Has Putin torn up your contracts? – HFW

Alex Kemp and Jean Koh, partners at sector-focused global legal firm HFW, have produced a piece on the legal implications of the Russian invasion of Ukraine.

The writers noted that while the conflict at the moment did not directly involve the USA or other western powers, there had certainly already been support behind the scenes. A direct declaration of war by a Western power against Russia was thought to be unlikely, but Kemp and Koh noted that there were enough examples over the years of countries having “undeclared” wars. If the situation continued to deteriorate in the coming weeks, greater involvement of the UN, NATO or a coalition of western forces acting outside of the UN or NATO might be within the realms of possibility.

HFW postulated on the impact this could have on companies’ insurance

War Risks Insurance

P&I insurance offered by the International Group of P&I Clubs and the standard H&M insurance available in the London market, all exclude losses arising from war risks. The practice being that assureds will “buy-back” additional war risk insurance for their liability and property risks. H&M policies also often contain the Institute Notice of Cancellation Automatic Termination of Cover War and Nuclear. which is an automatic termination provision for an outbreak of war between the UK, America, France, Russia or China.

The buy backs available for P&I war risks cover, either from the International Group, or the London market, all contain automatic termination provisions following the outbreak of war between any of the UK, America, France, Russia or China. The buy-backs for property insurance have the same provisions.

Charterparties

“War cancellation” clauses are also common in time charterparties (in standard forms or rider clauses) where parties are given the option to cancel the charterparty in the event of the outbreak of war between certain countries, often including Russia, the USA and the UK. HFW noted that this could be a powerful negotiating tool for Owners who wished to refuse to call at Ukrainian / or Russian ports, or indeed any other ports for that matter, and perhaps even be a “get out” for an unprofitable charterparty.

If it Looks Like a Duck and Quacks Like a Duck

Kemp and Koh wrote that the key question was, “has there been an outbreak of “war” (declared or otherwise) between Russia and the USA (or any other major powers)?”

The answer would depend on precisely what steps are taken by the USA, UK and other nations.

There were a range of options that might be pursued by the USA, not all of which would be considered “war”.

  1. The USA and/or or other nations could seek to deploy military assets with the support / backing of the United Nations. However the United Nations Security Council (UNSC) normally makes resolutions which are “peace keeping missions”, which are not war. Given that Russia is a permanent member of the UNSC (and can therefore veto proposed resolutions) it was highly unlikely that the UNSC would be able to act in the Ukraine.
  2. The major powers could seek the support and backing of NATO, who have previously deployed military resources in a more conventional military role. However when member states dedicate personnel and supplies to NATO, those resources are deployed as NATO forces, not as forces of the country that provided them. NATO operations of this type could well be “war” but would be undertaken as NATO, and as such, would unlikely be considered a war between the USA/UK/France and Russia. Even if NATO operations could be considered a war between the USA and Russia, it seems unlikely that NATO will engage in direct military conflict with Russia as NATO was established as a military alliance with the purpose of establishing “collective defence” amongst its members and will not automatically commit to deploying troops to non-member states.
  3. The USA could also choose to act outside of UN or NATO, with or without a coalition of supporting partners such as the UK or France. This is an option that has been adopted by the USA in the past even though post Afghanistan and Iraq, it is possible that their appetite for such conflicts has dwindled. There will almost certainly already be US forces (or forces of their allies) operating in Ukraine in support, training or clandestine capacities currently. There is therefore possibility that if these forces came into contact with the Russian military, a conflict may ensue and have the potential to escalate.

From an English law perspective, the courts have been reluctant to adopt narrow, or technical, definitions of “war”. If the parties include “war” in their contract and provide that certain consequences are to follow, “war” will be given its normal and popular meaning. It should be distinguished from “warlike activities and hostilities short of war”.

The English courts have expressly rejected any formal test or definition of “war” and rejected the suggestion that a “war” must be recognized by the UK Foreign Office. For example, the Sino-Japanese War of 1937 (where no declaration of war was made and where there were ultimately around 50 battles over 8 years with 10s of millions dead) was considered a “war”, as were the Spanish Civil War, Korean War, Falklands War and periods of Gulf War 1 although the 9/11 Al Qaeda attacks were not.

The writers said that it was not impossible that matters deteriorate in such a way in the coming weeks giving rise to an outbreak of “war” for the purposes of insurance contracts and charterparties, resulting in automatic termination of insurance policies and opening up options for parties to cancel their charterparties.

https://www.hfw.com/downloads/003793-CLIENT-ALERT-Has-Putin-torn-up-your-contracts.pdf