Sanctions, ownership and related issues

Termination of cooperation with a Russian counterparty

Published on 11th Mar 2022

Withdrawal from cooperation with Russian companies or discontinuation of business activity in Russia may involve different legal contexts which largely depend on the type of activity, the contracts concluded and the specific reasons for such a decision.

Sanctions make it easier to terminate cooperation

The case of discontinuing cooperation with entities covered by sanctions laws is quite clear. EU Council Regulation 269/2014 of 17 March 2014  (the Regulation imposing sanctions was issued as a result of the annexation of Crimea, while right now only the list of sanctioned entities is being expanded) provides for a solution pursuant to which sanctioned entities, i.e. the persons listed in the annexes to the Regulation and the subsidiaries and affiliates thereof, lose their rights to pursue claims related to non-performance of contractual obligations following the sanctions imposed. The Regulation applies within the territory of the European Union; thus it is theoretically possible to imagine a third-country court passing a judgment awarding compensation to a sanctioned entity, which will not be enforceable within the EU, however.

Three options

On the other hand, as regards the termination of business relations with non-sanctioned entities, three approaches can be distinguished, each with different legal consequences: refraining from concluding contracts or pursuing business activities, termination of concluded contracts or failure to perform obligations arising from the contracts concluded.

Discontinuation of activity

Refraining from concluding new contracts and ceasing to pursue business activities in Russia (closing down brand stores, removing the possibility to dispatch goods to Russia in online stores). These decisions fall within the scope of freedom of contract and, as a rule, do not involve a significant risk of legal liability. Naturally, they may be costly for the entrepreneur as a company deprived of sales revenue will be required to incur operating expenses (salaries, severance pay, rents, etc.). As regards the closure of traditional shops operated in leased premises (e.g. shopping centre in Russia), the lease contract may provide for contractual penalties for the shopping centre owner for the closure of the shop, which can be defended against in potential court proceedings. 

Termination of the contract - with notice or immediately

A significant number of contracts can be terminated by notice, usually at the end of the notice period, or - if the termination is for a valid reason or a reason specified in the contract itself - even with immediate effect.  In practice, this applies to contracts for the provision of services for consideration and other contracts of indeterminate term. There have recently been a number of announcements by professional service firms (advisory, law, accounting, auditing) about discontinuing services to companies with Russian stakeholders. Waging a regular war by Russia on Ukraine may lead to a peculiar conflict of interests and loss of trust in the relationship between the adviser and the client associated with the aggressor, which in principle excludes the possibility of cooperation and justifies the termination of the contract even with immediate effect, whereby it is certainly advisable to exercise professional diligence with respect to the proper hand-over of the client's pending business. 

Non-performance of contractual obligations

An entrepreneur who decides to terminate cooperation despite its obligations under contracts which do not provide for the possibility of their termination, e.g. a lease contacts concluded for a definite term, may be exposed to a significant risk of liability. In such a situation, it is possible to consider whether the armed conflict caused by Russia's aggression on the territory of Ukraine results in the objective impossibility of performance (which would be rather difficult to prove) or whether non-performance of the obligation occurred without the debtor's fault due to the war and its consequences, which in each case requires a detailed analysis.  A claim for termination or modification of the contract due to an extraordinary change of circumstances is also possible. It is worth stressing that each case has its own rules and should certainly be assessed individually, taking into account the provisions of the contract and the law applicable to the contract. On the other hand, in newly concluded contracts, it pays to include clauses specifying the consequences of such special events as the occurrence of an armed conflict or its escalation.

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The text was published in Rzeczpospolita daily: https://www.rp.pl/finanse/art35837291-zerwanie-wspolpracy-z-rosyjskim-kontrahentem

 

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