A look at the impact of international sanctions on yacht construction and refitting contracts
by Federico Santini*
In this issue we examine the legal consequences that the sanctions against Russia ordered by the European Union, and therefore specifically by Italy, will have on ongoing contracts in the yachting industry. It is clear that the exclusion of numerous Russian banks from the Swift system, the closure of airspace to any Russian civilian aircraft or any planes belonging to Russian citizens, – without even taking into account the ever-increasing list of Russian subjects who have sanctioned and whose assets have been frozen, will make it very difficult to fulfil existing contracts, including construction, refitting or sales contracts between Italian and European operators and Russian counterparts.
The main consequence of force majeure is that the party which successfully invokes it is released from the obligation of execution and from any liability for damages from the moment the event occurs.
In practice, the impact of economic sanctions on such contracts comes down to an issue of force majeure or – according to the definition given by the ICC (International Chamber of Commerce) – as an event or circumstance that prevents a party from fulfilling one or more contractual obligations, if, and to the extent that, the party suffering the event proves: a) that such impediment is beyond its reasonable control, b) that the event could not reasonably have been foreseen at the time the contract was signed, and c) that the effects of the impediment could not reasonably have been avoided or overcome by the interested party.
IN PRACTICE THE IMPACT OF ECONOMIC SANCTIONS ON CONTRACTS QUALIFIES AS FORCE MAJEURE.
This concept of force majeure is not dissimilar to that derived from the Italian civil code. The main consequence of force majeure is that the party which successfully invokes it is released from the obligation of execution, and from any liability for damages, from the moment the event occurs, provided that the other party is informed promptly. An exception is made in cases – such as that of sanctions against Russia – in which the situation is well-known, so already in the public domain. Where the restriction is temporary, the exemption from the obligation to comply, and from liability for damage, lasts until the force majeure issue ends. The international sanctions imposed against Russia can most certainly be viewed as a case of “Factum Principis”, meaning intervention by public authorities which – through laws or regulations – totally or partially prevent the provision of the services covered by the contract between an Italian contractor and a Russian owner. Even Russian nationals who are not the subject of sanctions will probably not be able to make payments due to contractors, whether advances on work in progress or balances for completed work.
Article 1256 of the Italian Civil Code expressly provides that “the obligation ends when, for a cause not attributable to the debtor, execution becomes impossible. If the state of impossibility is only temporary, the debtor is not responsible for the delay in execution as long as the impossibility lasts. However, the obligation ceases if the state of impossibility persists until, in relation to the claim of the obligation, or to the nature of its object, the debtor cannot be held obliged to perform the service, or the creditor no longer is interested in obtaining it”.
IF THE IMPEDIMENT IS TEMPORARY, EXEMPTION FROM THE OBLIGATION TO COMPLY AND FROM LIABILITY FOR DAMAGE LASTS UNTIL
THE FORCE MAJEURE EVENT ENDS.
It is standard practice to add clauses, some more complex than others, on force majeure in yacht construction agreements as well as refitting and sales contracts. This is not only to give a detailed definition of force majeure for issues that may affect the specific sector, but also to stipulate the consequences that the duration of an event may have on the outcome of the contract. In particular, force majeure events may often be limited to a maximum duration, and each party has the right to terminate the contract if the issues persists after that time. This is not a case of contract termination due to non-fulfilment but because of the unexpected impossibility of execution which, while not obliging either party to pay compensation, nevertheless involves both the parties returning any payments already made. In conclusion, the difficult situation resulting from the conflict in Ukraine and the economic sanctions imposed by the European Union against Russia means that Italian and European shipyards that have ongoing contracts with Russian owners run the risk of seeing contracts terminated because of force majeure and having to give owners back any advances received.
(The impact of sanctions – Barchemagazine.com – May 2022)