The Effect of International Sanctions on Arbitration
Some rules may be broken without any serious consequences. An international sanction is not usually one of these.
Businesses and individuals across the world can sometimes find their contracts affected by international sanctions.
For example, work with trading partners in sanctioned states or in specific industrial sectors within a particular state may have to be terminated, or essential assets and funding could be frozen. Loss can often occur from having to follow international sanctions in the first place.
As a direct result of an international sanction, the arbitral proceedings, and even the arbitrator, can be affected in several respects.
International Sanctions and Arbitration
Most international sanctions do not specifically apply to international arbitration proceedings.
However, the indirect effects of international sanctions can have a huge impact on resolving international disputes.
Difficulties can arise from the parties themselves, the perceived partiality of the arbitrator or place of arbitration right up to the enforceability of the award itself:
1. The effect of international sanctions on parties
Sanctions are primarily designed to restrict trade. If a party’s contract concerns carrying out trade of any kind, you can see why there may be a problem.
Parties may need to terminate their contract if sanctions present difficulties in carrying out their obligations. This can be anything from not being able to secure access to financial services, or more sector-specific conditions imposed on the trade at hand.
In some contracts, there may be a clause that requires compliance with all laws, or a force majeure (where there are extraordinary events beyond the control of either party). Considering the events of the last few years, most notably the ongoing worldwide pandemic, contracts of the future will no doubt be best-advised to include at least one of these clauses.
If the sanctions are a matter of English law, non-performing parties may be able to present a defence of frustration. This means that the performance of the contract could be deemed illegal because of sanctions.
English courts have, in the past, been reluctant to allow the frustration defence if sanctions are temporary, or performance could be permitted in another way. This may not apply if sanctions are imposed elsewhere, such as in a country where a party is based, and are not a matter of English law.
2. Significant delays can arise from arbitral institutions as they address where they stand on international sanctions
If Brexit taught us anything, it is that major changes to laws involving multiple countries require plenty of time.
Complying with the requirements of international sanctions is no different. Parties involved in a dispute affected by an international sanction can face many months of delays in getting it resolved. Delays can go on for longer if the impact of the international sanction also changes over time.
For example, In March 2014, the EU imposed certain, specific sanctions on Russia. The ICC, LCIA and SCC released a joint paper in June 2015, clarifying their stance and highlighting administrative steps for arbitral proceedings affected by the sanctions.
3. Impact on tribunals or individual arbitrators
Tribunals or arbitrators can face concerns over their neutrality when presiding over a dispute involving a sanctioned country.
Anecdotal evidence from an arbitration conference in Moscow found that Russian parties using arbitration were concerned about the impartiality of European tribunals or arbitrators. It also noted they are increasingly seeking to arbitrate in countries which do not impose sanctions , such as Hong Kong or Singapore.
This may stem from a concern that arbitrators and tribunal members from a country that has imposed sanctions may be more likely to consider those sanctions.
Countries that criminalise the breaking of international sanctions may also see an increased number of arbitrators declining to act in certain disputes.
This may also occur with arbitrators from the sanctioned state. They may be wary of issuing awards that are in compliance with the foreign sanction, but that may go against the sanctioned state’s laws.
4. Enforcing the award
Regardless of where the place of arbitration happens to be, or the nationalities of the parties involved, if an award violates a particular international sanction, it may be difficult to enforce fairly.
Under the New York Convention (Article V (2)(b)), a contracting state can refuse to recognise an award if they find that it is contrary to public policy.
This means that national courts may not enforce any award they believe to violate relevant international sanctions.
If an award is recognised, the practicalities of enforcing it can also be difficult, with extra administrative or logistical difficulties involved.
For example, international sanctions have long affected Iran’s ability to access traditional methods of payment. Some transactions have had to be concluded in other forms of payment, such as gold. Transporting billions of dollars’ worth of gold from the USA to Iran cannot have been an easy trip to organise!
Equally, if an award follows the laws of the sanctioned state, but not the international sanction, its courts may refuse to set aside (or enforce) the award based on its own laws.
This can present further layers of complexity to arbitrators and tribunals, who may find it difficult to reach a fair, unilaterally enforceable decision on the dispute.
With substantial experience in high-profile and complex international disputes, Carlsons Solicitors are experts at arbitration. With a team of in-house barristers and senior solicitors, our London and Dubai team are equipped to represent parties in a variety of circumstances. Get in touch with Carlsons Solicitors for leading, trusted advice.