In today’s unpredictable geopolitical environment, businesses entering international contracts often find themselves blindsided by hurdles such as trade sanctions, regulatory bans, frozen bank accounts, and government-imposed restrictions. A few decades ago, such scenarios were uncommon. With the sanctions landscape changing rapidly, they are no longer theoretical risks and have become disruptions with material consequences. Therefore, it is crucial to ensure that contracts are drafted to withstand the implications of sanctions, and this holds true for contracts that are executed by Indian parties with their foreign counterparties as well.
This article analyses how sanctions affect contractual performance under Indian law and how parties can draft smarter, more secure agreements. We break down key legal principles, highlight learnings from recent case law, and offer actionable guidance on writing force majeure, sanctions, and termination clauses that provide security to parties in times of uncertainty.
Sanctions and other government actions can derail even the most well-planned deals. For example, the recent closure of Indian airspace, which forced several airline operators to reroute or cancel flights, causing massive delays and soaring costs. Another example is the wide-reaching U.S. sanctions and tariff hikes against countries such as Russia and China, which have made it difficult for parties to fulfil their obligations under international contracts. These are not isolated events and now form part of a growing global pattern. The takeaway from the current global scenario is that contracts must expressly anticipate the possibility of sanctions and other official actions.
Under Section 56 of the Indian Contract Act, 1872, a contract can be deemed “frustrated” if its performance becomes impossible due to an unforeseen event. But the courts have been seen to interpret this provision very narrowly. In the landmark case Energy Watchdog v. Central Electricity Regulatory Commission the Supreme Court held that a spike in costs or commercial hardship is not a valid ground for frustration of the contract.
Unless an event renders the contract’s performance illegal or physically impossible, contractual obligations remain binding.
As a preliminary step, it is imperative for parties to a commercial contract to ensure that they have adequate processes in place to identify and screen their counterparts regularly against applicable sanctions lists. This can be done using a risk-based approach where counterparties operating in high-risk jurisdictions or sectors are regularly screened. It is also important to remember that sanctions may apply not only to the entities targeted by the sanction, but also to persons owned or controlled by such targeted entities. Thus, a thorough due diligence exercise is essential.
Additionally, the term “sanctioned” does not have a uniform definition or application. Some regimes impose a complete asset freeze, making it impossible to deal with the sanction’s target, while others impose more limited restrictions. Most asset freeze regimes are also subject to carve-outs and limitations which permit certain transactions. It may also be possible to obtain a licence which permits continued dealings with the relevant sanction’s target.
If a party discovers that: (i) it is engaged in a transaction with a sanctioned entity or individual; or (ii) continuing with the transaction poses a risk of breaching sanctions laws, what are the available options? On the one hand, violating sanctions laws may lead to criminal penalties, including fines and the possibility of imprisonment, while, on the other, businesses may face civil claims for breach of contract if they immediately cease to perform their obligations under a contract with a sanctioned counterparty.
Rather than relying on post-facto legal remedies, ensuring that contracts are soundly drafted is the most prudent approach to safeguard a party’s interests in such situations. This is where force majeure clauses play a pivotal role. These clauses cover situations where performance becomes difficult or impossible due to events beyond either party’s control. If a force majeure clause explicitly excludes certain events from the definition of a force majeure event under a contract, parties cannot rely on the force majeure clause on the occurrence of such an event. Consequently, it is imperative to ensure that the force majeure clauses are specific enough to be invoked when needed and avoid ambiguity on which events would fall under the ambit of a force majeure event.
A robust force majeure clause should explicitly mention events such as economic, diplomatic, military and environmental sanctions (depending on the nature of the contract), trade or travel embargoes, airspace or maritime closures, and other government actions that render performance illegal or commercially unfeasible. It should also outline the actions to be taken during such events, such as notice requirements, mitigation efforts, and a clear timeline (e.g., 60 or 90 days) after which the contract can be suspended or terminated.
Another crucial, but often overlooked safeguard is, to check whether the relevant contract contains express provisions which deal with sanctions. Such provisions are sometimes found in dedicated sanctions clauses; or even in other provisions (for example, in relation to termination) which are drafted widely enough to apply to sanctions-related issues. Given the increasing prevalence of sanctions, a clause that governs the effect of sanctions on the parties’ ongoing relationship is essential in international contracts. The clause must lay down whether either party has the right to suspend or terminate the agreement if new sanctions imposed on either party make continued performance illegal or commercially impractical.
When even the best-drafted force majeure or sanctions clauses fail to resolve long-term disruptions, a well-crafted termination clause becomes invaluable. Such a clause should provide a clear exit if, for example, a force majeure event persists beyond 90 days, or the counterparty becomes a sanctioned entity. It should also address practical matters such as the handling of partial performance, return of payments and equipment, and the settlement of obligations incurred before termination.
If either party fails to fulfil its contractual obligations, the chosen dispute resolution mechanism can significantly influence the outcome. In international contracts, arbitration is often a more commercially sound and convenient option as compared to litigation, particularly when the contracting parties are from different jurisdictions. It is therefore important to ensure that contracts include a robust dispute resolution clause. For arbitration, it is advisable to select credible institutions such as the Singapore International Arbitration Centre or the ICC International Court of Arbitration. Parties may also decide to adopt a multi-tiered dispute resolution process that begins with either negotiation or mediation before escalating the dispute to arbitration.
As an added safeguard, parties may consider including a hardship clause, which allows for renegotiation if the contract becomes excessively burdensome, even if not impossible to perform. This is particularly useful in volatile markets.
In a world full of uncertainties, the safest contracts are those that expect the unexpected. This means contracts must be smarter, clearer, and more resilient. By drafting specific clauses around force majeure, sanctions, and termination, and including clear dispute resolution mechanisms, Indian businesses can better protect themselves. The goal is not merely legal enforceability, but also commercial sustainability.
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