International Scenarios (2) for International Sanctions: 1st Landscape, 'Mars attacks'.

(published Sept 1st; updated Nov 07th, 2024)

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To what extent shall an arbitral tribunal apply sanctions not part of the law to which the parties have agreed to govern their agreement?

Regarding international arbitration, tribunals typically apply the law the parties choose in their agreement. This principle, known as party autonomy, allows parties to select the governing law and procedural rules for their arbitration. However, the situation becomes complex when EU sanctions, which are not part of the chosen governing law, affect the dispute.

In such cases, tribunals may need to balance competing legal obligations. On the one hand, they must respect the parties' choice of governing law and not apply extraneous legal provisions. On the other hand, tribunals may need to consider the impact of EU sanctions to ensure that the arbitration process is not undermined or rendered ineffective due to external factors.

There are several approaches tribunals may take:

1. Ordinary Conflict of Laws Analysis: Tribunals may analyse the conflict of laws principles to determine whether EU sanctions should be applied despite not being part of the chosen governing law. This involves examining factors such as the arbitration's situs, the parties' nationality, and the dispute's connection to EU law.

2. International Public Policy: Tribunals may invoke international public policy considerations to justify applying EU sanctions. If the sanctions serve fundamental principles of international law, such as promoting peace, security, or human rights, tribunals may deem them appropriate.

3. Interim Measures: Tribunals may issue interim measures to address the immediate effects of EU sanctions on the arbitration process while deferring the final determination of their applicability to the merits stage.

4. Consultation with Experts: Tribunals may seek guidance from legal experts or institutions specializing in EU law to understand better the sanctions' implications and their compatibility with the governing law chosen by the parties.

Note: Ultimately, a tribunal's approach will depend on the specific circumstances of the case and the applicable legal framework. The goal is to ensure a fair and effective arbitration process while respecting the parties' autonomy and relevant legal obligations, including those arising from EU sanctions.

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In addressing the question, acting as a tribunal member or lawyer in the name of any of the parties, or simply as a practitioner interested in the theme of doing its part the best, here we must consider several key legal principles and frameworks within international arbitration: party autonomy, the weight of mandatory rules, public policies, international enforceability, and blocking statutes by the EU. Let's go one by one with a short reference for each:

1. Party Autonomy

Party autonomy is a foundational principle in international arbitration. Parties to a contract have the right to choose the substantive law governing their agreement, and the arbitral tribunal is bound by that choice. If the parties have expressly agreed to a specific legal regime (e.g., English law, Swiss law, etc.), the tribunal must apply that law to the resolution of their dispute. In this case, EU sanctions or other external rules that are not part of the chosen law would generally not be applied unless they directly affect the legal framework the parties agreed to.

2. Mandatory Rules

Even where parties choose the governing law, arbitral tribunals must sometimes consider mandatory rules of other legal systems that may have a bearing on the dispute. Mandatory rules are laws that apply regardless of the parties’ choice and are often associated with public policy concerns, including sanctions. For example, if one of the parties is from the EU or the performance of the contract is linked to an EU member state, the tribunal may need to consider EU sanctions as overriding mandatory rules.

3. Public Policy Considerations

Arbitral awards must not violate international public policy. EU sanctions, which are often implemented for public policy reasons (such as maintaining international peace and security), could fall under this category. A tribunal may need to consider sanctions if their enforcement would violate such policy, even if they are not part of the law that the parties chose to govern the contract.

4. International Enforceability of Awards

Under the New York Convention (1958), arbitral awards are enforceable globally, but enforcement can be refused if the award is contrary to the public policy of the enforcing state. If a tribunal ignores applicable sanctions, especially if those sanctions are part of the enforcing state’s public policy, the award could face difficulties in being enforced.

5. EU Regulations and Blocking Statutes

Some states, including EU members, have blocking statutes that prevent their entities from complying with certain foreign sanctions regimes (e.g., US sanctions). If the tribunal applies a sanctions regime that is not part of the agreed governing law and one of the parties is from a jurisdiction with such blocking statutes, it could lead to conflicts. The tribunal must balance such conflicts to avoid unenforceable awards.

So, in summary, an arbitral tribunal should generally respect the law chosen by the parties. However, it may need to consider sanctions that are not part of that law in the following circumstances, as in cases like these three:

- If the sanctions are mandatory rules that override the parties' chosen law.

- If the enforcement of the award might violate public policy, particularly regarding sanctions.

- If the sanctions affect the international enforceability of the award under treaties like the New York Convention.

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Finally, let me try a systematic approach to analyzing the application of sanctions not part of the law agreed upon by the parties to an arbitration agreement. It requires a structured framework. This framework should address already seen key legal, procedural, and policy considerations to strike a balance between party autonomy, fairness, and compliance with relevant legal obligations, including international sanctions. So let's delve into this three A vs B controversial binomials [and let me know about any other you consider as relevant to illustrate your views and share], and four later cases about to temper the chances

1. Party Autonomy vs. Mandatory Rules

- Party Autonomy is a bedrock of arbitration, party autonomy allows parties to select the governing law for their contract and arbitration proceedings. The tribunal must respect this choice unless other considerations require deviation. What should deserve deviation from the main principle? This is not an easy ride.

- Mandatory Rules and Overriding Provisions are in Certain rules (such as international sanctions) may have overriding or mandatory effects that go beyond the parties' chosen law. In such cases, the tribunal may need to apply these rules to uphold broader legal and public policy obligations. The point is that tribunal members can assess going beyond what was inevitable.

- EU Sanctions as Mandatory Rules: When sanctions are introduced by entities like the EU, they may override private agreements for public policy reasons. These sanctions may directly impact the enforcement of contracts, making it difficult for arbitral tribunals to ignore them if they were allocated in EU landmarks; but what if they were not?

2. Party Autonomy vs Public Policy and International Public Order

- Public Policy in Arbitration: Yes, each country (so better say: each Government of a Sovereign Estate, or an International Organization created by sovereign estates) has its own public policy concerns, which may affect both the proceedings and the enforcement of an arbitral award. EU sanctions are often implemented with the idea of enforcing public policy goals such as human rights protection or regional security, and an arbitral award that disregards them could be seen as violating public policy, almost in the formal name. What to do then?

- International Public Order: Beyond national public policy, tribunals must consider international norms and standards, including the broader goals of international peace and security. If sanctions are part of such a framework, they may be deemed applicable even when not part of the parties’ agreement.

3. Party Autonomy vs Impact on Arbitral Procedure and Enforcement

- Tribunal’s Jurisdiction Authority (legitimacy): A tribunal typically derives its authority from the arbitration agreement and the law chosen by the parties. However, the application of sanctions may be seen as a procedural or substantive consideration, especially when the sanctions affect the performance of the contract or the enforcement of an award. For example, EU sanctions may prevent a party from fulfilling its obligations under the contract or may render certain transactions illegal, thus impacting the dispute. This is a specific case linked to the expansion of the mandatory rules, going beyond the initial authority fundament.

- Enforceability of Awards: Under the New York Convention, enforcement of an arbitral award may be refused if it conflicts with the public policy of the enforcing state. If sanctions are ignored by the tribunal, the award may be unenforceable in jurisdictions that have imposed those sanctions. Partly to mitigate this, Tribunals must therefore consider the enforcement phase early in their analysis, ensuring that any award they render will be enforceable in relevant jurisdictions.

4. Conflict of Laws: National vs. International Sanction

- Conflicting Sanctions Regimes: In cases involving parties from different jurisdictions, there may be conflicting sanctions regimes (e.g., EU vs. US sanctions). A tribunal needs to navigate these conflicts more carefully, considering the practical consequences of applying or disregarding particular sanctions. And not easy to point to a better, simple or direct guide to apply, but adding also the eventual interference between the EU and the US public policies, is not always aligned.

- Blocking Statutes: Some countries (like EU member states) may have "blocking statutes" that prevent the application of foreign sanctions within their jurisdiction (see above case). Tribunals must carefully assess how these statutes interact with international sanctions when rendering an award.

5. The Principles of Separability and Arbitrability to focus the issue

- Separability of the Arbitration Agreement: If the arbitration agreement is viewed as separate from the main contract -the ordinary view- this principle allows the tribunal to assess the contract’s legality and whether the underlying agreement has been frustrated by sanctions. For example, EU sanctions may affect the performance of the contract, but not necessarily the validity of the arbitration agreement itself.

- Arbitrability of the Dispute: Due to certain disputes, particularly those involving sanctions or public policy concerns, may be deemed non-arbitrable under the law of the relevant jurisdiction, the tribunal must ensure that the dispute remains within the scope of matters that can be arbitrated, especially when sanctions are involved.

6. Proportionality and Balance when in sanction applicability

- Balancing Party Autonomy and Public Policy: A matter for diplomacy; the tribunal must balance the parties' autonomy to choose their governing law with the mandatory application of sanctions that protect public policy interests. The tribunal’s decision-making should be proportional, applying sanctions only to the extent necessary to respect international or national obligations without unnecessarily undermining party autonomy.

- Impact on Commercial Relations: Again here is an issue beyond the regular limits for the conflict under scrutiny: the tribunal’s application of sanctions not contemplated by the parties could affect the predictability of arbitration, which is a key factor in its appeal as a method of dispute resolution. This needs to be considered when addressing the fairness and expectations of the parties.

7. Pragmatic Approaches for Tribunals

- Clarification Requests to the Parties: In situations where sanctions could apply but are not part of the agreed governing law, tribunals may ask the parties to clarify their positions on the applicability of sanctions or the impact of any sanctions regime on their contract. Then, they will weigh about the expectations on the work for doing in this issue.

- Seeking Expert Opinions: Where complex or evolving sanctions regimes (such as EU or US sanctions) are involved, tribunals may benefit from obtaining expert opinions on the potential impact of those sanctions on the case at hand. Expert opinions, as a lever for determining the line about to proceed, delegates in third hands that controversially.

- Suspension of Proceedings: In extreme cases, a tribunal may consider suspending proceedings until the legal implications of a sanction are clearer, especially if the sanctions regime is in flux or there is uncertainty regarding enforcement. Suspending proceeding during the term for experts to get their opinion is another form of proceeding but with elegance.

Reviewing the above, a systematic approach to applying sanctions not part of the agreed governing law involves balancing party autonomy with public policy, mandatory rules, and the enforceability of the arbitral award. The tribunal must carefully assess almost these three things:

- Whether the sanctions are mandatory and should override the chosen law.

- The impact of sanctions on public policy and international enforceability.

- Any conflicts of law that arise due to the imposition of sanctions by different jurisdictions.

By following these steps, tribunals can maintain the integrity of the arbitration process while respecting both the parties' agreements and relevant legal obligations arising from sanctions.

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