter of urgency to assess the possible impact and whether specific actions are needed to comply with their contractual obligations and/or protect their position.
Areas of interest
We consider the following areas to be central to this review of contracts governed by English law:
Force majeure resulting from a disruption of supply:
- Force majeure clauses generally allow a party affected by an event beyond its control to suspend performance of its obligations without penalty.
- However, the wording of these clauses is critical to understanding how contractual performance is affected by the force majeure event, as English law does not imply the concept of force majeure in contracts.
- Particular challenges can be faced by parties in the middle of supply chains, on the one hand requiring suppliers to perform, while on the other hand needing to make the case to customers that performance is impossible or must be delayed. .
Price increase clauses:
- Price review clauses contain mechanisms to prevent a contract from becoming too financially onerous for one or both parties.
- They are meant to reflect (and respond to) changing market conditions – especially during a long-term contract. The increase in the cost of raw materials, energy and transport will probably result from the current crisis.
- Disputes often arise as to whether the clause has been incurred and the method by which the price adjustment should be calculated.
- MAC/MAE clauses are intended to protect the parties against the risk that an unforeseen event or circumstance may arise which has a material adverse effect on one or more of the contracting parties.
- Any “change” will need to be material, not only to a company’s overall financial health, but also to whether or not it can afford to (for example) repay a loan or complete a transaction.
- Establishing that an event caused an EAD or that an MAC occurred is rarely straightforward, and a common area of debate is the benchmark against which to measure the change or adverse effect.
Compliance clauses related to sanctions:
- Sanctions compliance clauses are intended to prevent or limit dealings with entities subject to global sanctions regimes.
- Failure to comply with sanctions regimes may lead domestic and foreign authorities to initiate sanctions compliance investigations, and may result in the imposition of significant fines and/or other penalties.
- In the event that a counterparty becomes subject to a sanctions regime, it may be necessary to cease supplying that counterparty and/or to terminate the contract.
There are various steps businesses can (and should) take now to ensure that they do not become legally and/or commercially exposed as a result of the current crisis in Ukraine. These include:
- Review all key contracts to assess whether or not they can be executed on time (or at all) and whether changing market conditions have made the contracts materially more onerous or costly to execute.
- Considering the contractual protections (if any) available to them to delay or suspend performance or (potentially) terminate contracts, as a consequence of the effects of the ongoing crisis.
- Assess whether the contracts contain a price adjustment mechanism, in the event that the cost of performance has increased by a significant amount.
- Review sanctions provisions in all major contracts and terms and conditions to ensure they are up to date and contain necessary restrictions on trade with newly sanctioned countries, including Russia.
Although current circumstances and their impact on supply chains are likely to put additional pressure on already strained supply chain conditions, the risk of a dispute arising can be mitigated by clear communication. between upstream and downstream parties in the supply chain – all of which are likely to face common challenges.
Therefore, while it is important for businesses to ensure that all of their legal positions are properly protected, it is equally important to keep business communication channels open to prevent supply issues from escalating into full-scale litigation. commercial.
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This article by Mayer Brown provides information and commentary on interesting legal issues and developments. The foregoing is not a complete treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action regarding the matters discussed here.
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