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Implications of economic sanctions on international arbitration


Since the end of the Cold War, economic sanctions have become one of the primary foreign policy tools employed by governments to force change in a regime’s policies and practices, particularly as governments seek to avoid the high cost of military conflict. Sanctions are now commonly used to prevent or punish proliferation of nuclear weapons, terrorism-related activities, human rights violations and the narcotics trade.

Sanctions may be broadly classified as primary or secondary sanctions. Primary sanctions are those that are imposed on nationals or residents of a sanctioning country prohibiting them from engaging in any sort of trading activity with an entity that is the subject of the sanctions (that is, a target entity). Secondary sanctions apply to third parties (that is, entities which are not nationals or residents of a sanctioning country) from engaging in economic activities with the target entity.

Economic sanctions, both primary and secondary, have had an increasing bearing on international arbitration, impacting not only its actors (parties, counsel, arbitrators and institutions), but sometimes the underlying merits of the dispute itself. A case in point is the increasing number of sanctions imposed on Russia and Russian entities, a key source of work for the litigation and arbitration market. This blog sets out a brief analysis of how economic sanctions may impact international arbitrations and the measures that may be adopted to address them.

Implications on international arbitration proceedings

Arbitrators and counsel

Depending on the nature of sanctions imposed, arbitrators and counsel who are nationals of (or based in) a sanctioning country, may find themselves restricted from acting on disputes involving a target entity, unless the provision of legal services is exempted from the sanctions regime (see, for example, Article 4 of the EU Regulation 269/2014, which provides for exemptions from the freezing of funds for payment of reasonable professional fees or reimbursement of expenses incurred with the provision of legal services). As a result, arbitrators and counsel representing such entities may have to obtain the necessary licences or approvals from the relevant governmental authorities before agreeing to take on appointments or accept instructions. These issues are likely to be exacerbated when sanctions are imposed midway through proceedings. Whilst one would hope that carve-outs for the provision of legal services could be relied upon in these instances, the position may not always be clear-cut. This may also result in situations where arbitrators become reluctant to take on appointments in disputes involving target entities in order to avoid the cumbersome procedure of obtaining a licence. Alternatively, the arbitral institutions may avoid proposing individuals who are nationals of a sanctioning country. In each instance, this could serve to decrease the available pool of arbitrators.

Thus, when nominating an arbitrator in the context of disputes involving one or more entities from a sanction-targeted state, parties would be well advised to consider whether any potential candidates may be directly or indirectly affected by the sanctions; for example, where the arbitrator’s law firm may have offices in a sanctioning state (even if the arbitrator is not physically resident or practising in a sanctioning state) so as to avoid issues arising further down the line, including in terms of processing of arbitrators fees and expenses and so on.

Arbitral institutions

Arbitral institutions that are subject to the laws of a sanctioning country will also have to apply for licences to administer arbitrations involving target entities. Generally speaking, when disputes involve sanctioned entities, arbitral institutions will likely have to apply more administrative steps / procedures (in terms of screening, accepting payments, and so on) to such disputes than to disputes involving non-sanctioned entities, which will have an impact on the costs of the arbitration.

From an arbitral institution’s point of view, asset freezes and restrictions on the movement of money can significantly impact a party’s ability to pay advances or deposits on costs, either making it difficult to pay altogether or resulting in considerable delays before payment can be made. Typically, a sanctioned party (or a party from a sanctioned state) would need to seek a licence or approval from the authorities of the sanctioning country to access its frozen funds, so as to meet such calls for funds. This can be a time-consuming process. Where such a party is a claimant entity and the respondent is in no hurry to advance proceedings (for example, by paying the claimant’s share of any advances or deposits requested), one can see a situation developing where proceedings may stagnate to the detriment of the claimant.

A common problem resulting from economic sanctions that could impact all aspects of an arbitration proceeding is that banks are often reluctant to facilitate transactions involving funds belonging to or emanating from sanctioned states. This is exacerbated by the fact that most, if not all, commercial banks have some connection to the US banking system and may thus be exposed to prosecution by the US authorities, even if they are not US banks. See for example, the recent US prosecutions and fines levied upon Standard Chartered (US $1 billion) for sanctions breaches relating to dealings with Iranian entities and BNP Paribas (US $8.9 billion) for sanctions breaches with respect to Sudan, Cuba and Iran. Again, this results in a relatively small pool of institutions being able to facilitate payments relating to arbitration costs or settlement of awards without going through a formal licence / approval process (which could be resource intensive and thus act as a disincentive for smaller transactions).

Sanctions as part of applicable law to the dispute

Sanctions may also form part of the applicable law to the dispute if the arbitration seat is situated in a sanctioning country or the governing law of the contract (that is, the law applicable to the merits of the dispute) is the law of a sanctioning country. For example, if the parties have chosen London as their seat of arbitration, or English law as the governing law of the contract, EU sanctions may be applicable to the dispute.

The prevailing view is that disputes involving economic sanctions are arbitrable. In terms of the underlying merits of the case, a respondent in an arbitration may potentially rely on sanctions, forming part of the applicable law to the dispute, as justification for its failure to comply with contractual obligations, by raising a defence of frustration or force majeure. Whether such a defence is accepted, and whether the relevant sanctions are applicable to the arbitration proceedings, will naturally also depend on the terms of the contract, the impact that the sanctions may have on the contract and the treatment of such sanctions under any applicable law.

The English courts have taken a fairly strict approach to such issues, holding on a number of occasions that the imposition of sanctions will not serve to frustrate the operation of a contract where it can be shown that a licence to operate could be sought from the relevant authorities and was expected to be forthcoming (see, for example, Melli Bank v Holbud Ltd, DVB Bank SE (DVB) and others v Shere Shipping Company Limited and others). Therefore, as a necessary corollary, it would appear that for a party successfully to raise the defence of frustration in relation to the imposition of sanctions, it would have to show that no licence could be obtained in the prevailing circumstances, or that, despite its best endeavours, the licence was unobtainable (see also EU Regulation 883/2014 and EU Council Decision 2014/145/CFSP holding that the sanctions (referring to Russian sanctions) did not allow parties to excuse themselves from contractual performance or claim compensation where that performance was suspended or terminated. Also see Dalmia Dairy Industries Ltd v National Bank of Pakistan; Malik Co v Central European Trading Agency Ltd).

Similarly, under English law, a force majeure clause has to be explicitly incorporated into the contract and be wide enough to cover the imposition of sanctions legitimately to excuse performance. This was the case in Arash Shipping Enterprises Co Ltd v Groupama Transport, where a clause providing that “…where the Assured has exposed or may, in the opinion of the Insurer, expose the Insurer to the risk of being or becoming subject to any sanction, prohibition or adverse action in any form whatsoever against Iran…” was deemed wide enough to entitle the insurer to cancel the policy on the basis of the introduction of EU sanctions on Iran.

Post-award implications

The impact of sanctions continues even after an arbitration is concluded and an award issued. Where the sanctions were themselves an issue for consideration in the dispute, it is likely that these will be addressed in the award. However, that does not mean that these issues may not again arise in the context of enforcement, especially where enforcement is sought in a jurisdiction other than the seat of arbitration. An award may also be subject to challenge at the seat of the arbitration if allegations are raised concerning violation of sanctions regulations. If the award disregards the sanctions applicable at the seat or under the governing law of the contract, such award could potentially be set aside on the grounds that it is against public policy (see, for example, Article 34(2)(b)(ii) of the Model Law). A further complexity arises in the context of transnational public policy when there are contrasting positions taken by a sanctioning state and an international body, such as the UN or EU. For example, a sanctions programme which has been condemned by a resolution of the European Council may weigh less on the minds of an arbitral tribunal or indeed, when being considered by a court at the enforcement stage.

Further, where the award creditor is itself a target entity, the award debtor may seek to raise objections to enforcement on the ground that making payment under the award would contravene the public policy of the country in which enforcement is being sought. Whether this would be successful will depend on the facts and relevant court’s general stance on enforcement. For example, in 2014, the Swiss Supreme Court rejected objections to enforcement that were based on an argument that payment of an award would breach Swiss public policy and provide financial assets to Iran in violation of the international sanctions put in place following the 1979 Iranian revolution (the payment obligation in question arising in respect of oil shipments delivered prior to the sanctions being imposed). A further argument that the payment of the award would attract criminal liability for the award debtor’s Israeli shareholders under the laws of Israel was also rejected.


It is clear that economic sanctions may significantly impact different stages of the international arbitration process. As the prevalence and breadth of sanctions continues to increase, arbitration practitioners will need to implement strict screening and compliance procedures (with ongoing monitoring) to ensure that they do not inadvertently fall foul of sanction regulations or have their matters otherwise impacted by the same. Where necessary, prompt application for the relevant licences will be necessary. Similarly, contracting parties will want to also ensure that the likelihood of sanctions is properly considered and adequate provisions built into contracts (including in terms of dispute resolution forums and venues) when dealing with entities that are (or may be likely be) subject to sanctions in the future.

Kirkland & Ellis Chiraag Shah Kartikey Mahajan

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