Impact of the Ukraine war on contract performance: force majeure?

General rule: the enforceability of contracts

Previous to any consideration, it is worth mentioning that, under Spanish law, obligations arising out of contracts have "force of law" between the parties; that is to say, the parties must fulfil their contractual obligations. Thus, in the event of non-performance of a contract, our legal system foresees a whole battery of remedies for the performing party to rely on, including, without limitation, specific performance, damages in lieu of specific performance, termination of the contract and compensation for damages.

Notwithstanding the foregoing, and under certain circumstances, the parties to a contract may be excused from the performance of their contractual obligations. We refer mainly to force majeure events.

How is force majeure defined and what are its characteristics? is war a force majeure event?

An event amounts to force majeure when, being external to the contractual relationship, it is not only unforeseeable, but even when foreseen, remains inevitable and unavoidable.

More specifically, Spanish courts have referred to force majeure as a supervening impossibility to perform the obligations agreed upon. Said impossibility shall be objective, absolute, lasting, physical (e.g. the thing has been destroyed) or legal (e.g. sanctions) and not attributable to the non-performing party.

War, by its very nature and in general terms, has all the elements to be labelled as a force majeure event. However, this does not mean that the mere existence of an armed conflict may be sufficient to excuse non-performance of a given contract. For instance, the parties may have allocated the risks of an eventual war by agreeing on its exclusion from the scope of application of the force majeure clause, or by agreeing on a premium so that one of the parties shall bear the cost of such risk.

It is therefore insufficient to abstractly claim the existence of the war in Ukraine to trigger the application of a force majeure clause. Instead, it is generally necessary to assess the impact of the conflict on a specific contractual relation by identifying, for each particular case, which factors are effectively and directly preventing the performance of the obligations derived from the contract.

War as a trigger for other events: strikes, raw material shortages, etc. Which cases can or are likely to be considered force majeure by the courts?

The consequences unfolding from the war in Ukraine are likely, irrespective of the war, to constitute force majeure events themselves. We are referring, for instance, to the carriers' strike that began in March 2022 or the raw materials shortages.

Undoubtedly, these events have had and are having a major impact on the performance of numerous contracts. However, do these events discharge from liability? It would be a mistake to list, in general terms, events that can or are likely to be considered a force majeure event, since it depends on each particular case. As already mentioned, a case by case analysis is required in order to determine whether a certain consequence of the war (i.e. raw materials shortages) constitutes a force majeure event in itself.

In any case, it is worth noting that, in addition to force majeure, there are other similar legal  concepts that might be invoked by the parties, such as the rebus sic stantibus rule, which allows the parties, provided that certain requirements are met, to renegotiate their contractual obligations when there is an extraordinary disruption of the basis of the contract.

Which are the force majeure effects? Does it always discharge from liability? Can it lead to termination of the contract?

Under Spanish law, the most common and genuine force majeure effect is the discharge from civil liability, that is to say, no compensation claim can be upheld for damages caused by force majeure events, unless the law or the contract specifically provides otherwise.

However, if the performance of the obligation at stake is still feasible, the obliged party will not be released from such obligation. A clear and suitable example is the well-known Spanish Supreme Court ruling (13-6-1944) where, in the context of a sale and purchase agreement of olive oil, the court understood that, since the possibility of performance of the contract was restored after the end of the Spanish Civil War, the obligation to deliver olive oil subsisted, being the seller released from paying default damages.

Nevertheless, the above mentioned precedent does not preclude, in cases where supervening impossibility persists, the obligation to perform to be discharged. Indeed, force majeure may lead to termination of the contract. However, this requires that the force majeure event, in addition to impeding the performance of the obligation, affects the purpose of the contract. Even so, a temporary suspension of the obligations under the contract would still be possible.

Good faith as a limit. Some elements to consider

Despite the flexibility that force majeure may bring to the performance of a contract's obligations amid a change in circumstances, it must be stressed that opportunistic and/or uneconomic behaviours are unlikely to thrive in our legal system.

The general principle of good faith involves the observance of certain conducts. In this regard, the duty to mitigate and/or limit the extent of the harm as any reasonable person would seek in his own interest is particularly relevant. Good faith also demands prudence when exercising the legal remedies for non-performance of the contractual obligations: it is advisable to properly construe the circumstances and accurately estimate the costs associated with the concerned remedy.

In line with the above, it is also worth noting that good faith may be used as a basis for dealing with situations of "hardship and "frustration", which allows the parties to invoke the rebus sic stantibus clause.

My contract includes a force majeure clause. What happens in such cases? What does such a clause usually contain and how should I interpret it?

In accordance with Article 1105 of the Spanish Civil Code, except for the cases expressly mentioned in the law, no person shall be liable for events that could not have been foreseen or that, if foreseen, were inevitable.

However, the existence of a legal provision on force majeure does not preclude the possibility of contractually regulating force majeure events. In fact, parties can thereby further determine the application of such clause and agree on the effects and consequences it shall bring to their contractual relationship.

In this sense, it is common practice to agree on determined events that shall be regarded as force majeure by the parties, the procedure to notify the other party of such situation or the period after which, if the force majeure event continues to unfold, the parties are entitled to terminate the contract. In addition, it is advisable to include the obligation for the parties to try to eliminate or minimise the effects of the force majeure impediment, either to be able to resume the execution of the contract as soon as possible, or to simply ensure its survival. In any case, the non-performing party shall mitigate the harm the impediment may cause to the contracting parties.

In conclusion, and as highlighted above, to determine whether or not a force majeure clause can be applied, general assessments are to be left aside in favour of the specific circumstances of each case. It follows then that the examples indicated above, as much inevitable and unforeseeable as they can be, cannot, per se, constitute events of force majeure. Instead, what is relevant from a contractual point of view is to assess whether the parties have or could have foreseen such event or circumstance at the time of the conclusion of the contract, and whether they have sought to avoid it, to the best of their efforts. Indeed, it must be emphasized, that, it is ultimately the duty of diligence applicable in each sector and for each contracting party that will be the standard of reasonableness weighting on the parties and determining the applicability of the force majeure clause.

I force majeure is invoked by the other party, what should I do? Some recommendations

The content of the communication invoking the force majeure must be analysed. In particular, the event on which it is based and the specific grounds on which it is invoked must be clearly identifiable. We have already seen that a generic and abstract notification is unlikely to succeed, so a certain degree of detail is to be expected from the invoking party.

Furthermore, it is for the invoking party to prove the existence and effects on the contractual relationship of the force majeure event. In any case, we insist on the fact that the alleged event must, in addition of being external to the contractual relationship, be of a force beyond all control and foresight of the parties.

Moreover, it is highly advisable to assess up to what extent the whole performance of the contract will be affected, taking into consideration other relevant circumstances (time, personal, social and location circumstances, among others).

Finally, it is also recommended to construe the whole contract, since it is the will of the parties what is going to ultimately determine whether the application of a force majeure event is valid and/or effective.