International Scenarios (4) for International Sanctions: 3rd Landscape, 'Collateral Damages'.
- AAmstg
- Nov 9, 2024
- 12 min read
Updated: Nov 13, 2024
(published Sept 09th; updated Nov 09th, 2024)
Shall an arbitral tribunal apply sanctions that are part of the law of the seat of Arbitration?
As an initial approach, the application of sanctions that are part of the law of the seat of arbitration depends on several factors, including -again- the nature of the sanctions, the specific provisions of the applicable law, and any relevant international obligations. Here's a nuanced exploration of this issue: some waypoints for your approach:
1. Nature of Sanctions: The tribunal would first examine the nature of the sanctions imposed by the law of the seat of arbitration. Sanctions can vary widely in scope and purpose, ranging from economic and trade restrictions to punitive measures against individuals or entities.
2. Relevance to the Dispute: The tribunal would assess whether the sanctions are relevant. If the sanctions directly impact the dispute's subject matter or the parties involved, they may need to be considered in the tribunal’s decision-making process.
3. Conflict with Arbitration Agreement: The tribunal would determine whether the application of sanctions conflicts with the parties' arbitration agreement. If the sanctions undermine the effectiveness of the arbitration process or violate the principles of party autonomy and procedural fairness, the tribunal may choose not to apply them.
4. Public Policy Considerations: Tribunals typically have the discretion to refuse to apply provisions of the law of the seat of arbitration if doing so would violate principles of international public policy. If the sanctions are deemed to contravene fundamental principles of justice or fairness, the tribunal may decline to enforce them.
5. Impact on Enforcement of Awards: The tribunal would consider the potential impact of applying sanctions on the enforceability of its award. If enforcing the award would be impractical or impossible due to the sanctions, the tribunal may adjust its decision-making accordingly to ensure the efficacy of the arbitration process. And finally, there is a joker to set out:
6. Consultation with Legal Experts: Regarding EU sanctions, the tribunal may seek guidance from legal experts or institutions familiar with the law of the arbitration seat. This consultation could help the tribunal better understand the sanctions' implications and their compatibility with the arbitration process.
Ultimately, whether an arbitral tribunal applies sanctions that are part of the law of the seat of arbitration depends on carefully assessing various legal and practical considerations. The tribunal's decision should ensure a fair and effective dispute resolution while upholding the principles of party autonomy, procedural fairness, and international law. The latter is what ordinarily guidelines your commitments, the better.
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However, when sanctions are involved, particularly those closely connected to the law of a country relevant to the dispute, it presents challenges in almost three areas not to ignore; those challenges three areas are: a) applying the governing law, b) enforcement of awards, and c) maintaining neutrality. Here's a breakdown of six key points collected always to consider when facing sanctions in a controversy to manage for resolving:
1. Arbitral Tribunal's Role and Neutrality. Arbitral tribunals are typically independent from national legal systems. They are bound by the arbitration agreement and the law chosen by the parties (lex contractus). However, the tribunal must also respect public policy (ordre public) and international law. When sanctions form part of a country’s law closely connected to the dispute (like the EU’s), there’s a conflict between respecting these sanctions and the tribunal’s neutrality.
2. Public Policy and Sanctions. Sanctions, particularly EU sanctions, are often regarded as matters of public policy. If a tribunal overlooks them, there could be a risk that its decision might be challenged or unenforceable in certain jurisdictions due to public policy violations. The relevant question to ask here is how do sanctions impact the enforceability of arbitral awards under the New York Convention (Article V) where recognition of an award could be refused based on public policy grounds. That is a good matter to discuss.
3. Mandatory Application of Sanctions. The case is mainly unambiguous: if sanctions are part of the law of a country closely connected to the dispute, the tribunal may have no choice but to take these into account, especially when enforcing an award within a jurisdiction subject to those sanctions. Thus, in EU jurisdictions, tribunals would need to consider EU law, including sanctions, as they are directly applicable and can affect the parties' legal standing. But what if the sanctions came after the agreements under controversy? This is another subject to discuss.
4. International Arbitration Standards. If the tribunal is guided by international arbitration rules (like ICC, LCIA, or UNCITRAL), these rules generally require tribunals to apply the law chosen by the parties or, in its absence, the law most closely connected to the contract. Then, the tribunal might face the challenge of balancing the law of the seat of arbitration, the applicable law of the contract, and the sanctions imposed by the EU (or another country). The matter is unclear here, and proceeding with care is the most advisable in these cases.
5. Party Autonomy vs. State Sovereignty Dilemma. Arbitration is generally based on the principle of party autonomy, but this autonomy is limited by mandatory rules, such as sanctions. A tribunal may be constrained by the sovereignty of states that impose sanctions, particularly when they affect parties' ability to perform their contractual obligations. If a sovereign state is involved in the controversy, this dilemma is a regular situation.
6. Practical Considerations to Tackle the Issues. A tribunal might adopt a practical approach by examining the impact of sanctions on contractual performance and whether they render the contract void or unenforceable. Unveiling the nuances out loud takes part of common sense when making decisions. Tribunals could adjust or adapt the award to reflect the reality of sanctions, but this risks undermining the finality and effectiveness of arbitration as a dispute resolution mechanism.
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Prospective Framework: A Systematic Approach to Applying Sanctions in Arbitration
A systematic approach requires careful navigation of the legal framework, public policy considerations, and the practical impact of sanctions on the dispute. By following these steps outlined as a prospective—identifying applicable laws, assessing the impact of sanctions, balancing party autonomy, adapting the award where necessary, and ensuring enforceability—the tribunal can achieve a fair and enforceable resolution while complying with international and national sanctions regimes. ADR practitioners should clearly know these steps to schedule their framework as a tag list. This approach strikes a balance between upholding the principles of arbitration and respecting the mandatory legal obligations imposed by sanctions.
To convey a systematic approach for addressing the interplay between EU sanction policies and international arbitration, it sounds essential to outline a clear framework that arbitral tribunals, lawyers, and ADR practitioners could follow when confronted with sanctions imposed by a country closely connected to the dispute. This systematic approach above, in my view, ensures consistency, legal rigour, and respect for both party autonomy and international legal principles. The framework I've drafted takes seven steps; let me know if it may be shortened or larger as due process for tackling the subject:
1. Identifying the Applicable Legal Framework by decalage
▻ Start by applying the Governing Law of the Dispute (Lex Contractus): Start by identifying the law chosen by the parties to govern the contract. The tribunal must apply this as the primary legal framework unless it conflicts with public policy or mandatory legal provisions such as sanctions. Then,
▻ The Mandatory Rules and Sanctions: Determine whether any mandatory rules or sanctions, such as EU sanctions, are applicable based on the following: Then,
▻ The Law of the Seat of Arbitration: Investigate the law of the country where the arbitration is seated. If the seat is within the EU, EU sanctions will automatically apply. Then,
▻ The Law of the Jurisdictions Involved: Assess if the dispute is closely connected to any countries where sanctions may affect the arbitration, especially if one party is subject to sanctions. And, finally,
▻ Revise the chances related to Public Policy Considerations: Ensure that any decisions made are consistent with international public policy, which may include sanctions depending on the jurisdiction.
2. Evaluating the Impact of Sanctions on the Contract and the Process: three hints
▻ Legal Validity of the Contract: Analyze whether the sanctions affect the legal validity of the underlying contract. Sanctions may render certain aspects of the contract unenforceable, such as payment obligations or performance involving prohibited entities or goods.
▻ Frustration or Impossibility of Performance: Determine if sanctions create a situation of force majeure or frustration of contract, where performance is impossible or illegal due to sanctions.
▻ Temporal Considerations: Consider when the sanctions were imposed and whether they apply retroactively or prospectively. The timing of sanctions can impact the tribunal’s interpretation of contractual obligations.
3. Assessing Public Policy Concerns: two hints.
▻ Public Policy at the Seat of Arbitration: Consider whether enforcing an award in light of sanctions would contravene the public policy of the seat of arbitration. A tribunal may be required to refuse to enforce an award if it violates the seat's public policy.
▻ Public Policy in Enforcement Jurisdictions: Anticipate potential challenges to the award's enforcement based on public policy in other jurisdictions, especially those that adhere to international sanctions frameworks (such as the EU or US).
4. Balancing Party Autonomy and Mandatory Law: two ideas
▻ Party Autonomy: Respect the principle of party autonomy by giving effect to the chosen law of the contract, but balance it against the mandatory application of sanctions. Where sanctions are concerned, party autonomy cannot override mandatory public law.
▻ Sanctions as a Mandatory Override: Acknowledge that sanctions may serve as a mandatory override to the contract, making certain provisions unenforceable or invalid. Tribunals should carefully navigate this tension.
5. Adapting or Modifying the Award: two more ideas.
▻ Adapting the Contractual Obligations: If sanctions affect only part of the contractual obligations, the tribunal might consider adapting the contract to reflect changes in law while preserving the remainder of the agreement. This ensures fairness and mitigates the impact of the sanctions.
▻ Modifying the Award: In some cases, the tribunal may need to tailor its award to comply with relevant sanctions, such as modifying the payment method or performance to avoid violating sanctions.
6. Ensuring Enforceability of the Award: and two more.
▻ New York Convention Compliance: Consider the enforceability of the award under the New York Convention. An award may be refused recognition and enforcement under Article V(2)(b) of the Convention if it violates public policy in the enforcing state, which could include sanctions.
▻ Preemptive Compliance with Sanctions: Structure the award to avoid enforcement challenges by preemptively complying with sanctions. For example, direct payment through compliant channels or stipulate alternative methods of performance that do not breach sanctions.
7. Considering International Case Law: precedents and good practices
▻ Relevant Precedents: Review case law where arbitral tribunals have faced sanctions issues. Tribunals have sometimes refused to enforce contracts that violate sanctions or have adjusted awards to reflect the restrictions. Drawing on these precedents guides crafting awards that withstand legal scrutiny.
▻ International Practice and Guidelines: Refer to guidelines from arbitral institutions (such as the ICC or LCIA) or advisory bodies (like the IBA) for best practices in dealing with sanctions.
8. Transparency and Disclosure, as natural.
▻ Disclosure of Sanctions Compliance: Encourage parties to fully disclose any sanctions-related issues at the outset, such as whether a party or transaction is subject to sanctions. This allows the tribunal to assess the potential impact early in the proceedings.
▻ Transparent Tribunal Reasoning: In the award, the tribunal should explain how it considered and applied sanctions, particularly if it deviated from the contract due to mandatory legal provisions.
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Relevant Case Studies on Sanctions and Arbitration
Real-world arbitration cases highlight the challenges of applying sanctions, where tribunals often prioritize mandatory sanctions over party autonomy, especially where sanctions directly affect contractual performance or the enforcement of awards. Several arbitration cases have dealt with sanctions and their impact on the arbitral process. Below are a few key summarised examples as a nutshell on how tribunals address sanctions, either by rendering contracts unenforceable due to public policy concerns or by finding creative solutions to maintain compliance with mandatory sanctions laws:
Case Study 1: 'Bank Melli Iran v. Telekom Deutschland GmbH' (Germany)
The Tribunal: the Court of Justice of the European Union (CJEU).
The Context: This case dealt with EU sanctions against Iran, specifically under the EU Council Regulation 267/2012, which imposed sanctions related to nuclear proliferation concerns. Subject to these sanctions, Bank Melli Iran entered a contract with Telekom Deutschland. When sanctions were imposed, Telekom refused to provide services, leading to arbitration.
The Issue: The arbitral tribunal had to consider whether EU sanctions prevented Telekom from fulfilling its obligations under the contract and whether force majeure provisions applied.
The Outcome: The tribunal found that EU sanctions were mandatory and rendered the contract unenforceable. Telekom was justified in suspending its services. The tribunal emphasized that EU sanctions constituted a matter of public policy that contractual agreements cannot override.
Significance: This case illustrates how tribunals submitted to EU jurisdiction can determine that sanctions directly impact the ability to perform a contract and serve as grounds for non-performance or termination of obligations.
Case Study 2: 'Ministry of Defense of Iran v. Cubic Defense Systems' (U.S.)
The Tribunals: the International Chamber of Commerce (ICC) 1997; United States, U.S. Court of Appeals, Ninth Circuit 2011.
The Context: This case arose from a contract between the Ministry of Defense of Iran and Cubic Defense Systems for military equipment. After the 1979 Iranian Revolution, the U.S. imposed sanctions on Iran, prohibiting any military transactions with the country.
The Issue: Iran initiated arbitration against Cubic for breach of contract, seeking enforcement of the arbitral award in U.S. courts. The issue was whether U.S. sanctions against Iran prevented the award enforcement.
The Outcome: The U.S. courts ultimately enforced the arbitral award, ruling that the contract predated the imposition of sanctions, and the sanctions did not affect the obligation to pay damages.
Significance: This case highlights that, depending on the timing and scope of sanctions, they may not always invalidate or prevent the enforcement of arbitral awards, particularly in cases where the contract predates the sanctions.
Case Study 3: 'Rosneft v. EU Counsel' (EU)
The Tribunals: the EU General Court-Six Chamber (CJEU) 2018; Appeal The Court-Seven Chamber (CJEU) 2020.
The Context: Rosneft, a Russian state-owned oil company, was subject to EU sanctions following the issue of The Annexation of Crimea. An EU company initiated arbitration against Rosneft concerning the supply of goods.
The Issue: The tribunal had to decide whether the sanctions against Rosneft impacted the enforceability of the contract and if performance under the contract would violate EU sanctions law.
The Outcome: The tribunal ruled that the contract could not be enforced because it would violate EU sanctions. Even though the parties had agreed to arbitration, the overriding public policy concerns related to sanctions took precedence.
Significance: This case shows how tribunals submitted to the EU jurisdictions can refuse to enforce contracts that violate sanctions, prioritizing public policy and compliance with sanctions law over the parties’ agreements.
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Regulatory Frameworks: EU, U.S., and Other Jurisdictions.
The EU and the U.S. have robust, complex sanctions regimes that arbitral tribunals must sail through. These sanctions are treated as mandatory laws or public policy, and tribunals must ensure compliance, particularly when the sanctions directly apply to the contract or the parties involved. However, as is the case with the United Kingdom, China, and Russia, they are not the only players in this game. Let's say something about each one:
1. The European Union Sanctions Framework
The EU imposes sanctions based on the Common Foreign and Security Policy (CFSP). These sanctions may include economic and financial restrictions, arms embargos, and travel bans. The Council of the European Union issues regulations that directly apply to member states, such as the following, among others: 1) the EU Council Regulation 267/2012 (Iran sanctions): This regulation imposed broad economic sanctions on Iran concerning its nuclear activities, and 2) the EU Council Regulation 833/2014 (Russia sanctions): These sanctions targeted specific sectors in response to Russia’s involvement in Ukraine, covering areas like financial markets, energy, and military goods.
Key Features are two: a) Direct Applicability: EU sanctions are automatically binding on all member states, meaning arbitral tribunals seated in the EU must consider them, and b) Sanctions are considered matters of Public Policy, meaning tribunals must ensure compliance, especially regarding the enforcement of arbitral awards.
2. The United States Sanctions Framework
The U.S. sanctions regime is managed by the Office of Foreign Assets Control (OFAC), which is part of the U.S. Department of the Treasury. Sanctions often target specific countries (e.g., Iran, Cuba, North Korea) or entities (e.g., terrorist organizations, and certain Russian oligarchs).
Key Legislation is: 1) the International Emergency Economic Powers Act (IEEPA): Which empowers the president to regulate commerce in response to national security threats; 2) the Iran Sanctions Act (ISA): Which prohibits transactions with Iran and penalizes companies doing business with the country; and 3) the Global Magnitsky Human Rights Accountability Act: Which allows the U.S. to impose sanctions on individuals involved in human rights abuses.
Key Features: 1) Extraterritorial Reach: U.S. sanctions can have extraterritorial effects, meaning non-U.S. entities may also be affected if they engage in transactions involving U.S. persons or dollar-denominated payments; and 2) OFAC Licensing: Companies or entities seeking to engage in transactions with sanctioned entities may apply for specific licenses from OFAC to proceed with certain activities.
3. Other Jurisdictions
The United Kingdom: Post-Brexit, the UK has developed its own sanctions regime under the Sanctions and Anti-Money Laundering Act 2018 (SAMLA). This regime allows the UK to impose sanctions independently from the EU. The UK’s approach largely mirrors the EU’s, but there is scope for divergence, particularly in financial services.
The Russian Federation: Russia has responded to sanctions by implementing countermeasures, such as restrictions on foreign investment and retaliatory sanctions. Russian courts have also sometimes refused to enforce foreign arbitral awards involving sanctioned entities.
The People's Republic of China: China is increasingly developing its own sanctions regime, particularly in response to foreign sanctions. Under its Anti-Foreign Sanctions Law (2021), China reserves the right to take countermeasures against foreign entities that comply with foreign sanctions deemed to harm China’s interests.
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