Sanctions and the Supply Chain

Abstract

The Ukraine crisis and the Western and Russian sanctions it has prompted are not only a geopolitical problem for governments but also a noteworthy contractual issue for private parties. Sudden and unexpected drops in supply and substantial increases in the cost of inputs due to the sanctions may lead to problems in contract performance or even to a risk of default. These problems are exacerbated in long-term contracts that were originally drafted in a very different geopolitical climate. It is therefore important to understand the impact of sanctions on existing contracts, on one hand, and to take the risks of sanctions into account in drafting new contracts, on the other hand. Sanctions are not a new phenomenon in business or in law. However, a trade war between the Western nations and Russia would have such major negative effects on the complex contractual networks in supply chains that it is more than reasonable to analyse this risk from the legal perspective. The Ukraine crisis might not be making the lead headlines anymore, but there is no sign as of now that the economic sanctions put in place during spring and summer would be lifted anytime soon. In addition, depending on the way the situation develops, there is always a risk of further Western sanctions on Russia or counter-sanctions by Russia. If anything, the present crisis has taught us that the geopolitical situation can change dramatically in just a few months, with direct and indirect effects on businesses. Sanctions pose serious risks to the supply of materials, goods and energy, which may lead to shortages in supply or significant hikes in the prices of inputs, making it harder for companies to deliver orders or perform long-term agreements according to contract. For example, sudden restrictions on natural gas and fuel imports can lead to difficult problems in the performance of contracts for industrial manufacturers or power companies, including risk of default. To manage sanction-related risks, companies should first consider whether they have the right to suspend performance or terminate existing contracts on grounds of force majeure if they face sanction-related difficulties in performance. Going forward, companies need to take sanctions and the threat of sanctions into account when drafting contracts and entering into new agreements, for example, by including suitably worded force majeure and hardship clauses.