The growing use of sanctions as a foreign policy tool has significantly impacted international commerce and dispute resolution. These restrictions, implemented by individual nations or international bodies, can disrupt cross-border transactions affecting the supply of goods and services. The global business environment is characterised by its intricate nature and constant flux, with international sanctions imposing an additional layer of uncertainty as it can render contractual performance more onerous or even impossible. The imposition of sanctions has led to a surge in commercial disputes posing some unique challenges related to dispute resolution clauses.

Arbitration clauses, designed to prevent conflicts, can ironically become the source of contention when poorly drafted. To mitigate this risk, meticulous drafting and strategic foresight are essential for crafting effective arbitration clauses in a sanctions-laden environment.

This article explores the complex interplay between sanctions and international arbitration , highlighting key challenges at various stages of the arbitration process, from seat selection to enforcement.

Sanctions framework

Sanctions present significant challenges to the smooth operation of arbitration by disrupting logistical aspects and potentially rendering certain arbitral institutions and arbitral seats inaccessible. Understanding the potential ramifications of sanctions on international arbitration can ensure that the impacts of these measures on the dispute settlement mechanism can be adequately addressed and minimised.

Sanctions impose limitations or prohibitions on transactions with individuals or entities. Failure to comply with sanctions can result in potential criminal prosecution, imprisonment, and substantial monetary fines even when the act is done in compliance with contractual performance. However, most sanctions offer exemptions through general licenses for essential transactions, such as humanitarian aid or legal services, and specific licenses can be granted to a party before engaging in transactions that would otherwise be subject to sanctions.

Impact on arbitration proceedings

Seat Selection and Arbitral Institution: Choosing a sanctions-neutral seat and an experienced arbitral institution can help mitigate future challenges. Arbitral institutions and arbitrators may face restrictions on their ability to act or receive payments in cases involving sanctioned parties. Currently, most renowned arbitral institutions lack specific rules for handling cases involving sanctioned parties. Leading London arbitral institutions have required general licenses to process payments from sanctioned parties and a majority of Russian banks were excluded from the SWIFT banking system. Additionally, funds held by sanctioned individuals and entities within sanctioning countries were frozen, preventing these sanctioned entities/persons from accessing them for any purpose unless a specific licence was obtained.

Therefore, selecting the most suitable arbitral institution from the outset is crucial for mitigating potential challenges. Complying with sanctions laws is crucial but the arbitral institutes also have to manage their own international integrity, credibility and ensure that they continue to be seen as good administration of arbitral justice to parties.

Contractual Safeguards: Force majeure clauses are essential for addressing unforeseen circumstances, such as the imposition of sanctions, which hinder contract performance. By clearly defining force majeure events and outlining the parties’ obligations if such an event occurs, businesses can protect themselves from liability for non-performance or non-compliance. Equally crucial are termination and penalty clauses. These provisions should clearly outline the circumstances under which a contract can be terminated due to sanctions, as well as the applicable penalties. By establishing clear parameters for contractual non-performance or termination due to the imposition of sanctions, businesses can reduce uncertainty and potential disputes arising from sanctions-related challenges. Hardship clauses or renegotiation provisions may offer additional flexibility in adjusting contractual obligations and payment terms.

Engagement of legal representation: Unless there are exemptions specified in the sanction, parties may have difficulty in engaging legal representation involving a sanctioned party. Legal representatives have to consider carefully whether to act or continue to act for a sanctioned party not just for compliance and regulatory reasons but also for reputational reasons. Lawyers representing clients in different jurisdictions must manage these issues across all relevant jurisdictions.

Sanctions may prohibit a party from paying legal fees to its representatives or restrict the purposes for which fees can be incurred. For example, even when sanctions regimes provide for a general licence for legal services, it may have limits as to how much costs can be incurred for expenses (such as expert’s fees, travel, or printing) or may completely prohibit making payments to anyone based or resident in a sanctioned country.

Additionally, restrictions could impact the ability of a sanctioned party to retain legal representation or participate effectively in arbitration, potentially leading to procedural unfairness and challenges to the arbitral award.

Impact on specific parties

Sanctioned Claimant: A sanctioned claimant faces heightened risks, including potential refusal by the arbitral institution to accept the arbitration or fees, difficulties with arbitrator and expert appointments, and delays in payment due to banking restrictions. Non-compliance with administrative procedures may lead to termination of the arbitration. Additionally, any delay or payment issues can seriously prejudice a sanctioned claimant if the claim is reaching its statutory limitation period. The opponent may try to seek interim measures or security for costs in the event the sanctioned claimant’s assets are frozen due to sanctions. These interim applications would undoubtedly increase arbitration costs and unnecessary delays.

Sanctioned Respondent: Dealing with a sanctioned respondent comes with its own unique challenges. The sanctioned respondent may face difficulties in appointing arbitrators or experts, or obtaining payments from the respondent may be delayed or obstructed, potentially leading to tactical avoidance of the arbitration. The claimant, can of course, choose to pay the sanctioned respondent’s share of arbitration fees and bear the risk of non-recovery of these costs as well as the sums that might be awarded under the award.

Other parties and shared expenses – Sanctions may also impact the proper administration of the arbitration process. Since there might be limits on how much costs can be incurred for expenses, a sanctioned party may not be able to pay for shared expenses such as venue hire, transcribers and translation costs, travel costs for joint experts or arbitrators. Sanctions can also impose travel bans on sanctioned individuals which could bar them from travelling to the arbitration venue or seat unless a specific licence is granted.  

Any prohibition of specific technologies, such as Microsoft or Zoom in a sanctioned country, is yet another challenge as parties cannot rely on these technologies to conduct arbitration proceedings remotely. These restrictions may also limit a party in a sanctioned state from accessing documents making it impossible to prepare its case or comply with its disclosure obligations.  

Enforcement of Awards:

Sanctions can significantly impact the enforceability of an arbitral award. Courts may refuse to enforce awards if the losing party as was unable to present its case fairly.

Enforcing an award against a sanctioned entity may be hindered by asset freezes and bank restrictions. Sanctions can have exceptions for the execution of an arbitral award against frozen assets of a sanctioned party. Conversely, complying with an award and making payment to a sanctioned party might require a specific license, which can be challenging and time-consuming to obtain, increasing the business and reputational risks associated with enforcement proceedings in  non-sanctioning jurisdiction.

Conclusion

The rise in sanctions presents significant challenges for international arbitration. Businesses should proactively integrate sanctions compliance into their operational and contractual frameworks. Conducting thorough due diligence on potential business partners is imperative to identify and mitigate sanctions risks. Legal professionals play a pivotal role in guiding businesses through the complexities of sanctions and arbitration. Staying abreast of evolving sanctions and seeking legal advice on contract drafting, including arbitration clauses, is essential to minimise exposure to sanctions-related risks.