In coordination with numerous international allies, Canada has imposed several rounds of sanctions in response to Russia’s recent and ongoing invasion of Ukraine. Those that have business relationships with sanctioned Russian entities or individuals, even indirectly, must evaluate such relationships to ensure that they remain in compliance with applicable sanctions.
The purpose of this piece is to explore the steps that an individual or business can and should take once it has determined that a planned transaction or business dealing is prohibited by the sanctions.
The sanctions at a glance
The Canadian sanctions includes various amendments to the Special Economic Measures (Russia) Regulations (“Russia Regulations”) and the Special Economic Measures (Ukraine) Regulations (“Ukraine Regulations”). Key amendments to the Russia Regulations include the addition of hundreds of Russian individuals to the list of sanctioned individuals and the addition of key Russian financial institutions and defense entities to the list of sanctioned entities. Similar amendments have been made to the Ukraine Regulations, including an amendment prohibiting Canadians and Canadians abroad from most trade and investment activity involving the so-called Donetsk People’s Republic and the territory it controls in the Donetsk oblast of eastern Ukraine and the so-called Luhansk People’s Republic and the territory it controls in the Luhansk oblast of eastern Ukraine.
Additionally, section 5 of the Russia Regulations, prohibits any person in Canada and Canadians abroad from knowingly doing anything that causes, facilitates, or assists in, or is intended to cause, assist in, or facilitate, any activity prohibited by the Russia Regulations. This prohibition is broad – it can apply to any person in Canada or to any Canadian abroad who may have dealings with a listed person or entity.
The steps taken above are only some of the many steps taken by the Canadian Government. Others include restricting the import, purchase, or acquisition by Canadians and Canadians abroad of Russian crude oil and petroleum products via an amendment to the Russia Regulations and closing Canada’s airspace to all Russian-owned, chartered, or operated aircraft.
These measures have the potential to deeply impact Canadian businesses that engage in transactions with, or provide financial or other related services to Russian, Ukrainian, and Belarusian individuals and entities. The state of affairs remains dynamic and uncertain, and new sanctions and measures continue to be announced as circumstances unfold. Other international states continue to release similar measures, but careful note should be taken of each country’s specific requirements and restrictions in order to ensure compliance.
Unless special dispensation or an exemption is granted, transactions or contracts that involve a Canadian entity and a listed Russian entity or individual will likely be prohibited. This puts Canadian entities in a difficult position, as non-performance of the contract in an effort to comply with the sanctions may result in legal ramifications as a result of breach of contract. The issues faced by these Canadian entities will be highly fact dependent and will largely be dictated by the particular contract or transaction at issue. Specific provisions of the contract as well as broad contractual principles must be considered.
Look to the contract
Canadian entitles that have contracts with Russian counterparts should first look to the agreement itself to determine which jurisdiction’s laws govern the contract, and what, if any, dispute resolution provisions are included with the contract. This may provide clarity as to how best to approach the issue of non-performance. Contracts can also include provisions that allow for termination, such as a force majeure provisions; these clauses deal with situations where the circumstances in which the contract is expected to be performed have significantly changed, and as such, non-performance of obligations pursuant to the contract may be excused due to specific circumstances such as war or other unforeseen events where the non-performing party is not at fault. There are often procedural requirements that accompany a force majeure clause that must be considered, such as providing adequate notice to the other party. The entire wording of the contract should also be analyzed, as it may include other provisions that excuse non-performance.
Look at the surrounding factors
Additional external factors that must be considered include Canadian public policy and frustration. A contract may become unenforceable if performance of the contract is illegal or contrary to Canadian public policy; violating sanctions imposed by the Canadian government may excuse non-performance in this regard. This should be considered in tandem with the governing jurisdiction of the contract or transaction. The contract may also become sufficiently impossible to be completed such that the doctrine of frustration applies. For instance, a contract may become frustrated when, after its formation, certain unanticipated events arise as a result of unforeseen circumstances that are not caused by either party, which results in it being incapable of being carried out. As such, frustration may allow parties to be excused from performing their obligations under the contract in situations where performance is deemed impossible.
Canadian sanctions against Russian entities and individuals are rapidly evolving. Those interested should keep current and consult with a legal professional in order to better determine their obligations under a particular contract.