Lawyers for companies heavily involved in Eastern Europe are reading the fine print of their policies to help mitigate the impact of the disruption.
Force majeure clauses are back in focus, after drawing attention to the initial onset of the pandemic. These “Acts of God” clauses provide relief during events such as earthquakes and hurricanes that are largely unpredictable and beyond human control, and experts expect them to once again become a central argument for companies that have suddenly found themselves unable to honor their contractual obligations. obligations.
“It will depend on the content of these clauses, but certainly an armed conflict will generally be considered a force majeure event, as war directly affects a company’s ability to operate,” said Nathan O ‘Malley, a partner. at downtown law firm Musick Peeler LLP.
Planning for future operations in countries affected by invasion or sanctions will range from incredibly difficult to nearly impossible, O’Malley said, especially when there is no clear timeline for a “return to normal”. On this basis, O’Malley said, companies facing a potential breach of contract will argue that the force majeure provisions apply.
“We expect to see a complete realignment of the freedom to do business around the world because of this situation; it will largely depend on whether those markets are cut off for the foreseeable future or if this is a temporary situation,” O’Malley said.
While most force majeure notifications resulting from the invasion so far have come from European companies with significant operations in Russia or Ukraine, O’Malley speculated that there are situations in which they could be relied upon by Los Angeles-based companies, particularly if supply chain war-related issues persist.
Kirk Pasich, a lawyer at the Westwood-based law firm Pasich LLP who specializes in complex insurance matters, said that while force majeure clauses will certainly be a central point of contention in the coming months, they are not by no means airtight.
Pasich said economic losses associated with the invasion and subsequent sanctions may be difficult to fully recover, and opposing counsel may argue that the disruption could have been anticipated, especially given previous tensions. He noted, however, that many companies have political risk insurance policies under which companies facing significant impact as a result of the invasion would apply.
“If I had a business in Russia, my first questions would be whether I have political risk insurance and what my obligations are,” Pasich said.
To varying degrees, political risk insurance protects businesses against political violence, forced abandonment and corporate expropriation, Pasich said. A company operating in Ukraine suffering from the aftermath of the armed occupation could sue under the political violence clause, for example, while a company whose Russian operations were seized by the government after being forced to l giving up could benefit from these last clauses. .
“If a policy, such as a political risk policy, is designed to cover a specific risk … it has to pay out when that risk occurs – otherwise the insurance would be illusory,” Pasich said. “In other words, if a business property and income policy is an all-risk policy, any risk not expressly excluded triggers coverage – even though that risk may be a ‘force majeure’ such as for other contracts.”
He noted that many political risk insurance policies contain short windows for giving notice, and companies potentially affected by the invasion should review their policies and act immediately.
O’Malley, who leads Musick Peeler’s international arbitration and litigation practice, said companies caught up in international arbitration could face challenges because of their proximity to the dispute.
“If you have ongoing cases in Moscow, your ability to hold a hearing will clearly be affected,” O’Malley said.
Fortunately, O’Malley said, the pandemic has provided most companies with great experience with virtual issue management.
“Zoom and other audiences will help soften the effect, but it’s still going to cause problems,” O’Malley said.
Still, he said the dispute would likely add to the difficulties of compelling Russian individuals and companies to abide by the terms of an arbitration award.