Russia's incursion in Ukraine is likely to impair both U.S. and Ukrainian companies' performance of their respective obligations under agreements for the supply of goods and services in Ukraine. Conflict has spread throughout the country, including in major cities. As the situation develops, parties to contracts governed by U.S. law to be performed in Ukraine should be mindful of their rights and obligations if there are interruptions in the supply and payment for goods and services, in order to minimize their losses.
The analysis of the parties' rights and obligations under these disruptive new circumstances is a fact-intensive one that can only be resolved on a case-by-case basis. It requires both deep knowledge of the industries involved as well as understanding of the applicable law.
Knowledge of strategic industry segments, like oil and gas, is particularly important for the analysis of such rights and obligations. There are a number of private and state-owned oil and gas companies in Ukraine. According to the U.S. International Trade Administration, Ukraine has the second largest natural gas reserves in Europe, and the oil and gas industry is seen as a "significant strategic sector to achieve independence from foreign oil and gas imports" by the Ukrainian government. Inevitably, Ukraine's oil and natural gas reserves have led to a significant amount of interest from both U.S. suppliers and service companies providing goods and services to oil and gas companies in Ukraine, as well as U.S. companies that hold concessions for the exploration of oil and gas or exercise a controlling interest in a Ukrainian oil and gas company. Notably, in 2021, Ukraine's largest state-owned oil and gas company signed several agreements with leading U.S. companies.
Often, parties to agreements negotiate force majeure clauses that typically excuse nonperformance when an unexpected event occurs that is not caused by any party and affects the agreement by either limiting or making impossible performance by one or both parties. In major American jurisdictions such as New York and the District of Columbia, force majeure clauses are treated as bargained-for provisions and thus analyzed by courts narrowly and individually. See generally Beardslee v. Inflection Energy, LLC, 25 N.Y.3d 150 (N.Y. 2015); Nat'l Ass'n of Postmasters of the United States v. Hyatt Regency Washington, 894 A.2d 471 (D.C. 2006).
When a contract does not include a specific force majeure clause, general contract law can also provide for either an excuse for nonperformance or the suspension of performance until conditions improve. For example, impossibility or impracticability to perform may excuse nonperformance when unexpected situations arise that could not have been foreseen or guarded against. In the District of Columbia, a party seeking to excuse nonperformance due to commercial impracticability or impossibility must prove: "(1) the unexpected occurrence of an intervening act; (2) the risk of the unexpected occurrence was not allocated by agreement or custom; and (3) the occurrence made performance impractical." Nat'l Ass'n of Postmasters of the United States v. Hyatt Regency Washington, 894 A.2d 471 (D.C. 2006).
Meanwhile, courts in New York interpret the doctrine of impossibility extremely narrowly but have found, when analyzing disputes in the aftermath of September 11th, that wartime precedents led to the development of the law of temporary impossibility. See Bush v. Protravel Int'l, Inc., 46 N.Y.S.2d 790, 797 (N.Y. Cv. Ct. 2002). That law establishes that a supervening act may "excuse performance until it subsequently becomes possible to perform rather than excusing performance altogether." Id.
Overall, parties to contracts governed by U.S. law but performed in Ukraine need to be cognizant of their rights and obligations with respect to any such agreements. As the conflict in Ukraine continues and the situation evolves, companies should ensure that they are meeting obligations under their contracts and able to minimize any losses that are caused by the ongoing conflict in the region. In order to do so, it is imperative that companies analyze their specific contracts individually to determine whether they have specific provisions that would govern these circumstances, and seek expert guidance as to what their options may be with regard to their contracts.
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.
