Crisis in Ukraine – time to proactively review business relations, also from a legal point of view
In addition to the burdens of the COVID situation, the Ukraine crisis has significantly increased the pressure on global business transactions. This can affect corporate ownership and governance structures and also put substantial additional pressure on supply chains across all business sectors.
Following Russia’s ongoing invasion of Ukraine, the European Union alone has issued four far-reaching sets of sanctions since February 23, 2022:
The sanctions include severe restrictions on the financial sector as well as bans on the import of goods from territories not controlled by the Ukrainian government for certain economic sectors, export bans on certain goods and technologies and extend to the ban on the provision of tourist services.
Businesses must now be proactive in assessing what steps can be taken to limit their commercial and legal exposure in the best possible way. These actions include reviewing contracts and evaluating options for exempting performance and securing contractual rights and claims in general.
Options, risks and opportunities for the contracting parties may arise in particular in the following areas:
Force majeure clause
Generally, force majeure clauses allow a party affected by an event beyond its control to suspend the performance of its obligations. A detailed assessment of the specific wording of the force majeure clause is essential in several respects, such as whether a certain event is considered an event beyond that party’s control in the first place. Another key aspect is the question of the specific legal consequences of force majeure, such as a temporary or permanent suspension of obligations, with or without an obligation to compensate the suspended performance once the event qualified as force majeure has ceased. To qualify as a force majeure event, the following criteria are generally included as requirements: (i) the event must be an “external” event, which normally includes the actions of uninvolved third parties (such as authorities ); (ii) the event must be “inevitable”, ie it cannot be avoided by economically justifiable means; and (iii) the event must be an “extraordinary” event, meaning one that could not be expected in the normal course of events. Especially with regard to the last two criteria, meeting the requirement of proof is often particularly difficult, especially if the contracts were only concluded, amended or extended shortly before such an event.
MAC or MAE clauses
Material adverse change or material adverse effect clauses are intended to protect parties generally against unforeseen circumstances that materially impact the rights and/or obligations of one or more of the parties. Whether the materiality threshold is met is often highly contentious and in many cases also depends on how close the circumstances giving rise to the change in effect are to the parties. Here too, foreseeable events are generally not covered by a MAC / MAE. On the other hand, foreseeable events can also be covered if the clause is formulated in a sufficiently broad way, for example for the reduction of exported quantities and a drastic increase in prices which is not only temporary without corresponding substitutability. MAC clauses are also found in many contracts as a condition of completion or performance, so with a MAC/MAE there may be not only the right to change prices or conditions, but also the right to withdraw from contracts which have not yet been fully performed. . It is also possible to write MAC/MAE clauses so that they are triggered with a time lag at the different stages of the product and delivery and negotiation.
Long-term contracts often contain price adjustment clauses to deal with changing market conditions, which are generally of an unpredictable nature for the parties.
Compliance clauses in contracts, such as compliance or non-compliance with sanctions, are designed to prevent or limit dealings with individuals and entities subject to global sanctions regimes. Financing agreements often include mandatory repayment obligations in non-compliance scenarios that can lead to borrower defaults. Lenders and borrowers are well advised to review provisions, which are generally considered standard clauses with no concrete scope, especially for these clauses and their effects in the current environment.
Corporate governance rules and agreements can provide arguments to suspend or prevent shareholders and other corporate stakeholders from exercising their rights. In this regard, companies are well advised to check beforehand any legal incompatibilities or to foresee the limited capacity for action of executive bodies and shareholders (this is all the more true in international joint venture scenarios).
In addition to contractual terms, which must be assessed in detail on a case-by-case basis, especially in scenarios where companies are only indirectly affected, generally developed principles of law may also affect rights and obligations arising from contracts. . These include in particular the cessation of the basis of the activity or the temporary suspension of the obligations based on an exception of uncertainty, delay or subsequent legal or factual impossibility as well as the obligation to limit the damage .