THE AUTHOR:
Sue Ng, Associate at Freshfields Bruckhaus Deringer
Introduction
Since Russia’s invasion of Ukraine, there has been a proliferation of Russia-related sanctions, most notably those led by the G7 nations and the EU. With the EU’s 11th sanctions package on the horizon, readers of the Jus Mundi blog might be wondering what the impact of West-led sanctions on Russia is on Asia. Are Russia-related sanctions relevant to Asia, and more specifically, why should the arbitration community in Asia pay attention to Russia-related sanctions?
In my post, I explain why Russia-related sanctions are of relevance and how these can specifically impact arbitrations in Asia. First, I will outline the uncertain regulatory landscape for some sanctions regimes outside of Asia (referred to as “external sanctions”), which have led to suggestions to relocate arbitrations to Asia. Second, I turn to address the current regulatory environment in Asia and outline some of the risks with respect to sanctions in Asia. Third, weaving together the threads, I address the impact on arbitrations at various stages of their proceedings.
Implications of External Sanctions for Asia?
International arbitration is particularly susceptible to the application of different sanctions regimes due to the involvement of various stakeholders and its cross-border nature. The nationalities, residencies, and activities of the parties, the arbitrators, the arbitration institutions, the Parties’ counsel teams are all potential triggers for the application of different sanctions. Unless an arbitration is wholly located within Asia and has no foreign nexus, there will be a possibility for external sanctions to directly apply and impact arbitrations in Asia.
Turning to the current external sanctions regimes, Russia-related sanctions have been fast-changing with a movement towards new restrictions and tighter regulations. These changes have contributed to an overall complex and uncertain regulatory landscape for arbitration practitioners. For instance, in March 2022, when the EU introduced its 4th sanctions package, with a new Article 5aa that prohibited any transaction with a party owned or controlled by a sanctioned party, it was unclear whether arbitrations seated in EU Member-States and those administered by EU-based arbitration institutions could proceed without breaching EU sanctions. The position was later clarified in July 2022 to permit transactions which were strictly necessary to ensure access to legal proceedings, including arbitrations.
Similarly, the tightening of United Kingdom (UK) sanctions has also created uncertainties in arbitrations involving a sanctioned person. In September 2022, the UK introduced a prohibition on services including against providing transactional legal advice to sanctioned parties. The immediate effect on arbitration was that the UK regulator would first need to grant an individual licence for each arbitration involving a sanctioned party before the proceedings could continue. In October 2022, the position was partially changed, when the UK regulator granted the London Court of International Arbitration (LCIA) a general licence, which meant that individual applications were no longer necessary for arbitrations administered under the LCIA Rules. However, there are remaining uncertainties, in particular for (i) ad-hoc arbitrations where the LCIA is involved in some capacity but the LCIA Rules are not adopted, e.g., where the LCIA is purely acting as a fundholder or service provider under the UNCITRAL Rules; or (ii) other institutional arbitrations where there is still some nexus to the UK, e.g., an arbitrator who is a national of or resident in the UK, or an arbitration seated in the UK.
It has been suggested that such uncertainties in external sanctions regimes may lead to a rise in arbitrations seated in Asia. Traditionally popular arbitration seats such as London, Paris and Geneva fall within jurisdictions that have imposed sanctions on Russia, and where the regulatory environment for sanctions compliance is stricter. In the same vein, these jurisdictions are also home to many arbitration institutions which may be impacted by developments in the sanctions regimes. It has therefore been proposed that Asia may be a plausible alternative to avoid the current regulatory environment. Below, I address this scenario including possible pitfalls.
Internal Sanctions within Asia – What are the Risks?
I have earlier suggested that Asia, as a region, is relatively “sanctions-lite”. This is because the majority of jurisdictions that make up Asia have refrained from imposing sanctions on Russia, including China and India, all Member-States of the Association of Southeast Asian Nations (ASEAN) (except Singapore), and within Central Asia. However, it is notable that within Asia, there are also jurisdictions that have introduced sanctions against Russia (which I refer to as “internal sanctions”), including Australia, Japan, New Zealand, Republic of Korea, Singapore, and Taiwan. As these internal sanctions would directly impact arbitrations and stakeholders in the region, it is necessary to examine their content in greater detail.
The six jurisdictions stated above have imposed different types of sanctions. Across the board, these jurisdictions have implemented various export/import controls and financial and banking restrictions in relation to Russia. However, three specific jurisdictions, Australia, Japan, and New Zealand, have also imposed prohibitions on dealing with funds and economic assets involving designated individuals and entities (also known as “asset freeze measures”). As of February 2023, Australia has sanctioned more than 1,000 individuals and 100 entities, New Zealand has sanctioned over 1,100 individuals and 338 entities, and Japan has also sanctioned 824 Russian individuals and entities combined. As the war continues, it is likely that the list of sanctioned parties will only further grow in numbers. These asset freeze measures are crucial because they directly impact the ability of arbitration stakeholders to receive or deal with funds originating from or relating to sanctioned and related parties, be it for the purposes of remuneration for arbitration-related services or as winning sums to be awarded at the end of the arbitration.
On top of the prohibition on dealing with funds, there may also be additional prohibitions on the provision of legal services. In New Zealand, Article 11 of the Russia Sanctions Regulation 2022 introduces a general prohibition on services involving a sanctioned party, including legal services, with a narrow exception for obtaining legal advice on the sanctions framework. Arbitration-related services from an arbitrator, arbitration institution or party representative would likely fall under the prohibition on providing legal services. In contrast, in Australia and in Japan, such a wider and general ban on provision of legal services to sanctioned parties is not yet seen.
Overall Impact on Arbitration
As indicated above, the rise of external sanctions may lead to greater interest in relocating arbitrations to Asia. On the other hand, internal sanctions imposed by some Asian jurisdictions may also lead to risks for arbitration stakeholders. In this section, I outline some overarching strategic points in terms of the implications on arbitration for the readers to consider:
Pre-arbitration
(i) Determining the Ability to Act
Different sanctions regimes may require stakeholders to conduct their own due diligence when sanctioned and related parties are involved to avoid breaching sanctions. As shown with the examples of Australia and New Zealand, different sanctions regimes also provide different guidance, with some regulating dealings involving assets, and others banning services from being provided to sanctioned and related parties. For the latter, arbitrators, arbitration institutions and counsels may be considered legal services providers in an arbitration and would therefore fall squarely within such prohibitions.
Moreover, the extent of due diligence that has to be conducted by stakeholders remains unclear. A due diligence process that only looks at whether a party is on a sanctions list is likely to be insufficient, for it ignores the possibilities of ownership and control by the sanctioned party through other individuals, entities and structures. Clauses 1.2 and 3.1 of the Hong Kong International Arbitration Centre (HKIAC)’s sanctions policy expressly recognises that the due diligence process would not only include verification of whether a party is (i) sanctioned, but also (ii) directly or indirectly owned or controlled by a sanctioned party, or (iii) otherwise affiliated with a sanctioned party. Such questions of ownership and control are extremely fact-specific and is further complicated by the fact that the test is not always clearly articulated in every jurisdiction. At this moment, Australia is undertaking a consultation process to review its autonomous sanctions framework, including clarifying questions of ownership and control.
(ii) Strategically Choosing a Seat
Prior to the initiation of an arbitration, parties foreseeing the possibility of future disputes arising from Russia-related sanctions may be looking to make a strategic choice on the seat of the arbitration. Earlier, I mentioned the possibility of the rise of Asia-seated arbitrations involving sanctioned or related parties. In making such strategic choices, parties also need to take care to avoid designating certain seats that may create difficulties with enforcement of an arbitral award in Russia.
As mentioned, six jurisdictions in Asia have imposed Russia-related sanctions and these are on Russia’s list of “unfriendly” countries, regardless of the extent of measures imposed. The Russian Supreme Court has taken a liberal approach in granting anti-suit injunctions for arbitrations seated abroad involving “unfriendly” jurisdictions with sanctions against Russian parties (See, report). It has also been argued that while a foreign arbitral tribunal may in theory be free to disregard such an injunction, Russian courts are unlikely to enforce an arbitral award that defies its anti-suit injunction, and as a breach of public policy under the New York Convention.
In contrast, a popular seat, Hong Kong, has not adopted any sanctions towards Russia. For now, it appears that business is as usual with Russia-related disputes, with the HKIAC’s sanctions policy clarifying that as a general matter, it will not “treat any party listed under a sanctions regime differently from any other party” in the proceedings (See, clause 2.3), subject to its compliance with its legal obligations (See, clause 2.1). Because Hong Kong itself does not apply any sanctions towards Russia, the source of the legal obligations that the HKIAC may have to comply with would arguably be foreign in nature (if any). It would further be difficult to see how in general, foreign sanctions, which usually require some of territorial nexus, can apply to the HKIAC.
During the Arbitration
Having passed these initial hurdles, it is important for all arbitration stakeholders involved to continue to ensure compliance with the applicable sanctions regimes. Stakeholders have a continuing obligation to comply with sanctions during the arbitration. This has become more complicated due to new and tightening sanctions that may be introduced during the course of proceedings, such as further asset freeze measures which may render it impossible for the arbitration to continue without seeking necessary approvals from the regulators, or travel bans that may render it difficult for parties or witnesses to attend hearings.
End of the Arbitration
At the end of the arbitration, the enforceability of an arbitral award may also be compromised due to the operation of sanctions. As earlier outlined, the Russian Supreme Court’s approach towards sanctions adopted by unfriendly jurisdictions may complicate the enforcement of an award in Russia where assets are most likely located.
More broadly, whether foreign sanctions could amount to a public policy ground under Article V(2)(b) of the New York Convention for the non-enforcement of an award remains an open question. There may be more clarity as more sanctions disputes come to the forefront in various jurisdictions. For instance in France, the Court of Appeal in Sofregaz had accepted that UN Security Council sanctions and EU sanctions were mandatory rules that if violated, could amount to international public policy grounds for non-enforcement of an award. However, autonomous sanctions such as those imposed by the US would not suffice as an expression of international consensus and satisfy this threshold.
While there is no comparable decision in the context of an arbitral award thus far, a recent UK decision has also found that the UK sanctions regulations do not prevent the English High Court from entering judgment in a litigation context for a claim brought by a sanctioned party.
At this stage, what is clear is that the jurisprudence surrounding foreign sanctions as a public policy ground for the non-enforcement of an award is still being developed, and jurisprudence in Asia remains scarce at best.
Overall Remarks
Russia’s invasion of Ukraine has led to a global crisis and the promulgation of Russia-related sanctions at an unprecedented level has also had an impact on disputes and arbitrations that fall outside of the European continent. Whether we will see arbitrations relocating to Asia, the answer is not clear-cut and much more has to be considered both in terms of internal and external sanctions as stakeholders navigate the current fragmented and ever-changing landscape.
Sue Ng is an associate with Freshfields Bruckhaus Deringer. She is admitted as a Solicitor-Advocate in England and Wales and an Attorney in the State of New York. She is also a Fellow of the Chartered Institute of Arbitrators (FCIArb) and a HKIAC Tribunal Secretary. Sue’s practice focuses on international commercial arbitrations, investor-state arbitrations and public international law. She advises clients across different industries and jurisdictions on various dispute resolution mechanisms.
