Ukraine: Force Majeure - Hardship in relation to Conflict and Sanctions

Yes, there is. 

Martial law is regulated by the Law of Ukraine "On Legal Status of the Martial Law", which sets the rules of functioning of state authorities, business, and society in case of military aggression. 

The Law of Ukraine "On Sanctions" is the primary legislation that provides the regulatory framework of imposing sanctions (i.e. defined as special economic and other restrictive measures) for legal entities and individuals (including Ukrainian ones) for the protection of Ukrainian national interests, national security, sovereignty, and territorial integrity of Ukraine, prevention of violations, restoring the infringed rights, freedoms, and lawful interests of the citizens of Ukraine, society and the state.

Neither of the above laws explicitly addresses force majeure. Thus, the general provisions of civil law regulating force majeure/unforeseen circumstances issues are applicable. 

Art 617 of the Civil Code of Ukraine ("CCU") states that the party who has breached an obligation shall be released from liability for such breach if it proves that the breach occurred as a result of an accident or force majeure. A force majeure event is defined as an extraordinary and unavoidable circumstance that objectively prevents the fulfilment of contractual obligations, as well as obligations under legislative and other regulatory instruments (see Article 14-1 of the Law of Ukraine “On Chambers of Commerce and Industry in Ukraine” or the “CCI Law”).

Article 652 of the CCU also prescribes the consequences of substantial change of circumstances, which materially differ from the circumstances that were relied on by the parties while concluding the contract. In the event of such unforeseen circumstances, the contract may be amended or terminated upon the parties’ consent unless the contract provides otherwise or the circumstances stem from the essence of the obligation. However, if the parties fail to amend the contract in line with the unforeseen circumstances or terminate it, the contract can be amended or terminated at the request of the concerned party by the court decision subject to the fulfillment of the following conditions:

1. at the time the contract was entered into, the parties assumed that such change in circumstances would not occur;
2. the change in circumstances was caused by events, which the concerned party, acting with all due care and prudence, could not have prevented after they arose; 
3. the performance of the contract would upset the balance of interests between the parties and deprive the concerned party of what it expected to obtain at the time the contract was entered into; and 
4. it does not follow from the nature of the contract or business practice that the risk of the changed circumstances should be borne by the concerned party.

Yes, war and/or sanctions may constitute force majeure under Ukrainian law. 

Under Art 14-1 of the CCI Law, which provides an open-ended list of force majeure events, war can be attributed to force majeure events. The mentioned statutory provision, however, does not explicitly recognise sanctions as a force majeure event except for embargo, and export and import bans. 

• the extraordinary nature of the event (exceptional and out of the limits of the parties’ influence); 
• the unpredictability of the event (its occurrence or consequences were impossible to predict at the time of concluding the relevant contract or before the due date of the relevant obligation); 
• the inevitability of the event;
• the causal link between the event and the impossibility to fulfill the obligation under the contract.

At the same time, since the statutory list of force majeure events is not exhaustive, sanctions can also be deemed force majeure in case the party proves the following:

Yes. National legislation only provides a general legal framework regulating force majeure in relation to war and sanctions. Thus, the specific force majeure clause will help the parties to ensure that all potential risks are covered and establish the specific requirements for triggering the force majeure clause (e.g. the requirement to notify the other party about force majeure, the requirement to produce proper evidence of force majeure, etc.).

Generally, the term ''unforeseen circumstances'' is used in the context of the substantial change in circumstances, namely, the occurrence of unforeseen circumstances, which if the parties had foreseen them, they would not have entered into the contract or would have entered into it on different terms (for more details on the consequences of substantial change in circumstances - see item 2 above).

One of the grounds for applying sanctions under Ukrainian law is the decisions and regulations of the Council of the EU. Thus, if the latter issues its decision to impose sanctions on legal or natural persons, it may be legal grounds for imposing mirror sanctions by the Ukrainian authorities subject to the fulfilment of other necessary requirements and procedures under Ukrainian law.

In practice, EU sanctions would also serve as grounds for a high level of scrutiny of transactions made by a company or an individual under sanctions in Ukraine.

Yes, the sanctioned party is entitled to challenge the other party's default in the Ukrainian courts. However, the efficient enforcement of debt by the sanctioned party may be effectively hindered in Ukraine. For example, under the Law of Ukraine “On Enforcement Proceeding”, debt collection by the Russian entities in Ukraine, including sanctioned entities, is suspended.

In conclusion, the parties triggering force majeure shall remember that a person can be relieved from liability under Ukrainian law, if the person can prove all of the following three elements: (i) an event of force majeure; (ii) inability to perform under the contract or obligation arising from the law; and (iii) a direct causal link between (i) and (ii). 

The Ukrainian Chamber of Commerce and Industry, a non-governmental body that is vested with the right to document events of force majeure under Ukrainian law, recently published the official letter certifying force majeure in Ukraine due to the military aggression of the Russian Federation against Ukraine, which has become the basis for the imposition of martial law. However, the war and martial law may potentially constitute an event of force majeure if they hinder the ability of a party to perform its contractual or statutory obligations.

In order to properly protect rights and interests in the event of force majeure in relation to war and sanctions, we recommend including into contracts the specific force majeure clause that would cover the relevant risks and procedure for triggering force majeure, carefully following the requirements of the legislation regulating force majeure, and developing tailor-made strategies for specific cases.