2024 London International Disputes Week
THE AUTHOR:
Yi Ching Chan, Associate at Stephenson Harwood LLP
Within the realm of international trade and commerce, sanctions have emerged as a critical factor influencing cross-border disputes in recent years. As part of London International Disputes Week 2024, on 3 June 2024, a panel session was held on “Sanctioned countries: sanctions and arbitration – a practical perspective“, which sought to discuss the consequences of sanctions on international arbitrations, particularly in view of the Russo-Ukrainian War.
The panel was composed of speakers Ms Maya Lester KC (Brick Court Chambers), Dr Anna Bradshaw (Peters & Peters), Mr David Lorello (Covington & Burling) and Mr Jon Newman (Kirkland & Ellis), and was moderated by Ms Dara Shagal (Pinna Goldberg) and Mr James Freeman (A&O Shearman).
The following topics were discussed:
- The sanctions regime in the United Kingdom (the “UK“);
- Sanctions regimes in the United States of America (the “US“) and the European Union (the “EU“);
- The practical consequences of sanctions imposed on Russia;
- The effects of sanctions on arbitration; and
- How access to justice has been affected by sanctions.
The Sanctions Regime in the UK
Ms Lester KC began the panel by providing an overview of the sanctions regime in the UK, a fairly recent phenomenon following Brexit.
The Sanctions and Anti-Money Laundering Act 2018 (“SAMLA“) was the first piece of legislation to go through Parliament in the post-Brexit framework, and governs the current sanctions regime in the UK. A notable feature of SAMLA is that it imposes a statutory requirement for guidance to be issued on any prohibitions and requirements imposed by sanctions (see section 43 of SAMLA). As a result, there is now more guidance under the UK sanctions regime than there was pre-Brexit, when little guidance was provided on the interpretation of EU sanctions at the time.
Currently, there are two types of sanctions in the UK. The first type is targeted list-based sanctions, which intend to target parties on a specific list. Such sanctions include asset freezing prohibitions, which seek to freeze all assets and economic resources of specific parties by prohibiting others from dealing with those parties. The second type is the ‘everything else’ bucket of sanctions, which apply to all parties within the jurisdictional reach of those sanctions (for example, export or import controls from specific countries), and are broader compared to the first type of sanctions.
In the UK, it is illegal to breach or to circumvent sanctions, and such actions can lead to criminal or civil consequences. However, there are licenses available in the UK that allow parties to carry out an act that would otherwise be considered a breach of sanctions.
Sanctions Regimes in the US and the EU
Mr Lorello continued the panel by discussing sanctions regimes in the US and the EU.
The US has always been active in introducing unilateral sanctions, which are sanctions that the Office of Foreign Assets Control decides to impose on specific countries, such as Executive Order (E.O.) 13722, which are sanctions imposed on North Korea. The EU, on the other hand, was historically reticent to impose unilateral sanctions. Such reluctance, however, began to erode following the Arab Spring.
A recent trend emerging from the Russo-Ukrainian War is the increased coordination between the US and the EU on sanctions policy objectives.
The Practical Consequences of Sanctions on Russia
Dr Bradshaw then identified the practical consequences of sanctions imposed on Russia since the Russo-Ukrainian War. These include:
- More insolvencies and liquidations by companies;
- The introduction of various licenses available to parties (e.g., the UK’s Office of Financial Sanctions Implementation granted the London Court of International Arbitration (the “LCIA“) a General Licence which allowed the LCIA to receive payments from parties subject to the Republic of Belarus (Sanctions) (EU Exit) Regulations 2019 and the Russia (Sanctions) (EU Exit) Regulations 2019);
- Counter sanctions imposed by Russia; and
- Reporting requirements for law firms with client(s) that are subject to multiple sanctions regimes.
The Effects of Sanctions on Arbitrations
Mr Newman addressed another consequence of sanctions, that being on arbitrations. There are three practical problems which arbitration practitioners now face following sanctions:
- Pure regulatory issues: Uncertainties have arisen on whether law firms may need a license to represent their client, and how both the law firm, and the Tribunal, would be paid for their fees if sanctions are in the mix.
- Delays in the arbitral process: There is now an additional layer of complexity following the introduction of sanctions. There may be months of delay before the substantive stages of arbitrations may commence, as
- (i) arbitral institutions may have to work through their own compliance process before requesting the provisional advance of fees, and
- (ii) difficulties may also arise when appointing Tribunal members if sanctions are involved.
In addition, even if the substantive stages of the arbitration have commenced, parties may face difficulties attending the arbitration hearing in person if travel bans are imposed. This could impede the cross-examination process if the hearing is conducted virtually.
- Substantive legal issues: If a dispute arises out of sanctions, the Tribunal will have to determine whether the performance of contractual obligations is impeded by sanctions. This may not be a straightforward query depending on the sanctions involved. Another potential issue is jurisdiction. Article 248 to the Russian Arbitrazh Procedural Code was introduced by the Russian government in 2020 to grant the Russian Court exclusive jurisdiction over cases involving a sanctioned person and/or where the dispute itself arises from sanctions imposed on Russian entities or individuals. As a result, parties may not be able to refer the matter to arbitration even if there is an arbitration agreement.
Access to Justice
Mr Freeman and Ms Shagal then discussed with the panellists how parties’ access to justice is affected following the sanctions imposed after the Russo-Ukrainian War. Broadly speaking, access to justice refers to a party’s right to have effective access to the Courts (or Tribunal where arbitration applies), so that they have the proper means to resolve legal disputes.
Mr Lorello commented that it is unsurprising that sanctions will interrupt the arbitral process, as that is its purpose. However, there is a line to be drawn between balancing (i) the interest of arbitration practitioners to commence arbitration seamlessly, and (ii) achieving the policy objectives of sanctions regimes. Where that line is drawn, however, is uncertain. To that end, Ms Lester KC remarked that the Courts and Tribunals do try to keep cases moving where they can, despite the potential delays from sanctions. Likewise, Dr Bradshaw noted that most law firms are, barring anything unique, still able to obtain a license for payment of their fees.
Mr Freeman also raised the potential of parallel proceedings arising from Article 248 of the Russian Arbitrazh Procedural Code where a non-Russian party commences arbitral proceedings pursuant to an arbitration agreement, and a Russian party commences Russian Court proceedings instead. This could lead to conflicting outcomes from both the arbitral Tribunal’s award, and the Russian Court’s decision.
In this regard, from a non-Russian party’s perspective, it has limited options to prevent proceedings in Russia. Whilst anti-suit injunctions can be sought in other jurisdictions such as the English Court to prohibit the commencement or continuation of Russian proceedings (most recently, in UniCredit Bank GmbH (Respondent) v RusChemAlliance LLC (Appellant) (Case ID: 2024/0015) where the UK Supreme Court issued an anti-suit injunction to restrain Russian proceedings), the effectiveness of these injunctions is uncertain. Ms Shagal commented that there have been a series of decisions from the Russian Supreme Commercial Court which held that foreign anti-suit injunctions are not binding on Russia. As such, anti-suit injunctions may not be perceived as a threat to Russian parties, especially if they do not have assets outside of Russia.
Accordingly, a non-Russian party may risk judgment being entered against it in Russia if it does not participate in Russian proceedings. The risk appears onerous, as Ms Shagal commented that there are more than 90 cases where Russian parties commenced proceedings before the Russian Court, and won on the merits. Whilst it is unlikely for a Russian judgment to be enforceable outside of Russia, Russia has a number of international agreements with foreign states on the enforcement of Russian judgments, including Kazakhstan, Mongolia, China and India. In other words, it is unlikely that the non-Russian party will be able to entirely avoid Russian proceedings if they commence as a result of sanctions, even if it does not have assets in Russia for the purposes of enforcement.
Conclusion
The effects of sanctions on the arbitration landscape are far-reaching at each stage of the arbitral process: from administrative and jurisdictional hurdles prior to the commencement of arbitration to substantive issues arising during the arbitration and the enforcement of the arbitral award. However, the ongoing consequences of sanctions will hopefully continue to foster conversations and, in turn, bring about certainty regarding the scope and applicability of sanctions to disputes.
ABOUT THE AUTHOR
Yi Ching Chan is an Associate in the Maritime, Trade and Offshore practice at the London office of Stephenson Harwood LLP. She specialises in trade and commodities and has assisted with disputes before the Singapore Court and arbitral institutions such as the SIAC, SCMA, LMAA, RSA, SMA, LCIA and ICC.
*The views and opinions expressed by Authors are theirs and do not necessarily reflect those of their organizations, employers, or Daily Jus, Jus Mundi, or Jus Connect.