Wilmington, Del. (April 27, 2022) - With the long list of sanctions imposed on dealings with Russia continuing to grow, many businesses are finding themselves in need of expert guidance not only on compliance, but also on resolving disputes resulting from impacts of those sanctions on existing contractual relationships. One critical question is which forum, or which court, such contract disputes and other related disputes should be litigated in. Another important focus is the potential contract defenses for those companies that find themselves unable to continue to perform contracts with Russian companies or persons that are covered by the increasing number and types of sanctions imposed by the U.S. and other countries.
Federal or State Court?
For contracts with forum selection clauses that provide for any disputes to be litigated in a particular state or federal court, the United States Supreme Court has long held that a contractually valid forum selection clause should generally be enforced. See Atlantic Marine Construction Co., Inc. v. United States District for the Western District of Texas, et al., No. 12-929 (U.S. Dec. 3, 2013). See also John F. Coyle, Contractually Valid Forum Selection Clauses, 108 Iowa Law Review (2022 Forthcoming).
Likewise, it remains well-established in most states, including in Delaware, where many Russians form companies, that forum selection clauses are generally enforceable. See Mack v. Rev Worldwide, Inc., C.A. No. 2019-0123-MTZ (Del. Ch. Dec. 30, 2020). But compare Schwartz v. Cognizant Technologies Solutions Corporation, C.A. No. 2021-0634-LWW (Del. Ch. March 25, 2022) (acknowledging long-standing precedent that prohibits a state court from enjoining proceedings in a federal court.)
Choice of law provisions in contracts are also generally enforceable. However, Section 187 of the Restatement (Second) of Conflict of Laws may apply to a choice of law provision, and may support an argument that a chosen state has no substantial relationship to the parties or the transaction, or that the law of the chosen state would be contrary to a fundamental policy of a state that has a materially greater interest than the chosen state in the determination of the particular issue.
Potential Contractual Defenses
In the context of a contract with a Russian company, or Russian individual, that one of the expanding lists of U.S. sanctions makes illegal, the various contractual defenses that might apply, depending on the facts of the particular situation, include:
- Illegality
- Impossibility and Impracticability
- Force Majeure
- Frustration of Purpose
- Know Your Customer (KYC) Rules for Banks
- Anti-Money Laundering (AML) Requirements
- Material Adverse Event Provisions
- Potential Equitable Defenses
Many of the examples of contract defenses listed above are self-evident, but an explanation of some of them might be helpful. For example, some sources define impracticability to encompass impossibility, but the cases are not uniform. Nonetheless, an example of the types of factual situations that would excuse performance of a contract may include discharge of a contractual obligation by reason of impossibility caused by a supervening illegality. Compare Swift Canadian Co. v. Banet, 224 F.2d 36 (3d Cir. 1955). Equitable defenses include unclean hands and estoppel. A New York court many years ago reasoned that a contract need not be illegal to excuse performance, when fundamental concepts of morality and fair dealing, as well as public policy are involved. See, e.g., Flegenheimer v. Brogan, 284 N.Y. 268, 272 (1940); McConnell v. Commonwealth Pictures Corp., 7 N.Y.2d 465, 470 (1960).
Conclusion
The types of sanctions imposed by the U.S. government against Russian companies and selected Russian persons continues to increase; and the issues that arise in connection with the adjudication of contractual obligations that are impacted by the sanctions will eventually be litigated in the courts. Which court those issues are decided in, and on what basis, is heavily dependent on the particular facts of a given situation, but the first step is to identify the issues and any potential remedies that may be available--and where the litigation will take place.
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.
