Global M&A trends and risks
Powerful new forces shaping in the M&A landscape
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Global | Publication | March 2022
The new financial sanctions imposed following the Russian invasion of Ukraine have caused rapid dislocation across numerous financial markets. Financial institutions are grappling with whether an entity or transaction is caught by the new regime and the ramifications of that. This briefing highlights some of the potential areas for dispute in financial transactions arising in connection with the new sanctions regimes imposed following the Russian invasion of Ukraine.
1. Are there any conflict of laws issues?
a. Cross-border financial transactions are subject to the laws of multiple jurisdictions. Where some countries impose sanctions, these laws may conflict, leading to uncertainty and disputes about which laws take precedence.
b. While the law specified in the governing law clause will be one consideration, several other laws may well be relevant.
c. Even if there are no relevant sanctions under the governing law, a party might be excused from performance if it would be illegal in the country of performance (for example, payment into a contractually-specified bank account in a particular country might be illegal). Identifying the place of performance can be complex and lead to disputes, for example where correspondent banks must process payments in another jurisdiction, or where there are contractual obligations for presentation of documents in another jurisdiction.
d. Even if there is no relevant illegality under the governing law of the contract or the country of performance, there could still be illegality in the country where the party is located.
e. The language in the contract may specify that illegality under other laws is relevant, such as the laws of the location of the parties, or any extra-territorial law. For example, the illegality section in the 2002 ISDA Master Agreement refers to illegality under “any applicable law”.
f. It is also important to consider the jurisdiction clause, as usually the chosen jurisdiction will apply its own conflict rules to determine when other laws are relevant.
2. What may a financial counterparty still be permitted to do and is its performance excused?
a. Some activities may still be permitted under the sanctions regime even if others have become illegal. For example, a sanctions regime might provide that termination of the contract is permitted where it contains a contractual mechanism to terminate upon the imposition of sanctions, but not performance of the unterminated contract.
b. The contract may address whether sanctions entitle a party to refuse performance and in what circumstances. There may be disputes about precisely when such a clause is engaged, for example whether it is sufficient that there is a risk of sanctions in another jurisdiction.
3. What are the termination and suspension provisions?
a. Is there an illegality or force majeure clause in the contract? If so, what rights and obligations does it provide? For example, is there a right to terminate or are obligations merely suspended?
b. In contracts containing repeating representations and/or undertakings, the new sanctions might result in misrepresentations being made, or undertakings being breached (possibly triggering termination provisions).
c. Contractual interpretation disputes may well arise in relation to clauses drafted prior to the enactment of the recent sanctions.
d. If there are no express provisions in the contract dealing with force majeure, common law doctrines may apply – potentially giving rise to disputes of fact and unanticipated consequences. For example, the doctrine of frustration could potentially apply (automatically) if the sanctions make it impossible to perform the contract or make performance radically different from what was originally contemplated.
4. Are there any clauses which give a party a discretion?
a. Sanctions clauses may give parties a discretion to decide if (for example) a relevant sanctions event has occurred. In this situation parties need to consider if this discretion is fettered in any way – for example are they under a duty to be rational or to act reasonably.
b. Termination clauses may provide for the calculation of amounts to be paid under the contract, such as close out provisions under the ISDA Master Agreement, and there may be discretion as to how this calculation is performed.
c. Wherever one party has a discretion, there is a risk of a dispute as to when and how that discretion is exercised – particularly when large sums are at stake.
5. How do the parties calculate what is owed under the contract?
a. Determination of quantum upon termination may lead to tricky issues for parties as to how to value what is owed. Valuation is notoriously difficult where asset prices are subject to rapid movements and markets are temporarily closed or restricted, substantially increasingly the likelihood of disputes. This risk is further increased when large sums are at stake and where parties are restricted as to the markets in which they can operate, which can raise further questions regarding valuation and mitigation of loss.
b. The contract may provide that a transaction should be unwound in some circumstances. A party may dispute whether the relevant provision is engaged, depending on whether or not unwinding gives that party an economic benefit.
c. If frustration applies, there may be disputes about how to deal with payments and benefits that accrued before the contract was frustrated.
6. Can a party enforce any judgment debt?
Sanctions may impact on the ability of a party to enforce a judgment debt against assets subject to an asset freeze under the sanctions. The possibility of applying to the authorities to release frozen funds to satisfy judgment debts has been discussed by the English courts previously in relation to certain Syrian sanctions. Any licence application may only be permitted where limited exceptions apply under the regulations, and would be subject to certain conditions and a consideration by the relevant authorities of the particular facts.
For more information about the above or any other issues arising out of the recent financial sanctions please contact the individuals below.
Nina Varumo is a freelance portrait and documentary photographer based in Stockholm. A recent project of hers Kvinnor till sjöss (‘Women at sea’) is on ongoing photo series highlighting the working life of female seafarers in order to change the stereotypical image of what and who is a seafarer.
Companies have been publicly reporting on their financial performance for over a hundred years. However, they are increasingly having to make public non-financial disclosures relating to sustainability and environmental, social and governance (ESG) matters as a result of rules, laws and regulations issued by stock exchanges, governments and regulators worldwide.
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