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23 Oct 2023

The age of uncertainty: Identifying and navigating risks in an everchanging and complex world

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In today's constantly evolving and unpredictable global landscape, marked by geopolitical conflicts, political uncertainty and an increase in 'black swan events', it is crucial for businesses to have strategies and protective measures in place to mitigate risks arising from such events under their existing contracts, as well as knowing how to account for similar events in future contractual relations.

In this update, we cover how companies can protect themselves against 'known knowns' i.e. risks that we are aware of and are foreseeable and against 'known unknowns' i.e. risks we are aware might happen, but we do not know when they will occur.

'Known knowns'

These events are those which we are aware of as being risks and many businesses are generally well-placed to mitigate against them. For example, in respect of existing regulation, companies can ensure their contracts and wider activities comply with relevant regulations. Relatedly, contracts can be drafted to specifically include or exclude, as applicable, known active geo-political 'hot spots' and conflict zones.

'Known unknowns' and sanctions

By contrast, 'known unknowns' can be understood as events that we are aware of as being possible but do not know when they will occur; a recent and ongoing example of this would be Russian-related sanctions.

Whilst sanctions are now widely used as a governmental response to geopolitical events, their impacts are, and continue to be, wide-ranging for companies globally. Sanctions can range from strict prohibitions on certain jurisdictions, sectors and goods to more specific restrictions, such as providing direct or indirect economic resources to designated entities.

Even after sanctions become 'known knowns', the typical (and likely deliberate) vagueness of sanctions legislation leaves them open to wide interpretation and consequently makes it difficult for businesses to navigate and comply with them with a degree of certainty. There is also additional uncertainty as to how sanctions regimes will be enforced, which can again be problematic, as the implications of non-compliance can be severe for businesses, including being subject to asset freezes, fined, default provisions under contracts and insurance policies being triggered, alongside reputational damage.

Sanctions – potential solutions

For both existing and potential future sanctions that may be put in place, there are various steps that businesses should take in order to mitigate their risk. Such steps should include enhanced due diligence of their own activities and counterparties. Particular consideration should be given to whether your activities are covered under the scope of any sanctions, whether the business is exposed to the risk of dealing with sanctioned entities and whether a business has rights under existing contracts to terminate for sanctions-related reasons. It is also important to have dynamic sanctions clauses that allow you to be proactive in fast changing circumstances, rather than being restricted by standard-form wording. Finally, consideration should also be given to how diversified your business is, in the event of a sudden change in a trade or jurisdiction you are active in.

Black swan events

Black swan events can be categorised as events that are highly unpredictable and have significant, often global, effects, such as the 9/11 attacks and the COVID-19 pandemic. With the development of technology, and the ever-increasing role of social media in politics, there is an increased risk of political black swan events, such as the United Kingdom's decision to leave the European Union (Brexit).

Black swan events – potential solutions

Given their unpredictability and rarity, commercial contracts often omit provisions relating to specific black swan events. When such events do occur, businesses can be left without any contractual safety net.

Whilst the contractual principle of 'frustration' is one that is recognised under English law, courts are extremely reluctant to use this, such that for a contract to be frustrated, the black swan event must have caused the contract to have become impossible to perform, which in turn gives the relevant party the right to terminate the contract. For instance, if the contract becomes significantly delayed or more expensive to perform but it is still possible to perform, the contract will not be considered 'frustrated'.

Given the very high bar of 'impossibility', the doctrine of frustration means that, although a contract becomes commercially unviable to be performed, even financially burdensome, a party will still not be excused from performing.

Businesses should therefore strive to ensure that future contracts they enter into contain sufficiently comprehensive terms that can provide a framework to react to unforeseeable black swan events, such as wider force majeure clauses and market disruption clauses. However, such clauses will need to be carefully drafted to ensure that they will be triggered and not considered as too vague or restricted.

Next steps

For help with understanding protection from uncertainty, sanctions and how to utilise existing contractual mechanisms to protect your business and for assistance with drafting specific clauses, or any other related questions on these topics, please do not hesitate to contact Menelaus or your usual contact in the Middle East marine and international trade team at Stephenson Harwood.

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