Ukraine Crisis - Implications For English Law Contracts

• Published date: 07 March 2022
• Subject Matter: Corporate/Commercial Law, Government, Public Sector, International Law, Compliance, Coronavirus (COVID-19), Contracts and Commercial Law, Government Contracts, Procurement & PPP, Export Controls & Trade & Investment Sanctions, Litigation, Contracts and Force Majeure
• Law Firm: Mayer Brown
• Author: Mr Miles Robinson, Mark Stefanini and Jonathan Cohen

Introduction

The crisis in Ukraine will increase the pressure on global supply chains, which are already under significant strain as a result of the ongoing impact of COVID.

We anticipate that businesses will need to review their supply contracts urgently to assess the possible impact and whether specific actions are required in order to comply with their contractual obligations and/or protect their position.

Areas of focus

We see the following areas as being central to that review for English law governed contracts:

Force majeure arising from supply disruption:

• Force Majeure clauses generally allow a party affected by an event beyond the control of that party to suspend performance of its obligations without penalty.
• However, the wording of these clauses is critical to understanding how contractual performance is impacted by the force majeure event, as English law does not imply the concept of force majeure into contracts.
• Particular challenges may 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 argue to customers that performance is impossible or should be delayed.

Price escalation clauses:

• Price escalation clauses contain mechanisms to prevent a contract becoming too financially onerous on one or both parties.
• They are intended to reflect (and respond to) changing market conditions - particularly over the course of a long term contract Increased cost of raw materials, energy and transport are likely to arise from the current crisis.
• Disputes often arise in respect of whether the clause has been engaged and the method by which the price adjustment should be calculated.

MAC/MAE clauses:

• MAC/MAE clauses are designed to protect parties against the risk that an unforeseen event or circumstance may arise, which has a materially adverse impact on one or more of the contracting parties.
• Any "change" will need to be material, not just to the general financial health of a business but to whether or not it has the means to (for example) repay a loan or enter into a transaction.
• Establishing that an event has caused a MAE or that a MAC has occurred is rarely straightforward, and a common area of debate is the reference point against which to measure the adverse change or adverse effect.

Sanctions related compliance clauses:

• Sanctions compliance clauses are intended to prevent or limit trade with entities which are subject to global sanctions regimes.
• Failure to ensure...