Supreme Court: War and Inflation Do Not Automatically Justify Changing the Terms of a Commercial Loan
⚖️ Ukraine | Commercial Disputes
Case Details
Case No.: 910/8232/22
Court: Supreme Court, Commercial Cassation Court
Decision Date: 14 June 2023
Case Category: Commercial Law
Subject Matter: Amendment of Credit Agreement
Sub-Subject: Material Change of Circumstances / Martial Law / Inflation / Commercial Risk
Contract Type: Revolving Credit Facility
Relief Sought: Amendment of the credit agreement by recognising an additional agreement changing the deadlines for repayment of the loan and interest as concluded
Legal Basis: Article 652 of the Civil Code of Ukraine
Key Issue: Whether war, deterioration of business conditions, counterparties’ non-payment and inflation constituted a material change of circumstances allowing a commercial borrower to obtain judicial amendment of its credit agreement
Outcome: The Supreme Court upheld the lower courts’ dismissal of the claim.
Background of the Dispute
A Ukrainian company brought proceedings against a bank seeking judicial amendment of an agreement establishing a revolving credit facility.
The borrower asked the court to recognise an additional agreement to the credit agreement as concluded. The proposed amendment would have changed the contractual deadlines for repayment of the principal and payment of interest.
The company argued that when the parties entered into the credit agreement, they had not anticipated military hostilities in Ukraine and the consequences that the war would have for the borrower’s business.
According to the claimant, those circumstances substantially affected its ability to conduct commercial activities and comply with the original repayment schedule.
The company therefore sought to rely on a material change of circumstances as grounds for judicial modification of the financing arrangement.
The courts of first and appellate instance dismissed the claim.
The borrower appealed to the Supreme Court.
Can Wartime Economic Difficulties Justify Changing a Loan Agreement?
The Supreme Court considered the claim in the context of Article 652 of the Civil Code of Ukraine.
That provision allows a contract to be amended or terminated in certain circumstances where the circumstances upon which the parties relied when entering into the contract have materially changed.
However, the existence of significantly more difficult economic conditions does not, by itself, entitle a commercial party to have its contract rewritten by a court.
The Supreme Court focused in particular on the nature of entrepreneurial activity and the commercial risks assumed by a business when entering into contractual obligations.
Businesses Operate at Their Own Commercial Risk
The Supreme Court emphasised that a person carrying out entrepreneurial activity must understand that such activity is conducted at that person’s own risk.
A business is expected to make its own commercial assessment of the consequences of its decisions.
This includes assessing the possibility that particular transactions may produce unfavourable financial consequences.
Commercial parties must therefore independently evaluate risks and decide whether to enter into, perform or refrain from particular transactions.
This principle was central to the Court’s treatment of the borrower’s arguments.
Loss of Profit and Counterparty Non-Payment Are Commercial Risks
The claimant relied, among other matters, on deterioration of its financial position and the failure of its own counterparties to fulfil monetary obligations owed to it.
The Supreme Court did not regard those circumstances as extraordinary commercial events sufficient, in themselves, to justify judicial amendment of the credit agreement.
Loss of expected profit and non-payment by counterparties were characterised as risks inherent in entrepreneurial activity.
A commercial undertaking cannot generally transfer those risks to its contractual counterparty simply because they subsequently make performance of its own obligations more difficult.
The judgment therefore reinforces a significant distinction between a genuinely exceptional change in the legal or factual basis of a contract and the ordinary — even if serious — commercial risks associated with operating a business.
Inflation Is Also a Foreseeable Commercial Risk
The borrower also relied on inflation.
The Supreme Court considered inflation to be one of the possible risks associated with commercial activity in a market economy.
It was therefore not treated as an inherently extraordinary or unforeseeable circumstance.
The Court indicated that a commercial party should consider the possibility of inflation when entering into a credit agreement, including when selecting the currency in which borrowing obligations are denominated.
For businesses entering into financing arrangements, this aspect of the judgment is important: changes in the economic environment do not automatically shift the contractual allocation of financial risk.
Martial Law Does Not Automatically Satisfy Article 652
The claimant also relied on the consequences of the introduction of martial law in Ukraine.
The Supreme Court accepted that wartime circumstances may have substantial consequences for commercial activity.
But that does not mean that the existence of martial law, or its economic consequences, automatically establishes all of the statutory conditions required for judicial amendment of a contract under Article 652 of the Civil Code.
The Court considered the claimant’s reliance on material changes in its business operations, inflation and other consequences of martial law insufficient to demonstrate the simultaneous existence of the legal conditions necessary for the proposed judicial modification of the agreement.
The analysis therefore remains fact-specific.
A party must establish more than the general existence of war and resulting economic hardship.
Article 652 Does Not Operate as a General Hardship Clause
The practical effect of the Supreme Court’s reasoning is that Article 652 should not be treated as a general mechanism allowing businesses to renegotiate unsuccessful or financially burdensome transactions through litigation.
The fact that performance has become substantially more difficult or less profitable does not necessarily mean that the contractual relationship has undergone the type of material change contemplated by Article 652.
This is particularly important in financing arrangements.
Credit agreements allocate financial risks between borrower and lender. A deterioration in the borrower’s commercial position does not automatically require the lender to accept different repayment terms.
Judicial intervention therefore requires satisfaction of the statutory requirements rather than merely proof of financial hardship.
The Supreme Court’s Decision
The Commercial Cassation Court of the Supreme Court upheld the judgments of the lower courts dismissing the company’s claim.
The Court concluded that the circumstances relied upon by the borrower did not establish the necessary legal basis for amending the credit agreement under Article 652 of the Civil Code.
In particular, the Supreme Court treated:
the absence of expected profit;
non-payment by the borrower’s counterparties;
inflationary processes;
deterioration in the borrower’s business conditions; and
the general consequences of martial law
as insufficient, on the facts of the case, to establish the combination of statutory conditions necessary for judicial amendment of the credit agreement.
The original contractual obligations therefore remained unchanged.
Why This Decision Matters
The judgment is particularly relevant to foreign lenders, investors, borrowers and companies financing operations in Ukraine.
It indicates that Ukrainian courts will distinguish between exceptional circumstances capable of engaging statutory mechanisms for contractual adjustment and commercial risks that remain with the party that assumed them.
The distinction matters considerably in wartime.
The existence of war does not mean that every Ukrainian commercial agreement becomes open to judicial renegotiation.
For financing arrangements in particular, parties should consider separately:
whether the relevant event actually prevents performance or merely makes performance more expensive;
whether the risk was foreseeable when the agreement was concluded;
whether the relevant risk was contractually allocated to one of the parties;
whether the contract contains hardship, force-majeure or restructuring provisions;
whether the circumstances satisfy the statutory requirements of Article 652;
whether currency and inflation risks were addressed when financing was structured; and
whether a negotiated restructuring is available instead of judicial modification.
The decision therefore provides a degree of predictability for lenders while also demonstrating the evidential burden faced by borrowers seeking judicial amendment of financing arrangements.
Lions Lawyers’ Analysis
The decision reflects a broader principle of Ukrainian commercial law: commercial hardship and legal impossibility are not the same thing.
A business experiencing declining revenues, non-payment by customers, currency exposure, inflation or other financial consequences of war may face serious economic difficulties. Those difficulties do not necessarily alter the legal allocation of risk established by the contract.
For a party relying on Article 652, the central task is therefore not simply to demonstrate that circumstances became substantially worse. It must establish why the particular change satisfies the statutory conditions for judicial intervention in the parties’ agreement.
This has direct implications for foreign companies financing Ukrainian operations.
The allocation of wartime, currency, inflation, liquidity and counterparty risks should ideally be addressed when the financing documents are negotiated. Depending on the transaction, the agreement may need specific provisions governing restructuring, payment extensions, material adverse changes, force majeure, hardship, currency fluctuations, changes in law and events affecting the borrower’s operations.
Where a dispute has already arisen, the analysis should begin with the precise contractual allocation of risk and the particular factual event relied upon, rather than with the general proposition that the war has made performance more difficult.
Lions Lawyers advises Ukrainian and international clients on commercial and banking disputes in Ukraine, including credit agreements, debt recovery, contractual restructuring, material change of circumstances, force majeure, enforcement and cross-border commercial disputes. We provide full-service legal representation as well as standalone Ukrainian-law opinions for foreign lenders, investors, companies and international counsel assessing contractual rights and litigation risks in Ukraine.
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