Sanctions against Russia - Four Key Questions for International Arbitration

With the deepening of the crisis in Ukraine, the US, the EU and the UK have already adopted a series of sanctions and have announced a further wave of measures against Russia and Russian persons and entities.  Other countries in the Asia Pacific region (including Australia and Japan) are following suit.  At the same time, Russia itself may adopt sanctions countermeasures of its own.  

For commercial parties who have contracts in place with, or involving, targeted counterparties or in instances where the subject matter of the contract itself falls within the sanctions regime, there will be consequences.  Here we look at some key questions arising in the context of international arbitration of Russia-related disputes.  

1.  Do the sanctions affect performance?

Economic sanctions may dramatically shift the economics of existing contracts or even render performance impossible.  In such cases, most legal systems around the world have mechanisms providing for relief from performance, which include force majeure, hardship, and frustration.  

In most civil law jurisdictions, the doctrine of force majeure will generally excuse non-performance if an event is unforeseeable, beyond the control of the party seeking relief and unavoidable.  "Unavoidability" here is key.  Force majeure will not apply if the effects could be avoided by appropriate measures (e.g. if an exemption from sanctions is available, or a party can obtain a licence).  As for the consequences of force majeure, these vary depending on the applicable law.  Under French law for example, performance will be suspended if the inability to perform is temporary, but the contract will terminate altogether if the inability to perform is permanent.  In practice, it is not uncommon for contracts governed by civil law also to contain provisions on the conditions and consequences of force majeure and these will also need to be considered.  

A number of civil law jurisdictions also recognise the doctrine of hardship.  For example, under French law, hardship (théorie de l'imprévision) will apply if an unforeseeable change in the circumstances makes performance excessively onerous for one of the parties.  Unlike force majeure, hardship does not have automatic effect.  Unless there is agreement between the parties, the affected party must commence arbitration (or court proceedings) and seek to amend the contract.  The position can be different in other jurisdictions.

In contrast, there is no doctrine of force majeure or hardship in English law.  The parties need specifically to write such provisions into their contract and without them there may be no scope for reliance on them.  Any agreed contractual provisions need to be considered carefully to ascertain whether the event is covered and what the stipulated consequences are: suspension of obligation to perform, reduced performance obligations, a right to terminate (either immediately or after the lapse of a period of time), or a combination of these.  It is worth noting that, even where there is no legal basis for the application of hardship or force majeure (because as a matter of the applicable governing law they are not legal doctrines and depend upon the parties' writing them into their contractual relationship), there might be scope to argue that such legal doctrines that exist under civil laws (for example, in the place where one party does business) should apply on the basis of an application of mandatory laws.  

English law also has a doctrine of frustration when an unforeseen event renders contractual obligations impossible to perform or transforms the obligations into something radically different.  Frustration will act to discharge the contract; however it is of rare application.  For example, sanctions will not be held to frustrate a contract where a licence that would enable performance could be sought from the relevant authority and could be anticipated to be granted.  This is very similar in effect to the "unavoidability" criterion for force majeure under civil law discussed above.  

2.  Can you go to arbitration?

If it is necessary to commence arbitration to enforce rights and resolve a dispute, difficulties may arise when one of the parties to an arbitration is subject to sanctions or controlled by a sanctioned person.  For example, in addition to blocking all property, asset freezes usually also prohibit the provision to sanctioned persons of funds, goods or services.  In the case of institutional arbitration in particular, there are fees to be paid and the arbitral institution, as well as the arbitrators themselves, will be performing various services, such as the rendering and certification of an award.  What is possible will depend on the exact wording of the sanctions in question.  However, in most cases, there are carve-outs for the provision of, and payment for, legal services, subject always to obtaining a licence.  Most arbitral institutions (including the ICC, LCIA and SCC) therefore have systems in place to identify sanctioned entities and seek necessary approvals for processing of payments – although practical issues may still be encountered when seeking to route payments through international banks.

Caution does however need to be exercised when dealing with Russian sanctioned parties.  In June 2020, new provisions came into force in Russia which give exclusive jurisdiction to the Russian Arbitrazh courts (i.e. Russia's ordinary commercial courts, not to be confused with international arbitration, given their name) to hear disputes involving sanctioned parties, even where there is a dispute resolution clause providing for arbitration or for the exclusive jurisdiction of foreign courts.  The sanctioned party may also apply to the Russian commercial courts for an anti-suit or anti-arbitration injunction. 

3.  Can you enforce your award?

In the vast majority of cases, recognition and enforcement of foreign arbitral awards - where necessary - takes place under the 1958 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, known as the "New York Convention".  One of the very limited grounds on which recognition and enforcement may be refused is if it would be contrary to the public policy of the country in which enforcement is sought.  

In the context of an arbitral award involving a sanctioned person, recognition or enforcement could be seen as contrary to public policy both in a sanctioned country (if the award gives effect to sanctions) and conversely in a country that has imposed sanctions (if the award does not give effect to sanctions).  

The competing considerations here are between the national public policy that led to the imposition of sanctions in the first place, on the one hand, and international public policy in favour of enforcement of awards, on the other.  It will be important to consider the particular circumstances of each case; however the prevailing view in arbitration-friendly jurisdictions is that enforcement of an arbitral award should be permitted, possibly with appropriate caveats in place.  For example, this could take the form of paying any damages to a blocked account pending approval by the relevant authorities or the lifting of sanctions.  

4.  Is there scope for investment treaty claims? 

Sanctions may breach a number of provisions commonly found in most investment treaties. For example, if a state takes action to freeze the assets of an investor in the state, that could amount to a breach of the ability to repatriate returns on investment or even amount to expropriation if it deprives the investor of the economic use and enjoyment of its investment.  Sanctions might also be said to prevent the full enjoyment by a foreign investor of its investment.  These breaches might give rise to treaty claims.  

In most cases, however, claims may be difficult.  Some investment treaties contain exceptions when measures are adopted on the grounds of national security.  The precise wording varies from treaty to treaty but it is usually wide enough to cover international security.  It is important to check the precise terms of the relevant treaty carefully in order to assess whether a claim might be possible.  

Authors: Tom Cummins, Thomas Karalis