Legal issues of conflict

Before any discussion of how the invasion of Ukraine by Russia is impacting our sector, we must first acknowledge the devastating effects on the people of Ukraine of the indiscriminate shelling of civilian targets, the war crimes being perpetrated by Russian troops and the massive displacement of the population both within and beyond Ukraine, which is something most of us have never seen in Europe in our lifetimes, as well as the enormous courage and resilience of the Ukrainian nation.

We must also acknowledge the deep sense of injustice that many of the victims of other recent conflicts are feeling given the outpouring of support for Ukrainian refugees that has not been applied to others facing similar tragedies only slightly further away.

For oil and gas lawyers, the conflict raises a range of legal issues. First, both law firms and their clients are grappling with a rapidly developing international sanctions regime which targets a growing list of individuals, companies and banks with connections to the Kremlin.

These sanctions may prevent parties from performing their contractual obligations.

Many sophisticated supply contracts now contain extensive provisions regarding compliance with sanctions but even if a contract is silent on sanctions, under English and Scots law the existence of a trade sanction may represent a defence to an action for breach of contract on the basis of illegality, force majeure or frustration.

Companies need to be aware not only of UK sanctions but also the sanctions regime of any other country they are required to follow, for instance that in which their parent is incorporated, or that of the country of performance (including that of the banking system they will be using in their transaction), and ensure that they keep updated on developments which are happening almost daily.

If a counterparty has Russian links but is not sanctioned, a company may still wish to exit an existing contract to show solidarity with Ukraine, because they are concerned about the reputational effect of continuing to trade with Russia or because they wish to pre-empt potential future sanctions or logistical issues which may affect their counterparty – in this way, the market is finding its own “sanctions” that are much broader and deeper than any government has dared to impose, using the “tool kit” it has learned through dealing with issues such as modern slavery and carbon emissions.

In these cases, they will be asking their lawyers to review the contract to see if there are other legitimate bases, such as termination for convenience, on which they are permitted to terminate the contract, or if none exist, to advise them on what the legal consequences of termination might be.

Termination is fraught with difficulty and if the correct process is not followed, a party seeking quite legitimately to terminate may find itself in breach of contract, so it is always advisable to take legal advice before exercising termination rights.

It is also critical to assess the full financial exposure in the event that a party decides to abandon the contract, as this may raise complex issues of law around the enforceability of limitations on liability, exclusions and indemnities in favour of a party which has abandoned or “wilfully breached” the contract.

Although, at the time of writing, further sanctions have not been directly applied to Russian oil and gas, there is a UK ban on Russian-flagged, registered, owned, controlled, chartered or operated vessels unloading at UK ports.

Given the breadth of this prohibition, and the difficulty of navigating complex ownership structures, harbour masters face the unenviable choice of risking a breach of the prohibition by allowing the vessel to unload or becoming embroiled in a contractual dispute for failing to do so.

There have also been cases where dock workers have declined to handle Russian cargoes.

Where the vessel or cargo is not in fact sanctioned, there may be a need for urgent legal advice to ensure the vessel is permitted to unload and there is likely to be litigation in due course over liability for demurrage and force majeure claims in such cases.

Even if they have no business links with Russia, firms are being impacted by the conflict,which is fuelling sustained high energy prices and also putting pressure on the price of steel and other raw materials for which Russia and Ukraine are major sources, with resulting pressure on their margins.

The fact that a contract may be loss making is rarely ever a force majeure event (although interesting questions arise when a party has money but cannot access the banking system).

However, contracts may contain provisions entitling a party to claim an increase in price on a periodic basis or if they can establish particular events have occurred such as an increase in their input costs. It is always worth reviewing a contract to check for such clauses.

Judith AlderseyWilliams