EMBARGO – The impossibility of performing the current contract

EMBARGO – The impossibility of performing the current contract

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The embargo on Russia, Iran, and Cuba has consequences for international contractual relations due to the prohibitions imposed.

Definition of embargo

The term « embargo » refers to non-armed measures such as the interruption of economic and diplomatic relations (UN Charter, Art 41).

Article XXI of GATT 1947 authorizes exceptional measures to protect national security or public order.

The examples of an embargo

The first of the United States’ actions against Cuba, dating back to 1960, was reinforced by the Helms-Burton Act in 1996.

The European Union, the United States of America, and their allies have implemented a regime of sanctions against Russia, notably through Council Regulation (EU) No 833/2014.

Iran is referred to by the sanctions against its nuclear program, partially lifted after the Joint Comprehensive Plan of Action, except for certain dual-use goods, Council Regulation (EU) No 267/2012.

The consequences

Question 1: Does the embargo constitute an unforeseeable event exempting the co-contractor from liability? Is it a case of “force majeure”?

The embargo may make the performance of an international contract illegal or impossible, particularly when it targets one of the parties or the place of performance.

In principle, a “force majeure” clause is lawful.

However, if the law applicable to the contract is not the one of the state that imposes the embargo, its legal effect may be uncertain. It is therefore useful to qualify the embargo as a case of force majeure in the contract.

Question 2: Can the legislation on unforeseen circumstances (hardship) of article 1195 French Civil Code, which allows negotiation in the event of unforeseeable changes making performance excessively onerous, apply? Yes, if the embargo occurs after the contract has been signed.

European legislation: article 9 of Regulation (EC) No 593/2008 on the law applicable to contractual obligations recognizes overriding mandatory provisions (i.e, embargo measures) if they come from the place of performance and make the performance illegal.

The Paris court of appeal (25 Feb. 2015) specified that only these provisions can have an effect on the contract.

International legislation : Article 79 of the Vienna Convention of 1980 exempts a party in the event of unforeseeable impediment beyond its control. An embargo may be a case of force majeure if it makes performance unlawful or materially impossible, provided that it occurs after the signature of the contract.

The ICC arbitral award n° 8486 (1996) distinguished between force majeure (impossible execution) and hardship (execution excessively onerous) the latter not being covered by Article 79.

The UNIDROIT Principles (Art. 7.1.7) also recognize the embargo as a case of force majeure. If the execution just becomes excessively onerous, Article 6.2.2 (hardship) allows for a request of renegociation, even a review or termination of the contract.

Some practical advice

The parties have to verify if their products or partners are subject to the sanctions.

  • For Russia: Council Regulation (EU) No 833/2014 and its annexes.
  • For Iran: Council Regulation (EU) No 267/2012, annexes I to III; contact: doubleusage@finances.gouv.fr / formulaire CERFA 10994/04
  • Verification of co-contractors via the UN website: https://www.un.org/fr/sc/document/resolutions.
  • The Embassies, consulates, and local business desks “Services économiques régionaux (SER)” can direct businesses to the relevant authorities (e, DG Trésor) to legally secure their activities.

And carefully draft their liability exemption clauses, without forgetting to cover the risk with insurance if necessary.