Sanctions: Am I Off the Hook?

FTI Consulting

[author: Adam Grant, Senior Director]

Sanctions are not new. In 432 BC, at the pinnacle of the golden age of Greek democracy flourishing in the mighty Athenian Empire, its ‘first citizen,’ eloquent orator, brilliant general, yet unfortunately last leader Pericles decreed trade sanctions on the neighbouring Megara of the opposing Peloponnesian League, which was led by oligarchic Sparta.

Not only were these the first recorded trade sanctions in history, but they also triggered a chain of events that led to the so-called Peloponnesian War between the two alliances. Its consequences for Pericles and Athens are best portrayed in the famous History of Peloponnesian War by Thucydides (spoiler: take a different book as a goodnight story) and are not subject of this article.

What are the implications on a party to contract when its counterparty may become subject to modern-day sanctions?

Relevance of the topic of sanctions is of course best demonstrated by the current situation surrounding the Nord Stream 2 project implementation. However, many other projects are actually or potentially impacted. The parties at the receiving end of sanctions are often facing the situation where their contract counterpart effectively abandons its obligations on an ongoing project to avoid becoming subject to sanctions themselves.

The arguments that are often used as a contractual justification vary from a request for a variation due to changes in law, release from performance or frustration due to impossibility to lawfully fulfil its obligations, through to even seeking remedy in force majeure provisions.

However, in the absence of an express contractual mechanism that regulates an event of sanctions, the party abandoning its obligations would have an uphill contractual battle to fight in defending its actions; in particular, if the concerned sanctions are of extraterritorial nature coming from a jurisdiction that is not governing or otherwise expressly mentioned in the contract.

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FTI Consulting

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