Counsel for businesses with heavy involvement in Eastern Europe are reading the fine print on their policies to help mitigate the impact of the disruption.
Force majeure clauses are back in focus, having previously taken the spotlight around the initial onset of the pandemic. Theses “Acts of God” clauses provide relief in events such as earthquakes and hurricanes that are largely unforeseeable and outside of human control, and experts expect it will again become a central point of argument for companies that have suddenly found themselves unable to honor their contractual obligations.

“It will depend on what is in those clauses, but certainly armed conflict is generally going to be considered a force majeure event, to the extent the war directly effects the ability of a business to operate,” said Nathan O’Malley, a partner at the downtown law firm Musick Peeler LLP.
Planning for future operations in countries impacted by the invasion or sanctions will range from incredibly difficult to near impossible, O’Malley said, particularly when there’s no clear timetable for a “return to normal.” On this basis, O’Malley said, companies facing a potential contract breach will argue that force majeure provisions are applicable.

“We’re expecting to see a complete realignment of the freedom to do business in the world because of this situation; a lot of it will depend on whether these markets are cut off for the foreseeable future, or if it’s a temporary situation,” O’Malley said.
While most reports of force majeure notifications resulting from the invasion thus far have originated from European businesses with significant operations in either Russia or Ukraine, O’Malley speculated there are situations where it could be invoked by companies based in Los Angeles, particularly if supply chain issues associated with the war continue.

Kirk Pasich, an attorney at the Westwood-based law firm Pasich LLP focusing on complex insurance matters, said that while force majeure clauses will certainly be a central point of contention in the coming months, they’re by no means airtight.
Pasich said economic losses associated with the invasion and subsequent sanctions may be difficult to recover in full, and opposing counsel could argue the disruption could have been anticipated, especially given previous tensions. He noted however that many businesses 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 in the event of political violence, forced abandonment and expropriation of business, Pasich said. A business operating in Ukraine suffering as a result of the armed occupation could pursue a claim under the political violence clause, for example, while a business that’s Russian operations were seized by the government after they were forced to abandon it could qualify for the latter clauses.

“If a policy, such as a political risk policy, is designed to cover a specific risk … it must pay when that risk occurs – otherwise, the insurance would be illusory,” Pasich said. “Putting it all another way, if a property and business income policy is an all-risk policy, any risk not expressly excluded triggers coverage – even if that risk might be a ‘force majeure’ as to other contracts.”

He noted that many political risk insurance policies contain short windows to give notice, and businesses potentially impacted by the invasion should review their policies and act immediately.
O’Malley, who heads Musick Peeler’s international arbitration and litigation practice, said companies caught up in international arbitration may experience difficulties based on their proximity to the conflict.

“If you have ongoing matters seated in Moscow, clearly your ability to hold a hearing is going to be affected,” said O’Malley.
Fortunately, O’Malley said, the pandemic provided most businesses a great deal of experience when it comes to handling matters virtually.

“Zoom hearings and the like will help mitigate the effect, but it’s still going to cause problems,” said O’Malley.
Nonetheless, he said the conflict would likely add to difficulties in holding Russian individuals and businesses to the terms of an arbitration award.