Summary of the UIA Guide “Economic Sanctions and Arbitration: A Practical Guide for Parties, Counsel and Arbitrators”

Introduction

In September 2023, the International Association of Lawyers (Union Internationale des Avocats) published a guide on economic sanctions and arbitration (the Guide). The Guide considers the interaction between economic sanctions and the arbitral process (before, during and after the completion of an arbitration). It offers practical guidance to parties, counsel, arbitrators and other participants in the arbitral process, whether they are subject to economic sanctions or are involved in an arbitration with a sanctioned party. 

While the potential impact of sanctions for arbitration users and practitioners is not a new phenomenon, these issues have been brought to the forefront due to recent geopolitical events.  For example, we have discussed previously[1] how sanctions arising from Russia’s invasion of Ukraine have already resulted in an array of commercial disputes and will likely continue to do so.  The procedural and practical challenges faced by parties in such cases highlight the timeliness of the Guide. 

We set out below key points from the Guide for parties and counsel to consider at the crossroads of sanctions and arbitration.

Overview of the classifications of economic sanctions

Economic sanctions are “coercive measures applied against states, non-state entities or individuals that pose a threat to protected principles such as international peace or national security. Their purpose is to assert economic pressure in order to modify the behavior of the relevant target by reducing its capacity for manoeuvre or weakening its economic power, ultimately altering its strategic decisions on a given matter”.[2]

The Guide classifies economic sanctions into three categories: trade sanctions, financial sanctions, and travel restrictions, each serving a distinct purpose. 

Trade sanctions encompass measures such as quotas, tariffs, and embargoes.[3] They are intended to limit the target’s trade relations with or within a designated state. 

Financial sanctions target a sanctioned party’s financial capabilities through asset freezes, fund transfer restrictions, exclusion from financial organizations and limits on economic activity (including prohibitions or limits on investment or business activities).[4]

Travel restrictions, which include visa restrictions, focus on individuals, limiting a person’s movement to and from sanctioned states.[5]

Economic sanctions emanate from diverse sources. For example, international organizations such as the United Nations (UN) and the European Union (EU) [6] employ multilateral sanctions as mechanisms to achieve compliance with their global peace and security policies and goals. In a different way, individual states can also impose unilateral sanctions that align with their respective policies. In such cases, enforcement predominantly lies with state bodies such as the US’s Office of Foreign Assets Control (OFAC) and the UK’s Office of Financial Sanctions Implementation (OFSI).  Individual EU Member States have also designated specific authorities for implementation. It should be noted though, that not all entities or states that impose sanctions have designated regulatory bodies specifically tasked with the enforcement function.[7]

The Guide also classifies economic sanctions based on their scope. They can be comprehensive, imposing blanket prohibitions on dealings with a sanctioned state or region, commonly known as embargoes.[8] These include the trade embargoes that the US has imposed in respect of Cuba, Iran, North Korea and Syria. There are, however, alternatives to such widespread sanctions. For example, they can be list-based, targeting specific persons, entities, or organizations, as was done by the EU following the start of Russia’s aggressing against Ukraine.[9] Sectoral sanctions also exist.[10] These focus on specific activities or industries, such as in energy or defence.

Most sanctions regimes provide exemptions through licenses. General licenses, which are those built into the sanctions regime itself, cover transactions within their scope, often related to the provision of humanitarian aid or legal services. Conversely, specific licenses can be granted on a case-by-case basis.  To obtain a specific license a party must apply for an exemption before engaging in transactions that would otherwise attract sanctions.[11]

Impact of economic sanctions on parties

Pre-arbitration considerations

When a party is sanctioned, it is advised to take a meticulous approach to the arbitration clause of any agreement it concludes, with specific focus on the seat of arbitration and the relevant rules and institution. Parties are encouraged to select seats that are known to be arbitration-friendly and sanctions-neutral, as this will assist them in minimising future challenges to any ensuing arbitrations.[12] That said, parties should be aware that, due to almost universal membership in the UN, where the relevant sanction emanates from that organization, it is likely to be a neutral consideration in the choice of seat.[13]

The choice of arbitral institution also helps regulate future risk.  This is because most major arbitral institutions have experience in navigating sanctions or have proactively instituted measures to address scenarios where a party is under sanctions.[14] Although the experience and procedures differ amongst the various arbitral institutions, they may pertain to practical hurdles such as the clearance of payments or the appointment of arbitrators in accordance with potentially applicable sanctions regimes.[15]  In this regard, institutions require specific information when a sanctioned entity is involved, such as identity details for parties and related entities. While ad hoc arbitrations may give the appearance of more flexibility, by not imposing such requirements at the outset, arbitrators in such cases encounter more administrative hurdles, such as, having to obtain licenses in order to allow them to collect their fees where the relevant sanctions regime does not include a general license that covers arbitrator services.[16]

When drafting an arbitration clause, particularly in the choice of seat, parties should also take care to consider the impact that economic sanctions may have on eventual set-aside or enforcement proceedings (discussed further below). A potential claimant should exercise similar care when deciding to initiate an arbitration,

A claimant that is also a sanctioned party must take sufficient care at the outset of an arbitration or risk facing significant consequences. Insufficient provision of essential information may result in an institution refusing to register the claimant’s arbitration request or, in case of an ad hoc arbitration, result in an arbitrator’s refusal to accept their nomination.[17] Similarly, non-compliance with payment orders for institutional and tribunal costs due to a sanctioned party lacking the appropriate license from the relevant authorities could prompt arbitral institutions to discontinue claims or deem them withdrawn, abruptly halting the arbitration’s progression.[18] Administrative challenges of these kinds that a sanctioned party is more likely to encounter than a non-sanctioned party may introduce delays, impacting the application of limitation periods. 

Even if the claimant is not a sanctioned party, it will need to consider the administrative challenges it could face as a result of starting an arbitration against a sanctioned respondent. For example, before a respondent who is affected by sanctions can pay its share of the advance on costs of an institution or ad hoc tribunal, it may first need to furnish specific information regarding its beneficial owner(s) or related entities or obtain a license in order to complete the payment.[19] Tactical respondents may seek to use non-compliance with these additional requirements to evade arbitration, leaving it to the claimant to fulfill the respondent’s normal administrative obligations or risk an administrative dismissal. 

Beyond the nuances of the pre-arbitral process itself, sanctioned parties may face specific hurdles engaging counsel to assist them. Professional, ethical or other regulations may prohibit counsel from accepting briefs from sanctioned entities, or, at the least, give them discretion where it might not otherwise exist. Even where counsel can and does accept a brief from a sanctioned party, the client’s actions may still lead to legal consequences for counsel under applicable sanctions. For example, (i) counsel may need a licence simply to represent the sanctioned client; (ii) counsel may be required to obtain a license in order to collect fees from the sanctioned client; (iii) counsel may face practical difficulties if sanctions prevent them from traveling to the location of the client or the eventual hearing.[20] These scenarios underscore the complex interaction between legal representation, economic sanctions, and potential legal liabilities for clients across jurisdictions subject to sanctions. Parties thus need to proceed carefully when requesting counsel or paying for legal services.

During the arbitration – considerations

The Guide also addresses the complex situation of a party becoming affected by sanctions while an arbitration is on foot. In such cases, most arbitral institutions are well placed to guide parties and other stakeholders about how to continue with the arbitral proceedings with minimal disruption. This can include an institution requesting exemptions itself or referring the parties to the relevant authorities to obtain exemptions, as appropriate.

Sanctions may be a reason to seek relief early in the proceedings. For example, a non-sanctioned party facing an opponent whose assets become frozen mid-arbitration may wish to seek interim measures or obtain security for costs where this was not otherwise in play.[21] Sanctions may affect the forum in which such early interim relief may be sought. In this regard the Guide notes that a sanctioning state may limit the relief available from local courts, restricting a party’s ability to request interim measures.[22]

Separately, it should be kept in mind that a number of challenges posed by sanctions at the outset of an arbitration, such as those arising from frozen assets or restrictions on the transfer and receipt of funds, may persist throughout its duration, depending on the administration of the relevant sanctions regime.

Post arbitration – considerations

Perhaps the most important post-arbitration consideration where one of the parties is subject to sanctions is how the relevant restrictions can affect compliance with or enforcement of an arbitral award. 

A party looking to set-aside an award will need to consider whether sanctions-related issues in the arbitration would be considered matters of public policy at the seat. 

In addition to jurisdiction-specific public policy, parties and counsel should be aware that, due to their broad recognition, sanctions emanating from the UN can be regarded as international public policy. This can create clashes in the public policy analysis where UN sanctions align with the express public policy of certain states but not others.[23]

A similar analysis may be necessary in the case of recognition and enforcement.  This is because, under Article V of the New York Convention, recognition and enforcement of an award may be rejected when it would be contrary to the public policy of the country where enforcement is sought.[24]

Sanctions may pose additional practical challenges to enforcement.  For example, where an unsuccessful respondent’s assets have been frozen, or fund transfers prohibited.[25] A non-sanctioned claimant may need to obtain an exemption in order to collect its award. 

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[1] See https://www.freshfields.com/en-gb/our-thinking/campaigns/international-arbitration-in-2023/arbitration-arising-out-of-russias-invasion-of-ukraine/.

[2] Economic Sanctions and Arbitration: A practical Guide for Parties, Counsel and Arbitrators, International Association of Lawyers, para 9 [the Guide].

[3] The Guide, para 12.

[4] The Guide, para 13.

[5] The Guide, para 14.

[6] The EU has more than 40 different sanctions regimes in place, some of which are mandated by the United Nations Security Council, while others are adopted autonomously by the EU. See European Commission, Overview of sanctions and related resources (available at: https://finance.ec.europa.eu/eu-and-world/sanctions-restrictive-measures/overview-sanctions-and-related-resources_en.)

[7] The Guide, paras 15, 16, 19-21.

[8] The Guide, paras 23-25.

[9] The Guide, para 26.

[10] The Guide, para 28.

[11] The Guide, paras 31-33.

[12] The Guide, para 49.

[13] The Guide, para 129.

[14] The Guide, para 51.

[15] See, for example, ICC Note to Parties and Arbitral Tribunals on ICC Compliance (available at: https://iccwbo.org/news-publications/arbitration-adr-rules-and-tools/note-parties-arbitral-tribunals-icc-compliance/).

[16] The Guide, para 52.

[17] The Guide, para 54(a).

[18] The Guide, paras 51(b); 54.

[19] The Guide, para 56.

[20] The Guide, paras 61-62; 65-67; 71.

[21] The Guide, para 42.

[22] The Guide, para 43.

[23] The Guide, para 129.

[24] 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards, Article V. 2.: “Recognition and enforcement of an arbitral award may also be refused if the competent authority in the country where recognition and enforcement is sought finds that: (a) The subject matter of the difference is not capable of settlement by arbitration under the law of that country; or (b) The recognition or enforcement of the award would be contrary to the public policy of that country.”

[25] For example, in the case of US Sanctions applicable to Venezuela, “a specific license from OFAC is required for the entry into a settlement agreement, or for the enforcement of any lien, judgment, or other order through execution, garnishment, or other judicial process purporting to transfer or otherwise alter or affect property or interests in property blocked pursuant to the [Venezuela sanctions regulations]. See OFAC FAQs, (available at https://ofac.treasury.gov/faqs/808).