Economic Sanctions: Implications for International Arbitration
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The increase in foreign investment and trade in Africa and the Middle East has led to an increase in the number of international disputes involving African and Middle Eastern parties. As international arbitration is the default means of resolving international disputes, this has led to an increase in arbitration involving African and Middle Eastern parties.
Concurrently, since the Cold War ended in 1991, there has been a sharp upsurge in the imposition of sanctions as a means of effecting political change. As countries have become less and less inclined to use military force to achieve such objectives, they have turned to sanctions as a lower-risk and more cost-effective alternative.1
Sanctions have been imposed on individuals and companies in countries across the world. However, African and Middle Eastern countries have been particularly prominent as targets of sanctions regimes and a significant number of them remain subject to some form of sanctions today.
In this chapter we explore the effect of sanctions on the conduct of international arbitration, with particular reference to sanctions regimes imposed on countries in Africa and the Middle East. We focus on commercial arbitration. The imposition of sanctions may also be relevant to investment arbitration but that is beyond the scope of the present chapter.
Setting the scene
Sanctions in the Middle East and Africa
The purpose of sanctions has been described as ‘to try to alter strategic decisions of state and non-state actors that threaten [a state(s)] interests or violate international norms of behaviour’, for example, democracy, human rights or the rule of law.2
In line with this, sanctions have been imposed on countries in Africa and the Middle East in response to conduct that either constitutes a perceived threat to other states’ interests or a threat to international norms of behaviour. Recent examples include sanctions imposed in response to Iran’s nuclear programme and in response to misappropriation of Egyptian state funds during the Arab Spring.
Countries, entities and individuals in Africa and the Middle East have commonly been the targets of sanctions regimes that have been imposed since the Cold War. As at the time of writing (February 2017) sanctions regimes exist in relation to the following countries or territories, either imposed by the UNSC, the US, or the EU (or a combination of these):3
- In Africa: Burundi, Central African Republic, Darfur, Democratic Republic of Congo, Egypt, Eritrea, Guinea-Bissau, Liberia, Libya, Somalia, South Sudan, Sudan, Tunisia, and Zimbabwe.
- In the Middle East: Afghanistan, Iran, Iraq, Lebanon, Syria, and Yemen.
- The sanctions that have been imposed have taken a variety of different forms, including:
- arms embargoes: a total ban or partial restriction on trading weapons with a particular country;
- restrictions on the movements of specific persons (travel ban): preventing targeted persons from entering a particular state or group of states;
- freezing of assets belonging to specific persons or entities: all such frozen assets within a certain state or group of states are frozen and persons required to comply with sanctions cannot make any assets available to those specific persons or entities; and
- financial sanctions or restrictions concerning specific sectors of economic activity, including import or export bans on certain goods, investment bans, prohibitions on the supply of certain services, etc.4
By way of an example, the EU imposed sanctions on Syria in May 2011 in response to the violent suppression by government forces of peaceful demonstrations for democratic reforms. The targets of the sanctions are financial and other supporters of the Assad regime and associated companies, entities and subsidiaries, and military commanders and government ministers said to be involved in the internal repression. The sanctions imposed consist of all four of the types of sanctions mentioned above (ie, an arms embargo, travel bans, asset freezes and economic sanctions, which include limits on investments and relationships with Syrian financial institutions, as well as an import ban on oil or petroleum products).5
There is much controversy generally over the effectiveness of the imposition of sanctions, and the imposition of sanctions in countries in Africa and the Middle East is no exception to this. However, in relation to certain sanctions regimes there is some consensus that sanctions were either generally a success or a failure. For example, the sanctions imposed against the government of Muammar el-Qaddafi of Libya are often cited as a success, being credited as the reason for el-Qaddafi’s government admitting responsibility for the 1988 Lockerbie aeroplane bombing and renouncing its weapons of mass destruction programme. In stark contrast, however, the sanctions that were imposed on Iraq in the aftermath of the Gulf War in 1991 are widely criticised for principally harming the Iraqi people while failing to achieve their aim of hindering the production of weapons of mass destruction by Saddam Hussein’s regime. The sanctions prevented Iraq from being able to recover from the devastation caused by the Gulf War and arguably allowed Saddam Hussein to retain his grip on power.6
The controversy surrounding the collateral effect of sanctions imposed on Iraq was a major factor in the evolution of sanctions regimes from so-called comprehensive sanctions – which amount to near total embargos on trade with affected countries – to so-called targeted or ‘smart’ sanctions. Targeted sanctions are more surgical in their application. They seek to minimise the humanitarian consequences of sanctions and focus instead on inhibiting the activities of members of a regime or individuals associated with the behaviour that has given rise to the sanctions.
Arbitration in the Middle East and Africa
The increase in foreign investment and trade in Africa and the Middle East, predominantly in the resources and infrastructure sectors, has inevitably resulted in an increase in international disputes involving African and Middle Eastern parties.
Two of the leading global arbitral institutions have reported that cases involving African parties are on the rise. The ICC reported in 2014 that the number of African parties involved in ICC arbitrations had more than doubled in the past 10 years and the LCIA in 2013 reported that the number of African parties involved in LCIA arbitrations had doubled since 2012.7
As a result of this increase in arbitrations, and as part of a wider aim for states in these regions to bolster their standing as global financial and trading hubs, many states have set up their own arbitral institutions and upgraded their arbitration laws and regulations to standards reflecting international best practice.
Taking recent years as an example, in Africa, the Lagos Chamber of Commerce International Arbitration Centre and the Nairobi Centre for International Arbitration were launched, and steps have been taken in South Africa to adopt the UNCITRAL Model Law. Similarly, in the Middle East, the Saudi Center for Commercial Arbitration opened and both the Abu Dhabi Global Market and the DIFC-LCIA Arbitration Centre updated their rules to bring them in line with international best practice.8
The implications of sanctions for international arbitration: substantive and procedural matters
International sanctions regimes may impact international arbitrations in two ways: because of the consequences under substantive law, and because of procedural implications. We consider each in turn, commencing with substantive law matters.
Impact of sanctions on arbitration– substantive law issues
An international sanctions regime may be relevant to the substantive merits of a dispute in a number of ways. These include that a party may seek to rely on the sanctions as excusing or suspending its obligation to perform under a contract. A party may also seek to argue that international sanctions operate so as to reduce its damages liability to a counterparty.
In the former case, there are a number of legal grounds that may apply so as to excuse or suspend performance. Both common law and civil law legal systems provide for this.
English common law frustration
A contract governed by English law may be discharged under the doctrine of frustration when an unforeseen event renders contractual obligations impossible to perform or transforms the obligations into something radically different. However, successfully invoking frustration is not straightforward. Recent case law has shown that 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.9 Therefore, it seems likely that to argue successfully that a sanctions regime has frustrated a contract it would be necessary to show that no licence could have been obtained, or that despite best efforts, a licence was unobtainable.10 Frustration has wide-ranging effect: it brings to an end a contract without the need for an election by either party.
Doctrines of impediment and hardship
In civil law jurisdictions there are similar concepts to the English common law doctrine of frustration. Hardship provisions in civil codes may provide relief if contractual performance is prevented by sanctions. For instance, article 119 of the Swiss Code of Obligations provides that ‘an obligation is deemed extinguished where its performance is made impossible by circumstances not attributable to the obligor’.
Article 79(1) of the United Nations Convention on Contracts for the International Sale of Goods (CISG) (adopted by both civil and common law countries) provides that a party is not liable for a failure to perform his or her obligations if he or she proves that the failure was due to an impediment beyond his or her control and that he or she could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome its consequences.11 Several decisions have suggested that a correct application of article 79(1) must focus on assessing the risks that a party claiming to be exempt from its obligations assumed when it concluded the contract, such that if imposition of the relevant sanctions was predictable at the time of the conclusion of the contract a party would not be able to rely on the provision.12
A force majeure clause usually has the effect of suspending a party’s contractual obligations or releasing a party from liability in circumstances when an extraordinary event occurs that prevents its obligations being fulfilled. The suspension or release may have temporary or permanent effect. If an event occurs that lasts for a significant period of time, this may have the effect of bringing a contract to an end or permitting either party to elect to do so. The operation of a force majeure clause will depend on its contractually agreed content. Whether or not the imposition of sanctions will constitute an extraordinary event will primarily depend on the wording of the relevant force majeure clause. Often a force majeure clause will refer expressly to sanctions or embargos as a basis for claiming force majeure. However, sometimes the clause will be drafted more generically, and it will be a question of interpretation as to whether the clause is wide enough to encompass the effect of sanctions.
Again, the party relying on the force majeure clause will need to show that there were no reasonable steps that it could have taken to avoid or mitigate the event or the consequences of the event,13 for example, by obtaining a licence.
It is worth noting that, even if the contract that is in dispute is rendered invalid or unenforceable as a result of the imposition of sanctions (for instance due to common law frustration) an arbitration clause will more than likely still be effective. The widely recognised doctrine of separability dictates that an arbitration clause is a separate contract such that it is still effective despite the invalidity or unenforceability of the underlying contract.14 The doctrine is recognised in most jurisdictions and is enshrined in the leading arbitral rules, for example, those of the LCIA.15
Assessment of damages
A party to arbitration may argue also that international sanctions are of direct relevance to the calculation of damages for breach of contract. It may submit that its counterparty would not have been able to make significant profits due to the effect of sanctions either on the broader economy or on the specific business of the claimant, with the result that it should not be liable for substantial damages.
Impact of sanctions on arbitration – procedural and practical issues
In addition to the impact that sanctions may have on the determination of substantive issues in an arbitration, procedural issues may also arise. We consider these below.
Arbitrability of disputes
Historically, before international arbitration was as widely accepted, there were debates about whether particular legal questions were capable of resolution by arbitration, or were a matter exclusively for national courts. The effect of sanctions was one such issue. It remains possible that the law of a particular state that is applicable to a particular arbitration may render a dispute non-arbitrable as a result of sanctions issues. For example, in the early 1990s the Genoa Court of Appeal held that a dispute concerning the effect of UNSC and EU sanctions against Iraq was not arbitrable, rather it was a matter for the Italian courts.16 The Court of Appeal’s decision was not followed by the Paris Court of Appeal when the matter came before it.17 However, it is now likely that a commercial matter that raises issues of the contractual effect of sanctions will be capable of determination by international arbitration.
Practical effects on arbitral institutions, arbitrators and parties to the arbitration
Sanctions regimes may, however, raise practical issues for parties to arbitration, arbitral institutions and arbitrators.
At the outset, it should be noted that sanctions regimes do not typically prohibit the arbitration of disputes where one, or more, parties to the arbitration is targeted by sanctions. However, the widespread use of asset freezes in sanctions regimes does raise questions with regard to transfer of funds from and to parties targeted by sanctions.
Under EU sanctions regimes, assets freezes normally comprise two elements:
- a requirement that persons obliged to comply with EU sanctions freeze all funds (ie, financial assets and benefits of every kind) and economic resources (ie, assets of every kind, which are not funds but may be used to obtain funds, goods or services) belonging to, owned, held or controlled by any person targeted by sanctions (the asset freeze restriction); and
- a prohibition on persons obliged to comply with EU sanctions making available, directly or indirectly, to or for the benefit of persons targeted by sanctions, any funds or economic resources (the non-provision restriction).18
US asset freezes, or blocking sanctions, contain similar restrictions, which require the blocking of property and non-provision to targeted persons of funds, goods or services.19
Arbitral institutions need to assess their potential exposure to sanctions by having a process in place to identify targeted entities at the outset. This can be a more complex task than one might expect given that certain names, such as those originally in Arabic or Cyrillic, may be capable of transliteration into different forms in Latin script. Many software products that facilitate sanctions checks provide for so-called ‘fuzzy’ searching, which is intended to identify near, but not exact, matches of names. Institutions need to take care when investigating whether a party to an arbitration, or its ultimate beneficial owner, is targeted by sanctions.
If an institution identifies a targeted entity as a potential party to an arbitration, or that its ultimate beneficial owner is targeted by sanctions, there are a number of practical issues that may arise.
Will accepting a registration fee or advance on costs from a targeted entity infringe a relevant asset freeze?
The answer to this question will, of course, depend on the specific terms of the asset freeze. However, EU sanctions regimes at least typically include a provision that permits competent authorities in EU member states to license the release of otherwise frozen funds if such funds are ‘intended exclusively for payment of reasonable professional fees or reimbursement of incurred expenses associated with the provision of legal services’.20 Practically it may be possible for the registration fee or advance on costs to be paid from funds that are not within the ambit of the relevant asset freeze, for example, if the asset freeze is imposed by the EU, using funds that are outside the EU and that do not come within the EU. However, even if funds are capable of release for the purposes of payment of a registration fee or an advance on costs, institutions and parties may face difficulties obtaining payment services in respect of such funds. Many banks are unwilling to handle funds that may be linked to targeted entities. This has been a particular concern with regard to Iranian entities.
Will certifying an award in favour of a targeted entity infringe the relevant sanctions regime because the award permits a targeted entity to raise funds?
The answer to this question is currently unclear because it has not been tested in the courts. However, the approach taken by the Court of Justice of the European Union (CJEU) in a case named Möllendorf (Case C-117/06)21 may be instructive. The court concluded that notarisation by a land registry of a transfer of ownership, which would enable the buyer of the land to obtain a mortgage, amounted to the provision of economic resources to the targeted buyer in contravention of the sanctions in place. It follows that if an institution certifies an award that can be used to provide an economic benefit to a targeted entity, the institution may fall foul of any applicable sanctions restrictions.
In each case, these questions may also raise concerns for arbitrators, who may not know whether they can rely on payment for their services or whether issuing an award may expose them to sanctions liability.
Even though it may be possible to put in place procedures to mitigate or eliminate the risk of sanctions breaches, this may give rise to delays in the arbitration process.
Another practical issue that may arise if one of the parties to the arbitration, or a key witness, is subject to an asset freeze or a travel ban is that an individual may struggle to attend the arbitration. However, it may be possible to work around this by the targeted party participating via video-link from their home country.
Enforceability of awards
Assuming that the procedural hurdles mentioned above are overcome, the arbitration goes ahead and an arbitral award is granted, sanctions may affect the enforceability of an arbitral award if either:
- sanctions render the subject matter of the arbitration non-arbitrable in the state in which enforcement is sought (article V(2)(a) of the New York Convention and article 36(1)(b)(i) of the UNCITRAL Model Law); or
- recognition or enforcement of the award is contrary to public policy in the state in which enforcement is sought (article V(2)(b) of the New York Convention and article 36(1)(b)(ii) of the UNCITRAL Model Law).22
As mentioned above, most states’ laws consider economic disputes involving targeted parties to be arbitrable such that it is unlikely that an arbitral award would be rendered unenforceable as a result of article V(2)(a) of the New York Convention or article 36(1)(b)(i) of the UNCITRAL Model Law.
However, a number of cases have considered the argument that an award should not be enforced on the basis of article V(2)(b) of the New York Convention or article 36(1)(b)(ii) of the UNCITRAL Model Law. The recognition or enforcement of an arbitral award 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.23 So, for instance, an award that upheld a party’s claim that it was released from the obligation to perform due to sanctions might not be enforced in a sanctioned country. The balance to be struck by national courts in this scenario is between the national public policy serving national interests on the one hand and international public policy in favour of enforcement of awards on the other. Recent case law indicates that the balance tends to swing in favour of international public policy and therefore enforcement of the arbitral award. For example, in Iran Defense Ministry v Cubic Defense Systems, Inc (2011), Cubic Defense Systems, Inc argued in a US court that the ICC award of US$2 million in favour of the Iran Defence Ministry ‘was contrary to a fundamental public policy of the US against trade and financial transactions with the Islamic Republic of Iran’. The US court rejected this argument, and held that confirmation of the award did not violate the fundamental public policy against economic support for the government of Iran. There was a procedure under the sanctions whereby Cubic Defense Systems, Inc could obtain a licence to make payment into a blocked account, with the funds to be released after the lifting of sanctions.24
The use of sanctions has increased markedly in the past 20 years. They are an attractive means of imposing political pressure for governments keen to avoid military casualties and to limit the costs of intervention. Instability in the Middle East and parts of Africa has meant that many sanctions regimes are directed at states in those regions. As more and more disputes from the Middle East and Africa are referred to arbitration, questions of the interplay between international arbitration and sanctions are likely to become ever more relevant. High-profile sanctions regimes imposed on Russia and Iran have permitted rehearsal of the types of issues that may arise. It falls to participants in the arbitration process, be they institutions, arbitrators or counsel, to understand the implications of sanctions on arbitration proceedings, and to be ready to address them.
- Sanctions.com article ‘History Suggests That Effectiveness of Economic Sanctions May Depend on Targeted Measures’ by Anna Sayre (http://sanctionsalert.com/history-suggests-that-effectiveness-of-economic-sanctions-may-depend-on-targeted-measures/).
- According to Jonathan Masters (Deputy Editor at the United States Council for Foreign Relations) in the article, ‘What Are Economic Sanctions?’ (www.cfr.org/sanctions/economic-sanctions/p36259)
- Page on ‘Different Types of Sanctions’ from the European Council and Council of the European Union’s website (www.consilium.europa.eu/en/policies/sanctions/different-types/).
- Syria page of the European Sanctions blog by Maya Lester QC and Michael O’Kane (https://europeansanctions.com/eu-sanctions-in-force/syria/).
- Sanctions.com article ‘History Suggests That Effectiveness of Economic Sanctions May Depend on Targeted Measures’ by Anna Sayre (http://sanctionsalert.com/history-suggests-that-effectiveness-of-economic-sanctions-may-depend-on-targeted-measures/).
- The Middle Eastern and African Arbitration Review 2016 article ‘Developments in African Arbitration’ (https://globalarbitrationreview.com/insight/the-middle-eastern-and-african-arbitration-review-2016/1036968/developments-in-african-arbitration).
- Ashurst article ‘International Arbitration: 2016 in Review’ (www.ashurst.com/en/news-and-insights/legal-updates/international-arbitration---2016-in-review/).
- Melli Bank v Holbud  EWHC 1506 (Comm) and DVB Bank SE (DVB) and others v Shere Shipping Company Limited and others  EWHC 2321 (Comm).
- DVB Bank SE (DVB) and others v Shere Shipping Company Limited and others  EWHC 2321 (Comm) paragraphs 43-49 and 81.
- CISG Guide to article 79 (www.cisg.law.pace.edu/cisg/text/peclcomp79.html).
- For example, the two German cases CLOUT case No. 166 [GERMANY Schiedsgericht der Handelskammer Hamburg 21 March 21 June 1996] and CLOUT case No. 271 [GERMANY Bundesgerichtshof 24 March 1999].
- Chitty on Contracts, Sweet and Maxwell, 32nd ed, 2015, para 15-155).
- Fiona Trust & Holding Corporation v Privalov  EWCA Civ 20
- Art 23.2 LCIA Arbitration Rules (2014).
- Fincantieri-Cantieri Navali Italiani SPA v Iraq, Riv Dell’arb 4 (1994) 505.
- Legal Department of the Ministry of Justice of the Republic of Iraq v Fincantieri-Cantieri Navali Italiani 15 June 2006, Rev. arb. 2007, 87.
- Guidelines on implementation and evaluation of restrictive measures (sanctions) in the framework of the EU Common Foreign and Security Policy, 15 June 2012, available at http://data.consilium.europa.eu/doc/document/ST-11205-2012-INIT/en/pdf.
- See, for example, Executive Order 13469 of 25 July 2008 Blocking Property of Additional Persons Undermining Democratic Processes or Institutions in Zimbabwe available at www.treasury.gov/resource-center/sanctions/Documents/13469.pdf.
- See, eg, Regulation 269/2014 article 4(1)(b) and ICC, LCIA, SCC article ‘The potential impact of the EU sanctions against Russia on international arbitration administered by EU-based institutions’ (http://sccinstitute.com/media/80988/legal-insight-icc_lcia_scc-on-sanctions_17-june-2015.pdf).
- Case C-117/06, Gerda Möllendorf and Christiane Möllendorf-Niehuus (reference for a preliminary ruling from the Kammergericht Berlin), 11 October 2007 (http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:62006CJ0117&from=EN).
- Sanctions may also give rise to applications for set aside of arbitration awards.
- Kluwer Arbitration Blog article ‘The Challenge of Sanctions for Arbitral Participants’ (http://kluwerarbitrationblog.com/2015/10/05/the-challenge-of-sanctions-for-arbitral-participants/).
- Other examples of national courts upholding the enforcement of arbitral awards include a US court in MGM Productions Group v Aeroflot Russian Airlines (US SDNY, 2003) and a Swiss court in Iranian Co Z v Swiss Co X 4A_250/2013 (Swiss S. Court. Feb. 2014).