Force Majeure and the Inability to Fulfil Obligations in the Context of Sanctions

Key conclusions

Force majeure circumstances such as those arising from sanctions may prevent the fulfilment of financial obligations

“Of course, force majeure can prevent a monetary obligation from being discharged. As a matter of fact, we are seeing that sort of thing right now,” Vsevolod Baibak, Associate Professor of the Department of Civil Law and Procedure, National Research University Higher School of Economics (St. Petersburg).

“There have definitely been cases of force majeure. The very same temporary force majeure, [...] and it is impossible to fulfil these monetary obligations. Prohibitive measures of some kind. There have been such cases. We have issued certificates of force majeure in cases where there is a causal link between the prohibitive measure and the impossibility of fulfilment,” Vadim Chubarov, Vice President, Chamber of Commerce and Industry of the Russian Federation.

“There are situations when monetary obligations cannot be fulfilled. And this objective reality stems from the nature, in fact, of money. Let me remind you that most of our payments are made in non-cash form, meaning that money has no physical nature. It’s a kind of virtual reality created by banking infrastructure. If the banking relationship were to collapse, you wouldn’t physically be able to make a payment. And with sanctions, it has just become that objective,” Yury Shalnev, Head of Sanction Consulting and Corporate Finance Practice, Gazprom Neft.

PROBLEMS

The absence of a clear position on recognizing force majeure in the context of sanctions

“We did propose leaving the question, [...] whether the situation is due to unfriendly actions on the part of foreign states, which is a whole other topic, whether we’re talking about decisions made by the governments of these states, or in general about some kind of backdrop to cancel culture, which we were talking about, so - is it force majeure for domestic relations, [...] because actually in practice that is all that matters. For in relations with partners from those same unfriendly countries, as a matter of principle they are indifferent to what our legislator thinks. And, conversely, we have now quickly become indifferent to what their legislator thinks. The only question is whether the assets are there or here. So in domestic Russian relations it was important for us to avoid the domino effect with everyone starting to formally invoke this topic and refusing to fulfil their obligations,” Alexey Khersontsev, State Secretary – Deputy Minister of Economic Development of the Russian Federation.

“The first problem is right in front of us. Namely, the extent to which we can witness sanctions activity along the entire contract chain. And we already have a backlog of about five thousand written declarations from companies. It’s you, colleagues, who have to figure out whether you can testify to this or not. And approximately 18,000 consultations and verbal explanations on how we should proceed in this case. So far, frankly, and we reiterated this at our recent Chamber Leadership Council, we have suspended issuing any rulings on these facts because they are not sufficiently clear to us,” Vadim Chubarov, Vice President, Chamber of Commerce and Industry of the Russian Federation.

“To say that failure to notify would prohibit invoking force majeure in the future is fundamentally wrong. Maybe it’s just obvious to everyone and to the creditor as well, that notification [is needed] to someone who understands everything perfectly well. This needs to be stressed because it is such unnecessary red tape. It’s in the vast majority of agreements. Whoever wrote these pro-formas, and whoever still uses them, well, get rid of them,” Mikhail Tserkovnikov, Head of Energy Group, Pepeliaev Group; Head of the Department of Law of Obligations, Private Law Research Centre under the President of the Russian Federation named after S.S. Alexeev.

SOLUTIONS

An individual approach to dealing with each potential case of force majeure

“I was examining court practice in the application of clause 3 [of Article – Ed.] 401 [of the Civil Code of the Russian Federation – Ed.], how they decide whether sanctions measures should be considered circumstances of force majeure. So the practice that I have seen is exactly 50/50. The courts have ruled in half of the cases that it has to be qualified as force majeure, and in the other half they have not. And that is probably the right approach for now,” Denis Novak, Financial Ombudsman for Consumer Rights in Insurance, Microfinance, Credit Cooperation and Activities of Credit Institutions.

“With regard to the current situation, we cannot say whether these or those measures adopted by a foreign state will lead to 416 [Article of the Civil Code of the Russian Federation – Ed.] or not. There will be a specific dispute each time, assessing the behaviour of the parties to find out, really, how impossible it is,” Mikhail Tserkovnikov, Head of Energy Group, Pepeliaev Group; Head of the Department of Law of Obligations, Private Law Research Centre under the President of the Russian Federation named after S.S. Alexeev.

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