President Trump's decision to withdraw the USA from the Joint Comprehensive Plan of Action (JCPOA) with Iran and intention to re-introduce sanctions (see Clyde & Co's previous article on this issue here) serves as an important reminder for those involved in the arbitral process to have the impact of sanctions in mind at all stages of the process. The UK, France, Germany, China and Russia continue to maintain the deal with Iran but given the nature of international arbitration it is important to consider sanctions between jurisdictions other than those of the parties involved and the seat of the arbitration. For example, the legal status of the parties, those with a controlling interest in a party and the jurisdiction of enforcement may cause sanctions to still 'bite'.
The EU's imposition of sanctions against Russia in 2014 brought these issues to the fore in the UK arbitration community (though they are not the only sanctions the UK has implemented). From an arbitration perspective many of the impacts of sanctions are practical and administrative in nature. This in no way diminishes their importance – more it highlights the extra requirements placed on those involved in the arbitral process.
The sanctions imposed between jurisdictions vary but commonly include the imposition of travel bans, restrictions on the movement of money, freezing assets of certain individuals and a list of goods that cannot be supplied to or purchased from a certain jurisdiction.
The imposition of travel bans can have significant practical consequences for parties obtaining legal and other professional advice and services and attending hearings. It is worth noting at this stage that this issue is not limited to sanction situations as often it is difficult for parties to obtain visas to visit certain jurisdictions and thereby limit their ability to participate in arbitration. The ability of tribunals to hold hearings in places other than the legal seat of arbitration can assist, but nonetheless travel limitations can delay and compound the arbitral process.
The imposition of financial sanctions impact throughout an arbitration (eg the ability to pay arbitration costs and legal fees). For an arbitral institution, the impact of sanctions can be felt at the outset of the arbitration where Advances on Costs are sought from the parties. A party which is subject to a sanction which freezes its assets will likely require approval from a national authority to unfreeze funds for the purposes of the arbitration; this is not an impossible process but can take a significant amount of time. The institution will also take great care (as they do in all cases) to fully understand where funds they receive are paid from in order to ensure that sanctions are not being breached by the use of alternative entities.
Sanctions must also be considered once an award is issued and a party seeks enforcement as there is the potential for funds to be paid to a sanctioned person or entity. Where enforcement is sought under the New York Convention, enforcement that would require payment to a sanctioned entity could be challenged on grounds of public policy. In 2014 the Swiss Supreme Court considered the enforcement of an award by an Iranian company against a Swiss company with Israeli shareholders. The court enforced the award despite objections from the Swiss company that payment of the award attracted criminal liability for the Israeli shareholders under Israeli law. (Fincantieri Navali Italiani Spa and Oto Melara Spa v Ministry of Defence, Armament and Supply Directorate of Iraq, XXI YBCA 594 (1996).
In 2015, addressing specifically sanctions issued against Russia, the ICC, LCIA and SCC jointly published a paper 'The potential impact of the EU sanctions against Russia on international arbitration administered by EU-based institutions'. This was of particular concern given Russian parties preference for EU-based institutions and/ or EU jurisdictions' national laws. The combined institutions identified particular areas for attention:
- where a designated party appears as or is a controlling entity
- where a party to an arbitration is an entity trading in dual-use goods and technology for military use or for a military end-user
- asset-freezing restrictions leading to additional administration on the part of designated individuals and entities, essentially seeking an exemption from the freezing of funders
The institutions were also keen to emphasise that entities subject to sanction were not prevented from commencing arbitration under the rules of European institutions, nor would they be treated any differently by those institutions, the impact being largely restricted to potential extra administrative steps including the provision or extra information when, or preferably prior, to the filing of a Request for Arbitration
Potential for sanctions to lead to causes of action
Sanctions themselves may of course lead to causes of action such as frustration and questions of force majeure which create arbitrations. The EU sanctions imposed on Russia in 2015 addressed this to some extent in the text of EU Regulation 883/2014 and EU Council Decision 2014/145/CFSP that the sanctions did not allow parties to excuse themselves from contractual performance, claim compensation where that performance is suspended or terminated. The Regulation also enabled a party to seek juridicial review of whether the non-performance of contractual obligations was in accordance with the sanction.
The recent steps taken by President Trump to spare ZTE (a major Chinese telecoms company) for apparent sanctions violations somewhat clouds the water as to the effect and enforcement of sanctions. It remains to be seen whether President Trump's announced reprieve (delivered via twitter) will be upheld by the US Commerce Secretary, but it certainly opens questions for British, French and German companies operating under the JPCOA as to whether they will receive equal treatment.
Law firms and individual lawyers must of course have in place strict procedures to ensure compliance with sanctions and highly-skilled lawyers in place to ensure that the law firm is compliant. For arbitration practitioners, this latest move by the US reminds us to always remain vigilant for potential sanctions issues and to remain alert through the process of an arbitration in case the sanction situation changes.