Preparing businesses for turbulence during conflicts

March 24, 2022 | 14:05
The Russia-Ukraine conflict has caused chaos on all transactions with Russian contracting parties, mainly because of unprecedented comprehensive sanctions by other countries and blocs. Nguyen Trung Nam, founder and senior partner at law firm EPLegal, analyses the impact of these sanctions on ongoing international trading contracts between Vietnamese enterprises and their overseas business partners.
Preparing businesses for turbulence during conflicts
Nguyen Trung Nam, founder and senior partner at law firm EPLegal

This year marks 72 years of the Vietnam-Russia diplomatic relationship and the 10-year anniversary of a comprehensive strategic partnership. The trade turnover between the two countries in 2020 reached nearly $4.85 billion, an increase of nearly 9 per cent compared to 2019. Last year, total export-import turnover between Vietnam and Russia reached $7.3 billion, including $4.5 billion earned by Vietnam’s exports.

However, on March 2, the United Nations General Assembly passed a historic resolution condemning the situation in Ukraine and demanding an immediate end to the conflict.

Subsequent sanctions on Russia from the United Nations, the European Union, the United States, and the United Kingdom have been the most influential measures with a widespread impact on international trade activities.

The EU uses sanctions or an embargo to enforce its foreign and security policy goals, often related to human rights, democracy and principles of international law. On February 25, the European Commission, together with the UK, the US, and Canada, pledged to remove Russia from SWIFT, a global messaging service that connects financial systems, as a measure to paralyse Russia’s central bank assets and freeze its transactions, making it impossible for Russian companies to transfer payments through their Russian bank accounts.

States with powerful economies that use it for their foreign policy purposes, typically the US and the UK, have used sanctions to enforce foreign policies and ensure national security and economy through the promulgation of laws and regulations. The United States has traditionally imposed comprehensive measures against specific businesses, organisations or individuals, or an entire country/territory, such as in 1993 against Cuba.

Levels of sanctions

After the US alleged that Russia occupied Ukraine’s Crimea region in 2014, President Obama issued an embargo against Russia’s actions in Ukraine. The Ukraine Freedom Support Act of 2014 created a framework for secondary sanctions that can be imposed on non-US individuals/organisations investing in offshore projects in the Arctic, as well as crude oil shale and special crude oil projects located in Russia.

On March 3, the US president signed a new executive order prohibiting certain imports and new investments. The Department of the Treasury’s Office of Foreign Assets Control (OFAC) has issued, at the same time, newly added FAQs, which clarified the prohibited imports of Russian origin include “goods produced, manufactured, extracted, or processed in the Russian Federation, excluding any Russian Federation good that has been incorporated or substantially transformed into a foreign-made product.”

In the past, the United Kingdom almost always imposed collective sanctions, whether as a member of the UN or the EU. The Sanctions and Money Laundering Act 2018 allows the UK to enact financial and trade sanctions on its own now that is has left the European Union.

It is important for businesses to distinguish the two concepts of primary and secondary sanctions. Primary sanction is applied to transactions between US entities and entities from the country or organisation that is the target of the sanction. A secondary sanction, on the other hand, applies to the organisations which transact with the sanctioned country or entities – for example, the executive order authorised by the US to impose sanctions on non-US entities dealing with Petroleos de Venezuela S.A.

Accordingly, the US may freeze assets and interests in assets in the US of individuals and organisations determined by the Secretary of the Treasury to have provided material support to subjects listed by OFAC as specially designated nationals and blocked persons (SDN). This has caused threats to all commercial entities, including Vietnamese businesses, who may be transacting with Russian or other entities subject to the US sanctions.

The immediate impact of the above sanctions is that many international contracts with Russian and other parties which are subject to those sanctions will be unable to be carried out. Payments could not be made from the Russian parties (because they could not make transactions through the SWIFT system), and counterparties concerned by the risk of imposed sanctions will suspend or terminate the performance of the contracts. What then will happen with the disposal of these contracts?

Most of the parties will, firstly, think about force majeure as an excuse for non-performing their obligations, and thus, will not be liable for damages as a result of their breach. However, relying on force majeure is not easy. Under common law jurisdictions such as England, there is no such legal concept.

A party could only state that a contract has been frustrated based on the grounds of an unforeseen event that occurs after a contract is entered into which is outside the control of the parties, and makes the contract either physically or commercially impossible or illegal to perform; or transforms the performance of the contract into something so radically different from the intended purpose that it would be unfair to hold the parties to their obligations.

Grounds for frustration

Should Vietnamese laws be chosen by the parties to govern the contract, a party may only rely on force majeure if three conditions are satisfied as per the Civil Code 2015: objectivity, unforeseeability, and impossibility to overcome despite taking all necessary and possible measures.

Despite the differences, conditions for frustration and force majeure have one condition in common, which is that the event must be outside the suffering party’s control. Though the determination of this condition depends on the contextual circumstances, it is a high threshold and is generally very difficult to meet.

For example, sanctions will not be accepted as a ground for frustration if the non-performing party had somehow committed action(s) that contributed to causing the sanction to happen. This is the case for a number of companies with a close connection to the Russian government, which procured and/or sold goods and services in support of Russian activities in Ukraine.

If these actions caused them to be sanctioned by the OFAC’s SDN List, it is very unlikely that they will be able to rely on either a frustration doctrine or force majeure event when a sanction is imposed on them stopping them from carrying out the contracts.

Without a legitimate excuse for non-performance of the contract, breaches will give rise to the counter-parties the right to claim damages and, if the breach is fundamental, to void the contract and seek new business partners to continue their transactions.

To avoid the risk of sanctions and contracts being breached due to sanctions against their partners, Vietnamese businesses should be prepared for their crisis avoidance and management in various ways.

Firstly, it can constantly update and improve knowledge of global sanctions, especially measures and entities subject to those sanctions, so that Vietnamese businesses can plan better in the selection of markets and partners. It can obtain proper consultation to prepare the contract terms and conditions, including delivery, payment terms, and methods that could take into account sanctions against its contracting partners.

The country can also choose international banks with experience in anti-money laundering and sanctions. Choosing banks with rich experience in international payment, high quality in sanctions checking, and good advice will minimise risks for customers.

Finally, those enterprises which frequently deal with international trade of oil and gas, and other commodities that are sensitive to global sanctions, should establish a specialised team and action plan to deal with the situation.n

By Trung Nam

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