Introduction

The use of sanctions as a foreign policy tool is widespread. Prominent examples include the recent lifting of restrictions against Iran's financial, transport and energy sectors and hundreds of Iranian entities, as well as the imposition and tightening of sanctions against Russia by countries including Australia, Canada, the European Union, Japan, Switzerland and the United States. The effect of sanctions on international arbitration, particularly in sectors often affected (eg, energy), has come under the spotlight.

Although sanctions do not explicitly target the arbitral process, they can have implications for international arbitration at three different stages:

  • at the outset of arbitration, when institutions, arbitrators and counsel ask themselves whether accepting to arbitrate disputes involving sectors or parties caught by sanctions puts them at risk of violating those sanctions;
  • in the course of arbitration, when arbitrators decide on the effect of the sanctions on the claims brought forward by the parties; and
  • at the enforcement stage, when the enforcement courts decide whether the enforcement of an award violates sanctions.

This update highlights the issues that the parties to arbitration will face at the different stages.

Sanctions at outset of arbitration

As a reaction to Russia's annexation of the Crimean peninsula, the European Union imposed travel bans and asset freezes against certain individuals in March 2014 and later imposed sanctions on economic exchanges with Crimea in June 2014 and an economic sanctions regime against Russia in July 2014 (extended in December 2015). These EU economic sanctions introduced a licensing procedure regarding transactions within their scope. Similar to their US counterparts, the sanctions particularly affect Russia's energy and financial sectors. The sanctions prohibit the satisfaction of any claims in connection with any contract or transaction, directly or indirectly, in whole or in part affected by the sanctions, including claims for compensation or similar items, if such claims are filed by Russian persons or entities, by their affiliates or on their behalf. In addition, the sanctions prohibit the provision of technical assistance to targeted persons or entities. 'Technical assistance' includes "instruction, advice, training, transmission of working knowledge or skills or consulting services; including verbal forms of assistance".

In August 2014, Switzerland followed the example of the United States and the European Union and introduced similar bans and restrictions. However, the Swiss sanctions have no retroactive effect and contain no prohibition against the satisfaction of claims or the provision of technical assistance.

Some authors have suggested that commencing or pursuing arbitral proceedings by a claimant violates the prohibition against the satisfaction of 'any claim', as included in the EU and US sanctions. However, these sanctions do not warrant such a broad interpretation. While the sanctions provide that no claims may be satisfied, they do not imply that claims cannot be filed.

However, if the letter of the prohibition against the provision of technical support and related services is taken at face value, and if the seat of arbitration is in a jurisdiction where sanctions apply, there may be a risk that the services of arbitrators, legal counsel and arbitral institutions will fall under the sanctions regime. While the work of legal professionals seems completely different from the acts targeted by the legislative bodies when introducing the sanctions, considerable uncertainty remains as to the sanctions' reach.

Against this background, parties subject to sanctions have recently been opting for arbitration venues that have less strict sanction regimes in place (eg, Switzerland) or no sanctions regime at all (eg, Singapore and Hong Kong).

Even though arbitration proceedings are not prohibited (at least if the arbitral institution involved has obtained a licence from the competent authority), practical experience shows that sanctions can cause significant delays. In their joint statement of June 2015, the International Chamber of Commerce, the London Court of International Arbitration and the Arbitration Institute of the Stockholm Chamber of Commerce confirmed their views that sanctions do not explicitly target arbitration proceedings, but that the asset-freezing restrictions might require additional administrative steps on the side of the affected party. In particular, the affected party may need to obtain an exemption from the freezing of funds before filing a request for arbitration in order to pay arbitration fees. Even if the affected party is the respondent, sanctions will usually result in significant delay, as the arbitral institution may have to obtain an exemption for accepting advance payments, even from the unaffected party.

Sanctions and tribunal decision-making process

When deciding the merits of a claim, arbitrators must consider existing sanctions, either as part of the law chosen by the parties as mandatory rules of law applicable irrespective of the parties' choice of law, or as being potentially part of the public policy of the relevant jurisdiction. In this respect, it is now widely accepted that economic sanctions adopted by the UN Security Council form part of international public policy.

The application of Swiss sanctions to the merits of a claim differs from the application of EU sanctions. While EU sanctions contain a direct prohibition of certain contracts and transactions, including any claims arising from the reform, the application of Swiss sanctions requires additional analysis. A contract violating Swiss sanctions is null and void only if the prohibition existed at the time of conclusion of the contract. If sanctions enter into effect after that time, they may either render performance of the claims arising from the contract permanently impossible or only lead to a situation of (temporary) default.

Sanctions at enforcement stage

Sanctions may hinder the enforcement of arbitral awards either if they render the subject matter of the arbitration non-arbitrable (Article V(2)(a) of the New York Convention) or if recognition or enforcement of the award is contrary to the public policy of the enforcement forum (Article V(2)(b) of the convention).

Most jurisdictions acknowledge that economic disputes involving sanctioned parties are arbitrable. However, there are notable exceptions. For example, the Genoa Court of Appeals, in a case falling under the UN Security Council sanctions against Iraq, held that the embargo legislation deprived the parties from freely disposing of the contractual right at issue. It decided that the subject matter of the dispute was not arbitrable and that Italian courts had jurisdiction to declare the sanctioned contract inoperative (Fincantieri-Cantieri Navali Italiani SPA v Iraq, Riv Dell'arb 4 (1994) 505). Unsurprisingly, the Swiss Federal Supreme Court (4A_250/2013, January 21 2014) and Canadian courts (eg, Compagnie Nationale Air France v Libyan Arab Airlines, 2003 CanLII 35834 = [2003] RJQ 1040 = ASA Bulletin 21 (2003), 630 (Quebec Court of Appeal)) reached the opposite conclusion and held that contractual claims falling under a sanctions regime are arbitrable.

The question of whether an award deciding on a claim that falls under a sanctions regime complies with the public policy of the enforcement forum is more problematic. In this respect, the Swiss Federal Supreme Court again takes a liberal view – it upheld an award in which the tribunal found an agreement within the scope of sanctions against Iraq to be valid on the basis that the agreement was conditional on the lifting of the sanctions and was implemented only after that time. Moreover, the court recently allowed the recognition and enforcement of a $97 million award in favour of an Iranian company, dismissing the objection by the Israeli-owned Swiss counterparty that enforcement of the award would violate a fundamental principle of international law by contravening international sanctions against Iran (4A_250/2013, January 21 2014). The court held that the Swiss party had not pleaded in sufficient detail how enforcing the award was contrary to Swiss public policy.

For further information on this topic please contact Marc Veit or Tino Schneider at LALIVE by telephone (+41 58 105 2000) or email (mveit@lalive.ch or tschneider@lalive.ch). The LALIVE website can be accessed at www.lalive.ch.

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