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[IMPORTANT NOTE: this document is updated as at 10 March 2022; since the current conflict - which began with the invasion of Ukrainian territory by the Russian army between 23 and 24 February 2022 - and the resulting geopolitical situation are constantly evolving, the considerations set out in this document must be deemed preliminary and subject to updating and further study]
On 21 February 2022, Russia recognised the independence of the separatist regions of Donetsk and Luhansk in the Donbass area of eastern Ukraine and, on the night of 23-24 February 2022, launched a military operation on the Ukrainian territory.
In response to such events, (also) the European Union ordered a number of economic and financial sanctions[1] designed to hit Russia[2], the two mentioned separatist regions and multiple natural and legal persons belonging (or close) to the Russian political leadership.
The scenario briefly outlined above has major implications for everyone, including from an economic, financial and legal perspective.
Given the exceptional nature of the dramatic international situation of these days and the complex legal framework, the question has been raised as to what the consequences of the aforementioned sanctioning measures might be on existing business relations with Russian entities (whether natural or legal persons)[3].
This document focuses on the relevance of SWIFT Sanctions (as defined below) within the Italian reference regulatory framework, with a view to starting thinking – although the situation is constantly evolving – about possible remedies to maintain the contracts governed by Italian law that were in place before the adoption of the above-mentioned SWIFT Sanctions.
The Society for Worldwide Interbank Financial Telecommunication (or SWIFT) system was created in 1973 to provide a standardised and secure method of making payments abroad.
Specifically, SWIFT is an international consortium of banks headquartered in Belgium that connects some 11,000 financial institutions in over 200 countries around the world via a computer network.
In essence, the SWIFT system is a messaging network that allows banks to exchange information electronically.
SWIFT uses an alphanumeric combination - the so-called BIC code - which allows precise identification of the bank of the sender of the payment and of the recipient in case of international transfers and identifies the country of origin of the payment, avoiding confusion between banks located in different countries and making payments simpler and faster.
As SWIFT only communicates the identity of the sender and the beneficiary, without, however, carrying out the transaction, it is an extremely secure method of handling international payments, allowing the exchange of standardised instructions between financial institutions and thus reducing possible errors between banks in international money transfers.
The alternatives to SWIFT
SWIFT is today the most widespread international system, but not the only one.
In particular, China and Russia have in the last few years developed alternative systems, although (much) less integrated into the international economy than SWIFT.
The Chinese system is the CIPS (Cross-Border Interbank Payment System)[4], managed by the People’s Bank of China and based on the Chinese currency; it is supported by some 1,280 financial institutions worldwide, including some Japanese, Russian and African ones, as well as some Western banks.
The main limitation of CIPS is precisely the use of the Chinese currency as opposed to the US dollar, which is central to SWIFT and therefore does not have the same nominal value in international trade.
In order to have an international reach, CIPS signed an agreement with SWIFT in 2016 so that even banks that do not have a direct stake in CIPS could complete their transactions.
In contrast, Russia’s system, called SPFS (System for Transfer of Financial Messages)[5], is mainly used in the Russian domestic market, where it accounted for 20% of transactions in 2021.
400 banks participate in the system, and over time foreign banks from a number of countries have also joined the system, including Armenia, Belarus, Germany, Kazakhstan, Kyrgyzstan and Switzerland.
As part of the sanctions against the Russian military operation in Ukraine being considered by the main Western countries, the European Union (together with the USA, the UK and Canada, among others) has adopted certain restrictive measures, including those aimed at excluding some of the main Russian banks from the SWIFT system (the “SWIFT Sanctions”)[6].
More specifically, on 1 March 2022, the Council of the European Union adopted Regulation (EU) 2022/345 (the “Regulation”) amending Regulation (EU) No 833/2014 concerning restrictive measures in relation to the annexation by Russia of Crimea and Sevastopol in 2014.
By such Regulation, the Council of the European Union has inter alia prohibited the following:
(i) to provide specialised financial messaging services, which are used to exchange financial data (SWIFT), to the following seven Russian banks[7]: Bank Otkritie, Novikombank, Promsvyazbank, Bank Rossiya, Sovcombank, VNESHECONOMBANK (VEB) and VTB BANK[8]. It should be noted that such prohibition also applies to legal persons, entities or bodies established in Russia whose proprietary rights are directly or indirectly owned for more than 50 % by said banks;
(ii) to invest, participate or otherwise contribute to future projects co-financed by the Russian Direct Investment Fund - RDIF [9]; and
(iii) to sell, supply, transfer or export euro denominated banknotes to Russia or to any natural or legal person, entity or body in Russia, including the government and the Central Bank of Russia, or for use in Russia[10].
Except for the prohibition under (i), which shall come into force on the tenth day following the publication of the Regulation in the Official Journal of the EU (i.e. 12 March 2022), the prohibitions under (ii) and (iii) came into force on the day of publication of the Regulation (i.e. 2 March 2022).
In a nutshell – strongly condemning Russia’s military aggression on Ukraine[11] – the objective of the sanctions adopted by the Council of the European Union and, especially, the exclusion of important Russian banks from SWIFT, appears to be that of financially crippling Russia and significantly undermining its ability to trade globally.
As mentioned above, the adoption by, inter alia, the European Union of the SWIFT Sanctions entails the need to investigate the extent of the impact of such measures on the existing legal relationships between Italian and Russian business operators.
SWIFT Sanctions, as well as any further extraordinary and urgent measures that may be adopted by the European Union and/or by the Italian Government in order to face the Ukraine crisis, might indeed be relevant with respect to the performance of commercial contracts and the fulfilment of the relevant obligations, including, in particular, payment obligations.
In this context, without prejudice to the specific clauses provided for in the relevant contract from time to time, and given the fact that the contract is subject to Italian law, the legal institutions that might be relevant are those of force majeure and factum principis.
The Italian Civil Code does not provide a proper definition of force majeure, although it contemplates certain institutions whose application presupposes the occurrence of situations referable to such concept, i.e. natural and human events which, after occurring, due to their impetuosity, cannot be overcome with the effort that can be legitimately required from the obligor.
In particular, the two characteristics that an event must have in order to be considered as force majeure are its extraordinary nature and its unforeseeability[12], this category only including the event preventing due performance of the contract and making ineffective any action by the obligor aimed at eliminating it, it being understood that the impediment must not have been caused by the direct or indirect actions or omissions of the obligor.
In the event that an event qualifying as force majeure occurs as above, without prejudice to the desirability of a case by case assessment in order to activate the most appropriate remedy also in the light of the relevant contractual (cont)text[13], reference should be made, inter alia, to the institution of the supervening impossibility of performance for reasons not attributable to the obligor[14].
Supervening impossibility
“Supervening impossibility” means a situation preventing performance which was not foreseeable at the time the obligation was formed and which cannot be overcome by any effort that may be legitimately required from the obligor.
Supervening impossibility may be[15]:
Factum principis
Force majeure also includes the so-called factum principis or legal impossibility, i.e. such a situation in which the performance is prevented by the introduction of a rule or a measure of a public authority that cannot be overcome in any way, no matter how much effort the obligor puts in[16].
This includes orders or prohibitions or measures of (legislative, administrative or judicial) authorities imposed subsequently to a given contractual regulation, and grounded on general interests, which prevent performance, irrespective of the obligor’s conduct.
In a nutshell, such circumstances operate as exemptions from the obligor’s liability.
According to the Supreme Court[17], this exemption from liability does not operate “automatically”, since the obligor has nevertheless the burden of proving that the authority’s order or prohibition had a decisive role in causing the non-performance and that it can be considered as a fact totally unrelated to the obligor’s will and to any of its duties of due diligence[18].
Indeed, faced with the authority’s intervention, the obligor must not remain inactive, nor place itself in the position of being bound thereby without remedy, but must, within the limits of due diligence, consider and exploit all the possibilities available to it to overcome the situation preventing performance of the obligation.
Without prejudice to the foregoing, since this is a case of impossibility, the above rules on supervening impossibility shall apply.
In the light of the foregoing, if contract reciprocity is altered as a result of legislative measures - such as sanctions adopted by the European Union, including in particular the SWIFT Sanctions - there would be a case of so-called supervening impossibility (but not of factum principis).
While - in principle - the termination by factum principis of commercial contracts having as their subject-matter imports into Russia of so-called dual-use items is unavoidable due to supervening impossibility[19], SWIFT Sanctions pose a number of interpretative problems in respect of pecuniary obligations which, as such, never become (or should never become) impossible, since they are not subject to a material or legal objective impossibility, but only to a subjective unfeasibility, due to the unavailability of the SWIFT system payment mechanisms to the obligor[20].
Indeed, as has been seen several times in the context of the Covid 19 pandemic, the concept of impossibility of performance should not include financial impotence since money is a generic, fungible and imperishable asset (genus numquam perit) [21]. It follows that the greater difficulty of the obligor in obtaining financial resources should not constitute in itself an impossibility of performance since performance is always possible[22].
Hence, the obligor may not invoke said circumstance in order to discharge its obligation.
However, without prejudice to the foregoing, sanctions imposed (also) by the European Union on certain Russian banks[23], including in particular the SWIFT Sanctions, could open up a new scenario in which even payments should be considered impossible[24] - according to an evolutionary interpretation that takes into account the operational impact of the aforementioned sanctions -, thus discharging the obligor’s liability for the relevant payment obligations.
In any case, this would be a temporary impossibility due to a hopefully transitory impediment[25].
Therefore, in such context, it is necessary to understand - on a case-by-case basis - whether SWIFT Sanctions should be considered, also from an operational point of view, as a) supervening (at least temporary) impossibility which exempts the obligor from liability or b) an event which only causes an increased difficulty of payment. So, from this perspective, it will be necessary to assess whether and what, if any, legitimate alternative instruments to the use of the SWIFT payment circuit may be available to the parties (and in particular to the obligor).
In particular, since the preservation of the contract represents a preferable solution[26] compared to its termination, attention must be paid to the identification of possible efforts to “maintain” the contract that are aimed, in any event, at not jeopardising balanced reciprocity in terms of time and resources.
In the first place, and without prejudice to a concrete evaluation[27], in order to activate the most appropriate or even only feasible instrument in the light of the context and of the relevant contractual relationship, at least the following possible remedies (i.e. efforts) are - currently - available:
However, in view of the exceptional nature of the Ukrainian crisis and the continuous evolution of the sanctions adopted against Russia, a ratione temporis and case-by-case assessment of the individual commercial relationships affected by the SWIFT Sanctions is crucial.
This article is for information purposes only and is not, and cannot be intended as, a professional opinion on the topics dealt with. For further information please contact Paolo Gallarati, Filippo Federici, Martina Da Re and Valentina Molinari.
[1] A preliminary overview of the sanctions imposed, and in the process of being imposed, against Russia, with particular focus on the sanctions adopted by the European Union and some other countries including the United States, can be found in the note “Ukraine Crisis: sanctions” of 7 March 2022, available at https://www.advant-nctm.com/news/articoli/crisi-ucraina-le-misure-sanzionatorie.
[2] And, with the additional sanctions package adopted by the EU Council on 9 March 2022 being published in the EU Official Journal, also to Belarus: https://www.consilium.europa.eu/it/policies/sanctions/restrictive-measures-against-belarus/belarus-timeline/
[3] The considerations in this document should be regarded as relevant for Russia and Belarus by reason of what is stated in footnote 2 above.
[4] This is the link to the CIPS website: https://www.cips.com.cn/cipsen/7052/7057/index.html
[5] This is the link to the relevant page of the Bank of Russia: https://www.cbr.ru/eng/psystem/fin_msg_transfer_system/
[6] For a preliminary overview of the various sanctions imposed and in the process of being imposed on Russia, see also the memorandum “Ukraine Crisis: sanctions”, cit.
[7] The additional measures referred to in footnote 2 limit, inter alia, the provision of specialised financial messaging services (SWIFT) to three Belarusian banks.
[8] In accordance with the provisions of Article 1 of Regulation (EU) 2022/345, the following Article 5-nonies is included in Regulation (EU) No 833/2014, which reads: “It shall be prohibited as of 12 March 2022 to provide specialised financial messaging services, which are used to exchange financial data, to the legal persons, entities or bodies listed in Annex XIV or to any legal person, entity or body established in Russia whose proprietary rights are directly or indirectly owned for more than 50 % by an entity listed in Annex XIV”.
[9] In accordance with the provisions of Article 1 of Regulation (EU) 2022/345, the following paragraphs are included in Article 2-sexies of Regulation (EU) No 833/2014, which read: “3. It shall be prohibited to invest, participate or otherwise contribute to projects co-financed by the Russian Direct Investment Fund. 4. By way of derogation from paragraph 3, the competent authorities may authorise, under such conditions as they deem appropriate, an investment participation in, or contribution to, projects co-financed by the Russian Direct Investment Fund, after having determined that such an investment participation or contribution is due under contracts concluded before 2 March 2022 or ancillary contracts necessary for the execution of such contracts”.
[10] In accordance with the provisions of Article 1 of Regulation (EU) 345/2022, the following Article 5-decies is included in Regulation (EU) No 833/2014, which reads: “1. It shall be prohibited to sell, supply, transfer or export euro denominated banknotes to Russia or to any natural or legal person, entity or body in Russia, including the government and the Central Bank of Russia, or for use in Russia. 2. The prohibition in paragraph 1 shall not apply to the sale, supply, transfer or export of euro denominated banknotes provided that such sale, supply, transfer or export is necessary for: a) the personal use of natural persons travelling to Russia or members of their immediate families travelling with them; or b) the official purposes of diplomatic missions, consular posts or international organisations in Russia enjoying immunities in accordance with international law”.
[11] This is what the European Commission stated: ec.europa.eu/info/strategy/priorities-2019-2024/stronger-europe-world/eu-solidarity-ukraine_it
[12] See Civil Cassation, No. 12235 of 25 May 2007, in which the Supreme Court gives a precise description of both terms. In particular: extraordinary nature, according to the Supreme Court, has an objective character, in the sense that it must be an anomalous event, measurable and quantifiable on the basis of elements such as its intensity and size. On the other hand, unforeseeability is subjective in nature, as it concerns the cognitive capacity and diligence of the contracting party. The assessment of such characteristic must however be carried out in a totally objective manner, taking as a model the behaviour of an average person in the same circumstances.
[13] The limit placed on the obligor’s liability by Article 1218 of the Italian Civil Code is not the “objective and absolute” impossibility of the performance as was already assumed under the Italian Civil Code of 1865, but rather an objective impossibility but at the same time not absolute but relative. See F. Realmonte in Caso fortuito e forza maggiore, Wki, 1988 who also argues that it is necessary to have regard to the individual contract in order to know the obligations referrable to it to assess in concrete terms to what extent the effort required from the obligor to remove any obstacles that may have arisen (and been created by others) to proper performance may go. In this respect, see also L. Mengoni, La responsabilità contrattuale, Jus – Rivista di scienze giuridiche, 1986, pages 87 et seq., according to whom supervening impossibility is to be assessed “in the same way as the contractual terms on the basis of which the obligation was created. Thus, in the same type of relationship, the intensity of the obligation, i.e. the extent of the obligation assumed by the obligor to satisfy the beneficiary’s interest, may differ depending on the individual circumstances in which the promise was made”.
[14] Reference is made, in particular, to Articles 1218 “Obligor’s liability”, 1256 “Permanent and temporary impossibility”, 1258 “Partial impossibility”, 1463 “Total impossibility” and 1467 “Contracts with reciprocal obligations” of the Italian Civil Code. In particular, the institution of supervening excessive onerousness (Article 1467 of the Italian Civil Code) allows termination of contracts whose balance is altered by supervening events - extraordinary and not reasonably foreseeable at the time of entering into the contract - which do not fall within the scope of the normal contractual contingency and which make one of the performances underlying the contract excessively onerous or objectively debased in its value and/or usefulness.
[15] In this respect, see A. Torrente and P. Schlesinger, Manuale di Diritto privato, Nineteenth edition, 2009, Giuffrè, pp. 450 et seq.
[16] See, A. Torrente and P. Schlesinger, op. cit., pp. 402 et seq.
[17] See, Civil Cassation, No. 6594 of 30 April 2012, in De Jure.
[18] See, Civil Cassation, No. 14915 of 8 June 2018, in De Jure, according to which: “In the event that the obligor has not fulfilled its obligation within the contractually agreed time, it may not invoke supervening impossibility with respect to a subsequently imposed order or prohibition of the administrative authority (factum principis) that was reasonably and easily foreseeable, on the basis of due diligence, at the time the obligation was assumed, or in respect of which it has not, still within the limits set by the due diligence criterion, tried all the possibilities available to it to overcome or remove the public authority’s resistance or refusal”. See also Civil Cassation, No. 11914 of 10 June 2016 and Civil Cassation, No. 12093 of 28 November 1998.
[19] On this point, see again the preliminary overview “Ukraine Crisis: sanctions”, op.cit.
[20] On the irrelevance of the subjective condition of the financial impotence of the obligor and of the cause, even if not attributable to it, see the Minister of Justice’s Report accompanying the Italian Civil Code, which provides that “the impossibility of fulfilling the obligation, due to causes inherent in the person of the obligor or its economy, which are not objectively connected to the performance due, cannot be taken into consideration for discharging purposes”. On this point, see the Supreme Court’s Thematic Report No. 56 of 8 July 2020 “Substantive regulatory innovations of the ‘emergency’ anti-Covid 19 law in the field of contracts and insolvency”. On a more dubious perspective, see instead: P. Perlingieri, Commento all’art. 1256 c.c., in Commentario del Codice Civile, A. Scialoja and G. Branca (edited by), 1975, Zanichelli, Bologna, p. 484.
[21] On this point see the Supreme Court’s Thematic Report No. 56, op. cit. Along the same lines also C. M. Bianca, in Diritto Civile, IV, L’obbligazione, Milan, 143 et seq. according to which “after all, the performance of obligations to pay money is always possible because of the normal possibility of converting all present and future goods into money. The cornerstone rule of Article 2740 of the Italian Civil Code, in providing that the obligor is liable for the performance of the obligations with all its present and future assets, finds its scope of application in the possibility of having the value of the obligor’s assets transformed into money through the forced expropriation procedure”.
[22] See Civil Cassation No. 25777 of 15 November 2013 in De Jure, which in its reasoning states that: “It should be recalled that, according to this Court’s case law, the impossibility which, pursuant to Article 1256, extinguishes the obligation, is to be understood in an absolute and objective sense and therefore cannot be identified as a simple difficulty in performing, i.e. with any cause that makes performance more onerous, but consists in the occurrence of a cause, not attributable to the obligor, that definitively prevents performance; which, in accordance with the principle according to which genus nunquam perit, can only occur when the performance has as its object a fact or a thing that is determined or of a limited kind, and not a sum of money”.
[23] And Belarusian, see footnote 2 above.
[24] As a result of a relativistic assessment (see footnote 13 above) to be carried out on a case-by-case basis.
[25] In this respect, as already mentioned, Article 1256, second paragraph, of the Italian Civil Code provides that if the impossibility is temporary, the obligor is not liable for the delay but is nevertheless obliged to perform until when “in relation to the kind of obligation or the nature of its object, the obligor can no longer be considered liable to perform, or the beneficiary is no longer interested in its performance”. It follows that, once the reason for the impediment has ceased to exist, the obligor will nevertheless be bound to perform. However, it is likely that, in a critical situation such as the one described in the introduction, the prolonged state of impossibility could result in the obligor’s obligation to perform or the beneficiary’s interest in performing ceasing to exist and, consequently, lead to the extinction of the obligation.
[26] In accordance with the principle of preservation of the contract under Article 1372 of the Italian Civil Code, also referred to and emphasized by the Supreme Court in its Thematic Report No. 56, op. cit., to extend the maintenance remedy under Article 1467 of the Italian Civil Code also to the party affected by the supervening event, with the direct consequence that it would, in turn, be entitled to invoke equity for the unbalanced contract which in contracts for consideration, would be due only to the counterparty.
[27] From a purely operational point of view, it is advisable, first of all, to
[28] The so-called third EU sanctions package also prohibits financial assistance for trade with or investment in Russia, with the exception of prior binding financing commitments, trade in foodstuffs or for agricultural, medical or humanitarian purposes. On this point, see again “Ukraine Crisis: sanctions”, op. cit.
[29] Such ‘‘solution’’ has already been widely and recently adopted also to finance humanitarian aid in Afghanistan. In relation to cryptocurrencies, in addition to the risks mentioned above, particular caution is recommended also given the increasing attention paid to them by Western countries and the EU’s clarification of yesterday, 9 March 2022 - concomitant with the adoption of a package of sanctions that, among other things, extends the scope of SWIFT sanctions to a number of major Belarusian banks, bans the export of naval technology to Russia, and expands the list by 160 additional persons (Russian and Belarusian oligarchs and senior government officials) - according to which cryptocurrencies and, in general, all cryptoassets are to be affected by the previous sanctions imposed by the EU.
