Belarus: (Anti)Sanctions Clause: How To Minimize Sanction Risks

The number of unilateral economic sanctions of the EU, US and other countries is considerably growing. As a matter of recent example, on 7 December 2020 the EU Council adopted Decision (2020/1999) and Regulation (2020/1998) concerning restrictive measures against serious human rights violations and abuses, which will subsequently "simplify" the introduction of certain types of sanctions in connection with human rights violations¹.

Sanctions (restrictive measures) may apply both to government officials and entities, as well as to private companies.

However, after the introduction of sanctions, counterparties from the EU and US are still being contracted with sanctioned companies which have to perform their obligations. In case of non-performance the sanctioned company is still subject for judicial enforcement. On the other hand, counterparties from EU and US often refuse to perform their obligations before sanctioned companies, as far as the due performance is restricted by the respective sanction regime.

In view of this, one of the most effective mechanisms for managing sanctions risks is the inclusion of so called (anti)sanctions clauses into commercial contracts. Hence, two types of such clauses can be distinguished, depending on nature of consequences for the parties' obligations in result of the introduction of restrictive measures: anti-sanctions clause and sanctions clause.

Anti-sanctions clauses

According to the anti-sanctions clause, the parties are obliged to perform their obligations, despite the imposition of sanctions. The performance of obligations is not suspended or extended. Moreover, the imposition of sanctions is identified as not a force majeure. In result, the party in default is responsible for the undue performance of obligations.

The possibility to define the scope of circumstances that constitute force majeure is provided by general contract law provisions and particularly by the principle of freedom of contract (art. 1.1 of UNIDROIT Principles), as well as by other regulations. As an example of such regulation, para 1.3 of the Regulation on the procedure for establishing the circumstances of force majeure of the Russian Chamber of commerce and industry No. 173-14 dated 23 December 2015 provides that the circumstances that the parties directly excluded do not constitute force majeure.

Moreover, the parties are free to agree on the circumstances that will not be considered as a ground for contract adaptation, including under the provisions of hardship (adjust) clauses.

For example, Germany is recognized as very adaptation-friendly in view of a quite broad wording of section 313 of BGH, which allows to adapt the contract in the circumstances which became the basis of a contract have significantly changed. However even this provision is still subject to the principle of good faith and foreseeability criterion which may well be interpreted if the parties directly define in contract those circumstances that do not constitute the "significant change of circumstances".

The regulation of contract adaptation in Belarus and Russia is provided by para 1 of art. 421 of Civil Code of Belarus and para 1 of art. 451 of Russian Civil Code respectively, which expressly stipulates that parties may agree in contract on "other", derogating from the general rule of contract adaptation based on concept of "significant change of circumstances".

Moreover, if to consider lex mercatoria, as provided by art. 6.2.2. of UNIDROINT Principles, the parties may allocate the risks of changed circumstances on one party as one of criterion for hardship. That as well may be regulated by the parties in the framework of sanction clause.

Thus, if the parties expressly define "sanctions, restrictive measures, or other mandatory regulations of the same nature [...]" as being not unforeseen circumstances that do not undermine the balance of contract and parties' interests and shall not affect the performance and initial conditions of contract, this will make a strong prerequisite for the courts in favor of non-adaptation of the contract.

Sanctions clauses

The essence of the sanctions clause is that in case of the imposition of sanctions, the parties do not acquire additional obligations and are released from any liability for undue performance once it is caused by the imposition of sanctions. In addition, under this clause, the performance of the contract is suspended for the duration of the sanctions.

Thus, the purpose of the sanctions clause is to preserve the balance of the parties' interests and the status quo in contractual relations, despite the original contractual conditions.

The clause on force majeure and (or) the hardship (adjust) clause serve as a ground for achieving this purpose.

In this regard, the position of English High court in case Lamesa Investments Ltd v. Cynergy Bank Ltd [2019] EWHC 1877 (Comm) (12 September 2019) is indicative².

In this case, the court resolved the dispute between LIL (Cyprus) and CBL Bank (London) as to whether the performance of contractual obligations by CBL continues in the events that had happened (i.e. imposition of US sanctions against Mr. Viktor Vekselberg (VV) who is the owner of LGI, which owns LIL).

At the same time, art. 9.1 of the Facility Agreement between LIL and CBL provides that "...[CBL] shall not be in default if during the 14 days after [LIL's] notice is satisfies [CBL] that such sums were not paid in order to comply with any mandatory provision of law, regulation or order of any court of competent jurisdiction...".

The court (Judge Pelling) interpreted the provisions of the agreement quite broadly and held that art. 9.1 of the agreement allows CBL to suspend the performance of its obligations to make payments in favor of LIL for as long as VV remains a SDN and LIL remains a Blocked Party by reason of it being controlled by VV, since the wording of art. 9.1 of the agreement "any mandatory provision of law" embraces the US sanctions.

Therefore, in case of presence of such contractual provisions as art. 9.1, the imposition of sanctions may be considered as a ground for non-performance as far as sanctions remain in force. This also in some extent represent the effect of adjust clause which adapts the term of performance (i.e. the contractual provisions).

From the other side, in court practice the definition of a properly-written force majeure clause as a part of sanctions clause will allows the non-performing party to avoid liability for late performance or other undue performance. For example, by the decision of Moscow city court dated 22 December 2015 in case No. 4?-12995/2015 Bank was released from liability for freezing of funds on correspondence-account bank (STANDARD CHARTERED BANK). Generally, in Russia banks are often recognized as being not in default in case of freezing of funds by other banks that are obliged to comply with sanctions regulations (see e.g. Arbitrazh court decisions in cases No. N ?40-222224/2016 dated 13.11.2017, case No. 4?-12995/2015 dated 22.12.2015 and case No. ?56-56974/2017 dated 07.03.2018).

In Belarus the possibility to define the scope of force majeure clause was recognized inter alia by decision of Appeal economic court of Minsk region dated 23 September 2020 in case No. 78-13/2020/373?.

The description of (anti)sanctions clause, including abovementioned force majeure and hardship (adjust) clauses.

Footnotes

1. Available at Official Journal of EU: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=OJ:L:2020:410I:TOC

2. Full text is available at: https://www.bailii.org/ew/cases/EWHC/Comm/2019/1877.html

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.