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The Russian military’s invasion of Ukraine, coupled with the considerable economic sanctions levied against Russia and certain Russian entities and individuals, has significantly impacted businesses worldwide. Recognizing the uncertainty created by the ongoing crisis, the Ukrainian Chamber of Commerce and Industry issued a March 30, 2022 <a href="https://ucci.org.ua/en/press-center/ucci-news/protsedura-zasvidchennia-fors-mazhornikh-obstavin-z-28-02-2022" target="_blank" rel="noopener">statement</a> declaring that the “military aggression of the Russian Federation against Ukraine, which led to the imposition of martial law,” has evidenced “force majeure circumstances.” This statement is a reminder—if one was needed following the contractual and supply chain issues tied to the global pandemic—to remain alert to the contractual issues that may arise when the armed conflict in Ukraine, and related sanctions, disrupt business operations and contractual commitments.  Force majeure clauses excuse or defer performance of a contract without liability, and “acts of war” are events commonly listed in force majeure clauses. But courts’ interpretations of “war” for force majeure purposes has shifted over time. Prior to World War II, a “war” meant a formally declared war between two or more nations, and courts distinguished between an act of war and a state of war (with only the latter qualifying as a force majeure event).  But after the shocking and unexpected attack on Pearl Harbor on December 7, 1941, that thinking began to change. As the U.S. Court of Appeals for the Tenth Circuit summarized the legal paradigm shift in 1946 when applying a war exclusion clause: “The parties did not specify any particular type or kind of war, rather they used the all-inclusive term, and we think it only fair to assume that they had in mind any type or kind of war in which the hazard of human life was involved.” New York Life Ins. Co. v. Bennion, 158 F.2d 260, 265 (10th Cir. 1946), cert. denied, 331 U.S. 811 (1947).  More recently, in connection with the Iraq war, the Southern District of New York excused the Iraqi government’s non-performance of a contract to purchase yarn from a Spanish manufacturer when UN inspectors—who were required to issue credit-conform documents—were withdrawn due to the impending Iraq war; hostilities prevented required inspection and acceptance of the goods; and the manufacturer never tendered reasonable substitute performance. Hilaturas Miel, S.L. v. Republic of Iraq, 573 F. Supp. 2d 781 (S.D.N.Y. 2008).  Below we provide general guidance on force majeure and related defenses, including those found in the common law. Evaluating whether the armed conflict in Ukraine triggers a given force majeure clause or a related defense will typically involve a fact-bound determination focused on the specific contractual language, the relationship between the conflict and a party’s performance or failure to perform, and the foreseeability of the conflict, among other possible factors. And differences in law governing the interpretation of the contract could mean that performance excused in one jurisdiction is not excused in another.  Q: What is a force majeure clause?  A: Force majeure is a French term that literally means a “superior” or “irresistible” force or power. Contracting parties often include force majeure clauses in their agreements to protect themselves from unforeseeable or uncontrollable events that prevent or unduly delay performance. These clauses, depending on their wording and applicable law, may excuse performance when an act of God or other unforeseeable event identified or included in the clause makes it illegal, impracticable, impossible, or sometimes even inadvisable, to fulfill the terms of the contract.  Q: Do force majeure clauses cover conflicts like the Russian invasion of Ukraine?  A: While contracts rarely identify specific conflicts, they typically reference “war” or “acts of war.” Even where such events are not expressly referenced in a force majeure provision, a war like the armed conflict in Ukraine could trigger other events that are identified, including, for example, an act or order of a governmental authority that renders performance illegal or impossible.  As noted, the concept of “war” for force majeure purposes has evolved over time from a rigid definition to a more flexible one. Even in statutes, such as New York Insurance Law § 3203(c)(2)(D-E), the definition of “war” includes “any war declared or undeclared, and armed aggression resisted by any armed forces,” while the expression “act of war” includes “any act peculiar to military, naval, or air operations in time of war.” In contrast, some courts have held that a “trade war” increasing prices in a fixed-price contract does not excuse non-performance under a contract’s force majeure clause. Similarly, in the wake of the 2008 financial crisis, courts have typically held that market forces do not constitute force majeure.  Choice of law may control how broadly a force majeure provision will be construed. A party analyzing a force majeure provision should assess whether governing law frowns on boilerplate force majeure provisions and interprets them narrowly. A court may also assess whether the contract’s express identification of particular force majeure events (e.g., war, change in law, abnormal delay, etc.) could be read as a limited list of events reflecting an intent to exclude others. And some courts may be stingier than others in applying catch-all references to unforeseen events or disasters.  Businesses should also keep in mind that a party’s choice to include or exclude events is likely to be assessed as of the time of contracting – the absence of a reference to war or armed conflict in a contract entered today may well be assessed differently than for a contract entered a year ago.  Q: Might other defenses to contract performance apply where a contract does not include a force majeure provision or where that provision is narrowly drawn?  A: Common law defenses to contractual non-performance, including impossibility of performance and frustration of purpose, may also be available to a party. The availability and applicability of these defenses vary by jurisdiction.  Generally speaking, the doctrine of impossibility applies (as the name suggests) when performance of one side of the contract has become impossible. The defense of frustration of purpose, on the other hand, applies when achievement of the purpose or object of the contract is frustrated, for example where a change in circumstances renders one party’s performance useless to the other. Although frustration of purpose and impossibility both implicate a party’s ability to fulfill its obligations under a contract, frustration of purpose also requires a court to investigate why the parties entered into the contract in the first place. Because determining the parties’ subjective intent implicates thornier issues, courts generally have been more inclined to consider impossibility defenses.  Whether the event at issue was foreseeable may be pivotal in determining whether a force majeure provision applies. Some jurisdictions like New York require a showing of foreseeability, whereas others like Delaware, do not. In regard to the foreseeability analysis, not all wars are judicially treated as unforeseen.  In addition, because force majeure clauses often require a showing of impossibility or frustration, courts recognize that there can be substantial overlap in applying force majeure provisions and related common law defenses. But even if a contract has a limited, narrow force majeure provision, traditional contract defenses of impossibility and frustration of performance are still in play. The exception is where the parties’ express allocation of the risks of unforeseen events is read to foreclose such common law defenses.  Q: What facts matter in evaluating force majeure claims and other defenses to contract performance?  A: Because these contractual and common law defenses focus on the impact of a triggering event on performance, parties must be methodical in documenting the link (or lack thereof) between a force majeure event and performance. What impact, if any, did conflict or sanction have on performance? Should parties have anticipated such challenges? Is the conflict being used as an excuse for an existing inability to perform that would have resulted in a breach wholly apart from the conflict? Did the party seeking to excuse performance take reasonable steps to limit the impact of the force majeure event? These and other facts could make or break a defense.  Q: Is notice of a force majeure event required?  A: A force majeure provision may include a notice requirement – for example, that a party provide notice of its intent not to perform within a certain number of days after a force majeure event. In addition to such specific notice provisions, there may be general contractual notice provisions in the contract that cover force majeure events.  Even if a contract is silent on the question of notice, a court is likely to evaluate whether reasonable notice was given. Because the impact of a force majeure or impossibility declaration is significant, a court may focus on whether a party supplied sufficient information to permit the other party to evaluate the defense and mitigate the impact of non-performance.  Finally, a party should keep in mind that a wrongfully declared force majeure may be read as a repudiation of the contract, subjecting the non-performing party to damages for breach.  Q: Does force majeure or impossibility excuse performance?  A: The language of an agreement may specify whether a force majeure excuses performance, merely delays performance, or requires some other remedy, like renegotiation of the contract’s terms.  Q: Do the contracting parties have to be in one of the countries at war?  A: Not necessarily. Force majeure may apply in different contexts where contractual performance is delayed or prevented by an event outside of the contracting parties’ control. In the context of war, that does not necessarily mean one (or more) of the contracting parties must be based in one of the countries at war. For instance, key Ukrainian vendor plants, factories, or supply lines could be damaged or destroyed during the war such that relevant goods can no longer be manufactured or distributed by a contracting party based elsewhere. That said, parties may require, in a force majeure clause, that one of the contracting parties must actually be based in one of the countries at war.  Q: Can force majeure delay or defer performance, as opposed to entirely excuse it?  A: Yes. This concept is reflected in Section 269 of the Restatement (Second) of Contracts, which states: “Impracticability of performance or frustration of purpose that is only temporary suspends the obligor’s duty to perform while the impracticability or frustration exists but does not discharge his duty or prevent it from arising unless his performance after the cessation of the impracticability or frustration would be materially more burdensome than had there been no impracticability or frustration.” See Restatement (Second) of Contracts, § 269 (1981).  Q: What can parties whose contracts are potentially impacted by war in Ukraine learn from force majeure cases that arose during the COVID-19 pandemic?  A: Force majeure cases that arose during the pandemic may be instructive. In those cases, courts have typically honored parties’ contractual allocations of risk.  On that note, affected parties should consider the following legal and business considerations:  (1) The terms of the force majeure provision are key. Any list of non-exhaustive force majeure events and consequences of triggering a force majeure event are especially important.  (2) Similarly, governing law may be pivotal. If no choice of law provision exists, parties should thoroughly evaluate which potentially applicable law provides the most protection under the circumstances.  (3) The parties may brainstorm alternative methods of performance, minimize delay, mitigate any losses, and/or explore other practical solutions for resolving any dispute. For instance, it may be in the best interest of both sides to modify the underlying agreement.  (4) The parties should be mindful of notice provisions in the contract.  (5) Parties should review any applicable insurance policies that may cover the supervening event.  (6) Detailed records of impracticability, frustration, or delay should be kept, as well as documentation of any steps taken to mitigate loss or explore alternative means of performance.  (6) If there is no force majeure provision in the contract, parties should evaluate (ideally through the advice of legal counsel) other contractual remedies, such as price adjustment clauses and material adverse change (MAC) or material adverse effect (MAE) clauses.  (7) The war in Ukraine may drag on for some time. That is, at least, currently foreseeable. Parties should consider specifically referring to the war under the force majeure clause in future contracts (and clarify allocation of risk, whether and/or how a party may be excused from performance, etc.).  * * * *  As your business confronts the challenges of navigating the significant impact on businesses created by the ongoing conflict in Ukraine, BakerHostetler is here to help. We are continuing to develop and publish information about this fast-changing environment and have developed an online resource to help address and answer legal questions, available <a href="https://www.bakerlaw.com/Ukraine-Russia-Conflict-Resource-Center" target="_blank" rel="noopener">here.</a>

core/freeform

Washington, D.C.

Partner

Gilbert S. Keteltas

Cleveland

Los Angeles

Kyle T. Cutts

Seattle

Associate

Alexander Vitruk

Emily S. P. Baxter

Litigation

Russia-Ukraine War Resource Center

FAQs: Ukraine-Russia Conflict: Force Majeure and Other Defenses to Contractual Performance

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