Their practical impact on international trade
Recent world events have drawn attention to various international, regional and country-based economic sanctions, such as those imposed by the US and the EU on Iran, and those imposed by the UN Security Council on North Korean firms on 2 May 2012 in the aftermath of North Korea’s missile launch in April. Conversely, there have been moves in the other direction, such as the recent promises by the US, UK and Australia to ease the existing sanctions in relation to resource-rich Myanmar, thus paving the way for a significant increase in the trading of natural gas, wood products, rice and other commodities in the future.
Broadly, economic sanctions can affect a commodities contract in several ways at the same time. It is therefore crucial to identify how a sanction is applicable, in order to assess the impact and whether a legal work-around is attainable.
Firstly, an economic sanction may make the contract (or its performance) illegal under local law, for example at the place of loading, place of discharge or place where payment is made.
Secondly, an economic sanction may prohibit the contract or conduct under the governing law of the contract, for example the governing law may give effect to certain UN sanctions, in which case any contractual performance thereafter would be prohibited as a matter of the governing law.
Thirdly, the contract in question may expressly provide that certain conduct/events would fall foul of the sanctions. For example, force majeure clauses and sanctions clauses entitling a party to decline to perform the contract.
Obviously, the scope of each economic sanction varies, and the precise legal effect in each case depends on factors such as the nature of the commodity, the identity of the parties to the transaction, the payment mechanism, and on whether the sanction is an international obligation, for example, under a UN resolution, or otherwise. There have been recent cases where the courts and arbitral tribunals have examined the applicability of sanctions in the cases before them, at the expense of significant time and costs to the parties involved.
Further, a sanctions regime can also change quickly depending on the prevailing political winds. In such case, the legal advice sought in each case may have to be constantly reviewed and/or updated. A good example is the escalation of the US sanctions against Iran, from the passing of the Comprehensive Iran Sanctions, Accountability and Divestment Act (CISADA) in 2010, the lowering of the triggering limits in November 2011, the expansion of the regime to cover fund transfers and financial institutions under the National Defense Authorization Act (NDAA) in December 2011, and various other directives and laws that are either in place or being debated in the legislature.
The practical effect of economic sanctions, of course, is that it puts a standstill to international trade. However, in each case such stoppage can manifest itself in different ways.
The first effect is that parties often face difficulties in either making or receiving payment. In the case of Iran, there have been reported cases of South Korean banks refusing to remit monies to Iran for fear of breaching the US and EU sanctions. In certain cases the bank customers have been asked to issue guarantees to the banks opening the letters of credit to bear any losses suffered by the bank due to the sanctions. Payments have also been routed through intermediaries, however this has not always been satisfactory. For example, the cost of using intermediaries may be high, and may result in the seller receiving payments in currencies such as Indian Rupees and Chinese Yuan which are not freely convertible. Another option which has been explored by some traders is the use of barter trade, though once again this is not always satisfactory particularly when one commodity being bartered is significantly more valuable, or in demand, than the other.
Sanctions can also have a widespread impact on the ancillary services such as the carriage of goods. Depending on the charterparty terms (for example, BIMCO sanctions clause or INTERTANKO sanctions clause), a carrier may well decline to carry cargo that the carrier considers in its view may put it at risk of breaching sanctions. Tied to this is the fact that carriers may also be unable to obtain insurance cover and may therefore have to abandon a charter for that reason.
This lack of suitable insurance coverage is also exacerbated by the fact that insurers almost invariably re-insure on the London market, and re-insurance becomes almost impossible once sanctions become a credible risk in any given transaction. As it stands, there are already reported English cases in which insurers successfully exercised their contractual rights to decline cover.
Because of the ways in which sanctions can have an impact on a transaction, the number of jurisdictions involved, and the ever-changing nature/scope of sanctions, it is often the case that a commodity trader, legal counsel or compliance officer requires local law advice at very short notice. Some of the risks involved can be effectively managed by having clear compliance policies and procedures in place, whereas some of the other aspects will require more attention, as and when they arise.