The Insolvency and Dispute Resolution team at Walkers in Dubai continue to advise on the impact of the recent sanctions imposed on Russia in an offshore context, including whether such sanctions can give rise to a defence for non-performance under Cayman Islands law contracts. We set out below a summary of the position.
Force Majeure
Commercial contracts will often contain a "force majeure" clause which in general terms provides for a party affected by an unforeseen external event to escape liability for breach of contract. Ordinarily after a given time period the counterparty can terminate. Force majeure can include any circumstance not within a party's reasonable control and in many contracts the clause will specifically name trigger events including an act of God, terrorism, war, explosions, civil disturbance and rebellion.
The Cayman Islands Courts respect the contractual agreements of parties, including whatever list of categories of events they determine should constitute a force majeure event. Accordingly, where an agreement contains a force majeure clause which details the events that constitute force majeure, then such a clause is likely to be valid, binding and enforceable between the parties to that agreement. Parties may have chosen a broad or narrow definition of what constitutes a force majeure event. Where the force majeure clause does not specifically reference sanctions, the Court will look to determine whether the definition of a force majeure covers this particular scenario.
To date the Cayman Islands Courts have not been asked to address this issue in relation to sanctions. However, the Cayman Islands Courts would likely take into consideration the position of the English Courts which in a recent decision in MUR Shipping BV v RTI Ltd [2022] EWHC 467 (Comm) held that the particular wording of the force majeure clause covered sanctions because it contained the wording "any rules or regulations of governments or any interference or acts of governments" and "restrictions on monetary transfers and exchanges". The relevant event in that case was that a party could not pay the other in US dollars as required under the contract. The force majeure clause was subject to the affected party using reasonable endeavours to overcome that issue. The Court found that reasonable endeavours would not extend to requiring the seller to accept payments in another currency (here Euros) which would mean a variation or non-performance of the contract. Whilst this decision does not guarantee that sanctions would be covered by all force majeure clauses, it can give some comfort where the clause is drafted broadly.
Where the issue is less clearly connected to the sanctions or as binary as currency provisions, for example a disrupted supply chain and non-performance by third parties, the factual scenario in each case will determine whether the breach of the current contract is really beyond the affected party's reasonable control.
Frustration
If a Cayman Islands law governed contract has no express provision for force majeure or the clause cannot be relied upon in respect of a particular event, the common law doctrine of frustration applies. This doctrine is designed to protect contracting parties from unavoidable and unforeseen circumstances that make the performance of contracts impossible.
In order to satisfy the Cayman Islands Court that sanctions imposed on Russia give rise to a frustrating event (thereby giving rise to a defence for non-performance), the contracting party will need to prove that the imposition of sanctions:
- occurred after the contract has been entered into;
- rendered performance of the contract impossible, illegal or radically different from what was originally contemplated by the parties;
- was not the fault of the contracting parties; and
- was not envisaged by the contract or the parties.
The Court will take a multi factorial and fact dependent approach when deciding if a contract has been frustrated and considering the following issues which are key in a sanctions context.
Impossibility
When relying on frustration on the basis of impossibility, it is necessary to demonstrate that there is no way to perform the contractual obligation. Where, for example, sanctions make it impossible to make payments under the contract due to the disconnection of banks from SWIFT, this could amount to a frustrating event. However, a party cannot rely on this basis where an exemption or license is available under the sanctions regime which allows performance under the contract.
Illegality
Illegality under foreign law does not relieve a party from performance of a contract governed under Cayman Islands law. This makes it unlikely that the Cayman Court would conclude that the illegality of the contractual obligation under the sanctions regime (i.e. foreign law) frustrates or otherwise relieves a party from performance of a contract governed by Cayman Islands law. The defence of frustration, as it relates to illegality, also does not arise if the contractual obligation in question can be performed in a different but legal way (for example through a license or exemption). Whilst unlikely in a sanctions context, if the performance of the contract involves the performance of an act illegal at the place of performance, a party could then seek to rely on frustration as a defence.
Fault of the party
Where a party's actions have caused the frustrating event (i.e. if sanctions are imposed on a certain category of persons), it may be argued that the party's inability to perform the contract is their fault and therefore does not satisfy the criteria necessary to rely on the doctrine of frustration. The Court would likely be interested in the circumstances giving rise to the imposition of sanctions to determine if the frustrating event was "self-induced". This is of course different from an unsanctioned party who cannot, for example, make payments under the contract because the counterparty is subject to sanctions. The Court may be more willing to accept the defence of frustration in the latter case than in the former.
Foreseeability
If a contract was executed many years prior to the imposition of sanctions, it seems unlikely that sanctions would be held to have been foreseeable. However, if the threat of sanctions over one party to the contract was always present (e.g. where a party was already subject to sanctions but these have now become more severe or other sanctions have been imposed by different countries), this could be sufficient for the Court to find that the sanctions were foreseeable.
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.
