There has been a tremendous increase in the imposition of sanctions and less inclination to use military force to achieve political objectives by several countries. The Russia-Ukraine crisis led to dynamic changes in our geopolitics and crushed several economies. Following this, thirty countries imposed sanctions on Russia and its allies in 2022. In addition, the European Union shall be taking measures to investigate, prosecute and punish those breaching the sanctions in the coming months of 2023.
These sanctions are politically motivated to restrict economic development and create commotion in business relationships. Several Companies do not perform their contractual obligations, terminate agreements or reassess clauses. Consequently, commercial disputes will be inevitable and resolved by Arbitration. These Sanctions will give rise to several issues in Arbitration such as:-
- Annulment of proceedings
- Stay the enforcement of the Award
- National security
- Appointment and payment of arbitrators
The London Court of International Arbitration Rules addresses sanctions. Article 24A.10 of the LCIA rules reserves the right to refuse to act on any instruction involving a breach of sanctions at its sole discretion and without the need to state reasons.
Under the New York convention of 1958, enforcement of foreign arbitral awards may be contrary to public policy. Therefore, such awards become unenforceable. The most draconian form of sanctions is blocking sanctions or asset freeze resulting in practical difficulties in enforcing an award. The amendments to the Russian Arbitrazh Code in 2020 made enforcement of any foreign award unlikely.
Accordingly, an Arbitration agreement entered by a Russian-sanctioned party providing for Arbitration with a seat in a sanctioning country is potentially unenforceable in Russia. The United States law firms are prevented from acting in arbitration involving US-sanctioned institutions under blocking sanctions unless prior authorisation has been sought from the Office of Foreign Assets Control (OFAC).
Sanctions may potentially prevent an arbitrator from acting or accepting payment because of a complicated process for payment of fees. An application to the relevant authority for the grant of a licence must be made. This may delay the start of arbitral proceedings. The processing of the licence application is likely to take weeks. This gives rise to multiple applications for several different cases. Also, the removal of sanctioned countries national banks from the SWIFT payment system will be creating practical barriers to paying an arbitrator.
Several treaties explicitly deny the benefits of a treaty to an investor whose home State is sanctioned. There are several jurisdictional issues raised in the arbitral proceedings when any sanctioned state comes into the picture. If the claimants violate the economic sanctions, it may impact the admissibility of their claims. Investment treaties may contain clauses carving out space for limiting the transfer of payments relating to an investment in sanctioned countries.
Such sanctions may breach other standards of protection such as non-discrimination, full protection, security, fair-equitable treatment etc. Investors or sanctioned countries national may face the taking of property by a foreign investor or their state. Qatar Airways is seeking at least $5 billion from the United Arab Emirates, Bahrain, Saudi Arabia, and Egypt for illegal expropriation by denying access to their airspace.
The State may use public policy, public order and security reasons to justify its sanctions. They may also contend partiality of the arbitrators to annul award passed against them. Zimbabwe wanted to challenge the award stating that the arbitral tribunal was not independent and impartial and therefore award passed against them must be nullified. Also, during the same annulment proceedings, Zimbabwe wanted to put a stay on enforcement of the award citing the economic impact of sanctions.