Altered states: sanctions and international arbitration

April 2024  |  FEATURE | LITIGATION & DISPUTE RESOLUTION

Financier Worldwide Magazine

April 2024 Issue

Generated to a great extent by the ongoing Russian military aggression in Ukraine, today’s volatile geopolitical environment has, among other things, resulted in a radically altered sanctions landscape.

A primary foreign policy tool of governments, sanctions are employed to force change in a specified regime’s policies and practices deemed harmful to sovereign states’ national interests or that violate international norms of behaviour.

Sanctions can be comprehensive, such as those implemented multilaterally by the United Nations or the European Union (EU), or selective, applied through states’ domestic legislation, using the blocking of assets and trade restrictions to accomplish foreign policy and national security goals.

Sanctions and arbitration

One arena that has been particularly affected by the imposition of sanctions in recent years is arbitration. Sanctions have created numerous disputes, including disputes related to performance of contracts which contain international arbitration clauses.

“The arbitration community has been operating in an environment of increasing numbers of economic sanctions and counter-sanctions regimes for a number of years,” observes Chiraag Shah, a partner at Morrison Foerster. “In response, most arbitral institutions and participants have taken steps to adapt to new regimes.”

However, despite considerable adaptation to evolving sanctions regimes, in the experience of Mr Shah, many issues are still likely to arise during the arbitral process, including those outlined below.

First is the payment of institutional and arbitrators’ fees. With many financial institutions increasingly reluctant to process payments where a party or state is subject to international sanctions, this often results in lengthy delays to proceedings even getting off the ground, particularly where a licence may be required from sanctions authorities to accept or process payments from a designated individual.

Second is access to suitably qualified counsel. This is an issue particularly in jurisdictions which have imposed sanctions and where specific licences may be required for lawyers to be able to represent a sanctioned party.

Third is enforcement of arbitral awards. Different jurisdictions may hold divergent views on the arbitrability of disputes involving sanctions or whether enforcement of an award would be contrary to public policy in the enforcing country. Practical difficulties may also arise where a payment or transfer of assets is required to be made to a sanctioned party (possibly requiring an exemption or licence under the applicable sanctions regime to allow a sanctioned party to make or receive transfers of assets).

Fourth is challenges around recovery of costs. Receiving a payment on account of costs from a sanctioned entity may itself breach sanctions or present significant logistical difficulties – with most banks having extremely strict restrictions on dealing with funds from a sanctioned entity.

Last is the mechanics of settlement. Negotiating with a sanctioned party may also potentially be in breach of sanctions, as would potentially making a payment to settle a claim.

Sanctions relating to Russia

An offshoot of global conflict, such as the 2022 full-scale Russian invasion of Ukraine, is that it often spurs the use of international arbitration as the preferred venue for neutral dispute resolution. That said, Russia has attempted to politicise the arbitral process through legislation which grants Russian courts exclusive jurisdiction over disputes where one party is subject to sanctions.

“Russian courts have issued anti-suit injunctions against international arbitrations, which flows entirely contrary to the very tenets of arbitration – parties’ freedom to contract away from national courts,” affirms Mr Shah. “Some arbitral tribunals have nevertheless ignored such injunctions and proceeded to hear the arbitration. In other cases, national courts in other jurisdictions have in turn also issued anti-antisuit injunctions in favour of arbitration.

“Naturally, all of this leads to the risk of costly parallel proceedings and judgements,” he continues. “The interpretation of relevant sanctions legislation, and possible orders of Russian courts which are contrary to internationally accepted policy and arbitral practice, have added a further layer of complexity for arbitrators navigating this area.”

Arbitral lacuna

Currently, there are 14 UN sanctions regimes in place, 11 of which include arms embargoes, travel bans and asset-freeze measures. Moreover, such sanctions are expected to continue throughout 2024 and may lead to further adjustments to current sanctions regimes and associated arbitration proceedings.

“Arbitrators have the right to determine their own jurisdiction, and to be unfettered by courts in exercising this right,” contends Mr Shah. “There is the very real risk that an arbitral award rendered in disregard of such an injunction, or potentially, sanctions, may be much more difficult to enforce and subject to challenge under the New York Convention or otherwise. Until there is more established jurisprudence on these issues, arbitrators may find themselves in a bit of a lacuna.”

And yet, as Russian sanctions continue and more disputes from regions such as the Middle East, Africa and China are referred to arbitration, questions surrounding the interplay between international arbitration and sanctions are likely to become ever more relevant.

“The issues primarily arising from the imposition of broad sanctions against Russia may be replicated and multiplied should the US, the UK or EU adopt sanctions against China in the event of an armed conflict with Taiwan,” concludes Mr Shah. “While hoping that there will not be a need for Western governments to impose sweeping sanctions on China, it is important to review, and if needed, consider whether relevant contractual provisions may need to be pre-emptively amended or renegotiated ahead of time.”

© Financier Worldwide

BY

Fraser Tennant