The impact of armed conflicts on commercial disputes in the UK: Navigating sanctions and supply chain challenges

Airlie Goodman

Mayer Brown, London

Cail Wyn Evans

Mayer Brown, London

Globalisation has magnified the impact of armed conflicts on businesses, extending the consequences far beyond the territorial conflict zones. Understanding the impact of armed conflicts on commercial disputes is key both for lawyers and their clients. This article considers how the English commercial disputes market has developed in response to the legal risks that arise, focusing on: (i) navigating sanctions; and (ii) supply chain challenges.

Navigating sanctions

Whilst sanctions are an important tool governments can use to pressure parties to conflicts into changing their behaviour, they can also create challenges for innocent counterparties, who must comply with different international sanctions regimes and contracts involving sanctioned entities or individuals.

For example, across the UK, EU and US sanctions regimes, different legal tests are applied in assessing whether a company is ‘owned or controlled’ by a sanctions target. This can result in a party being subject to sanctions (by way of its ownership and control structure) under one sanctions regime, but not another. Many international companies, driven by concerns over complying with overlapping and sometimes inconsistent sanctions regimes, have adopted a conservative risk approach. This approach, despite its merits, may still expose them to a claim for breach of contract.

In 2023, the High Court of England and Wales held that a confirming bank was not prevented by UK sanctions legislation from performing its obligations to a non-sanctioned beneficiary under US dollar payable, English law governed standby letters of credit (‘SBLCs’), where the issuing bank of the SBLCs was sanctioned.[1] The confirming bank argued that the payment, in triggering the sanctioned issuing bank's repayment obligation, would amount to dealing with or providing financial assistance to a sanctioned entity in violation of UK, EU and US sanctions. This approach was rejected by the Court because the payment was not for the provision of funds in connection with the supply of aircraft to Russia, but rather a distinct obligation to pay under the SBLCs, which crystalised before the relevant sanctions were introduced.

Further, the sanctioned bank's repayment obligation was distinct (albeit linked) to the issuing bank's obligation with a nil financial gain, so there was no financial assistance. The Court also considered whether the requirement to pay in US dollars would trigger US sanctions, with the effect of suspending or otherwise excusing non-performance. The Court held that US dollar payment denomination did not necessitate the involvement of a US corresponding bank, and consequently that the foreign illegality rule was not applicable.[2] Further, the Court commented that US courts are the final arbiter on US law[3], and that here, it was not established that payment under the SBLCs would in fact violate US sanctions.

The Court also subsequently rejected a previously untested statutory defence. Section 44 of the Sanctions and Anti-Money-Laundering Act 2018 (SAMLA) excuses parties from civil liability for any acts/omissions done in the ‘reasonable belief’ that the same was necessary to comply with UK sanctions. There is a two-stage test to rely on s44 SAMLA: (1) that the party's actions were governed by the belief that it was complying with the law (a subjective test); and (2) that its belief was reasonable (an objective test). The Court held that the belief that payment was prohibited by sanctions was not ‘reasonable’ in this case, as it should have been clear that any obligation to make payments was not contingent on reimbursement, and was not therefore prohibited by any sanctions regime.

Another key case is Mints & Ors v PJSC National Bank Trust & Anor [2023] EWCA Civ 1132, in which the Court of Appeal dismissed an appeal by four Russian businessmen who were accused of fraud by two Russian banks, one of which was subject to UK sanctions. The Court of Appeal held inter alia that the sanctions did not prevent the sanctioned bank from bringing or enforcing its claim. The Court also considered, obiter dicta, that the other bank should be considered sanctioned by virtue of it being ‘controlled’ by President Putin and/or the Governor of the Central Bank of Russia (both UK sanctions targets for the purpose of Regulation 7(4) of the Russia (Sanctions) (EU Exit) Regulations 2019) since it was reasonable to conclude that they could ‘call the shots’ with regards to the bank's activities if they chose to do so. The Court of Appeal went as far as to say that President Putin ‘could be deemed to control everything in Russia’. The UK government has since published guidance stating that it does not generally consider a designated public official to exercise ‘control’ over a public body in which they hold a leadership function.[4]

These cases highlight some of the challenges international companies face when seeking to comply with the complex framework of international sanctions regimes. In practice, compliance with one sanctions regime does not necessarily excuse contractual performance, and appropriate due diligence (including proper assessment of ‘ownership and control’) remains essential.

Supply chain challenges: managing risks and resilience

Supply chains play an increasingly pivotal role in facilitating global commerce but are also inherently vulnerable to disruptions caused by armed conflicts. For example, Russia's war in Ukraine heavily disrupted grain and natural gas supplies to Europe, whilst the ongoing Israel-Hamas conflict has seen shipping in the region attacked, resulting in increased insurance premia and expensive and time-consuming re-routing of vessels. In both instances, this has led to price fluctuations and supply chain disruption. As the commercial benefits of meeting one's obligations under a contract decrease (eg due to price increases or delivery delays), tension between the contracting parties naturally increases, exacerbating risk of disputes. Some key English law concepts that should guide companies on their options when facing supply chain challenges are:

1. Price escalation clauses, which are a mechanism to prevent a contract becoming too financially onerous as a result of increased costs (as can often be the case in armed conflicts). They are intended to reflect (and respond to) changing market conditions – particularly over the course of a long term contract.
2. Force majeure clauses, which allow a party impacted by an event beyond the control of the parties and which was not foreseen at the time of contracting to suspend performance of its obligations without penalty. In contrast to some civil law jurisdictions, English law will not imply force majeure into contracts and requires the express inclusion of a specific clause. Notwithstanding the apparent difficulties caused by armed conflicts, or even specific support for force majeure (such as the Ukrainian Chamber of Commerce and Industry's February 2022 letter certifying a force majeure event following Russia's military aggression), English law will determine whether current events and their consequences fall within a force majeure clause by reference to the specific wording of the clause.
3. Material adverse change or event (MAC or MAE) clauses, which aim to protect parties against the risk that an unforeseen circumstance arises which materially changes a party's ability to perform its contractual obligations. English law imposes a high threshold for materiality, and it is not sufficient that the general financial health of a business has decreased such that it can no longer fulfil its contractual obligations. It also requires specific consideration of how the contract defines the MAC or MAE to determine whether a circumstance or event triggers, such that minimal guidance is available from case law.
4. Sanctions-related compliance clauses may be included in a contract to provide for the termination or suspension of the contract if sanctions make performance unlawful. Their wording should be considered carefully to ensure that it encompasses all potentially relevant sanctions regimes, to clearly indicate the relevant trigger event, and to specify the outcome. As already discussed, the Mints case highlights the difficulty in assessing when a party is ‘controlled’ by a sanctions target. Consequently, significant consideration must be given to the drafting of these clauses.
5. The doctrine of frustration allows a party to treat itself as having been discharged from its obligations if the contract is impossible to perform (not merely if the obligations are increasingly difficult or uneconomic) or performance becomes radically different from that undertaken at entry into the contract. This doctrine is highly fact-specific, with a high threshold, but, where it is successfully invoked, the contract is automatically terminated and all parties are released from their obligations.

In light of the importance of these concepts in supply chains disrupted by armed conflicts, impacted businesses should continue to review key contracts to identify: (i) whether they may be of any assistance in the current circumstances; (ii) how best to seek a collaborative outcome with counterparties; and (iii) what additional or different drafting it may be prudent to include in future agreements.

Future outlook: managing uncertainty

Navigating the impact of international armed conflicts on commercial contracts requires a multifaceted approach that encompasses factual and legal analysis, strategic foresight, and proactive risk management.

English law suggests that, to mitigate litigation risks arising from armed conflicts as a result of the expansion of sanctions regimes and increased supply chain disruption, clients would be well-advised to adopt proactive risk management measures in response, including thorough risk assessment, appropriate due diligence processes, carefully drafted contractual protections, and ongoing monitoring and review.