This article was featured in our 2023 Energy Arbitration Report, which is part of a series of industry-focused arbitration reports edited by Jus Connect and Jus Mundi.
This issue explores the energy industry, encompassing information on electricity & renewables, based on data available on Jus Mundi and Jus Connect as of September 2023. Discover updated insights into energy arbitration and exclusive statistics & rankings, as well as in-depth global and regional perspectives on energy projects, disputes, & arbitration from leading lawyers, arbitrators, experts, arbitral institutions, and in-house counsel.
THE AUTHORS:
Diego Brian Gosis, Partner, GST LLP
Ignacio Torterola, Partner at GST LLP
Quinn Smith, Managing Partner at GST LLP
Although not a new development or a recent trend, the latest waves of international sanctions affecting exports to and imports from certain jurisdictions have created a vast network of restrictions that significantly impact the energy sector, with foreseeable consequences in international commercial and investment disputes.
Over the last 50 years, but increasingly over the last decade, countries and international organizations have imposed sanctions on a number of countries that play preponderant roles in the energy sector, from Iran to Venezuela and Russia, to name a few. We will strive in this paper to reflect on the impact that those sanctions carry on the practice of international arbitration, rather than on the legal appropriateness or the effectiveness of those sanctions for their purported purposes.
One should distinguish between the disputes involving the sanctioning State or organization and challenging the sanctions themselves – which we will call “first-level” disputes – and those dealing with second or third-level corollaries of the sanctions – which we will call “second-level” and “third-level” disputes, respectively.
“First-level” disputes may include public international law disputes between sanctioned States or organizations on the one part, and sanctioned parties on the other, but also investment disputes by foreign investors against a sanctioning State – or, more rarely, against a sanctioning international organization – which argue that the sanctions imposed wrongfully affect their protected investment in the territory of that sanctioning State or a territory subject to the rules of that international organization. They could also include some limited form of contract dispute, where the sanctions are argued as a ground for the sanctioning State or international organization not to abide by the terms of a preexisting contract.
For practitioners in these disputes, the merits might become easier to prove—after all, sanctions often result in some kind of non-payment that gives rise to liability. But a new set of defenses might arise. Depending on the scope of the sanctions and the parties involved, the sanctioned State may have arguments of force majeure under international law, although this is difficult to prove. This is especially true since sanctions often contain a “wind-down” period or the possibility to obtain a license. And with the narrow nature of contractual defenses, it is challenging for a State-owned entity, even in a first-level dispute, to escape payment, as was shown by the US Court of Appeal decision that recently ordered PDVSA – the Venezuelan sanctioned State-owned oil company – to pay its defaulted notes in spite of the sanctions. The primary challenge will be one of enforcement. The countries imposing sanctions often contain links to the banking sector such that any funds subject to enforcement will be blocked. A State that has blocked the funds has no obligation to convey them to an investor that has prevailed against a State. Indeed, the blocked funds are often spent in ways that award creditors may not expect, such as compensating victims of terrorism –as was the case with certain Afghan funds frozen and then released by the US for this limited purpose–or fulfilling other policy prerogatives. And this does not take into account the impact of global sanctions. Sanctioned States often see overseas revenues drop and move their business to countries that may not respect an international arbitration award. These hurdles are often too much for small and medium-sized businesses, that cannot afford the years of creative litigation needed to recoup their losses. Needless to say, sanctions in this context often make disputes longer and more difficult to resolve.
Examples of “second-level” corollaries would be disputes over measures adopted by a non-sanctioning State in furtherance of international or foreign sanctions. Disputes of this sort may arise where the challenging party is the target of the sanctions or their contractual counterparty.
Such would be the case, e.g., where a sanctioned State or State-owned company attempts to deliver oil and collect the purchase price from a purchaser in a non-sanctioning State under a pre-existing contract, but the non-sanctioning State prevents delivery from or payments to the seller. As the measures at stake were adopted by a non-sanctioning State, it is unlikely that the reasons for the sanctions or their adequacy to the policy purposes of the countries or international organizations issuing the sanctions will or can fully be debated in the context of this first level of disputes. It is conceivable that the discussion may extend to whether any conduct by the target of the sanctions allegedly leading to the sanctions can act as a bar to the arguments by such sanctioned party. Most foreseeable types of disputes falling in this category will be matters of contract law between that seller and purchaser, with the most likely debates focusing on whether performance by one or both parties is affected by an “act of God”, force majeure, or hardship, and the consequences of such finding.
These disputes pose unique challenges and opportunities. In some cases, a non-sanctioning State may use the pressure created by sanctions to take actions on their own, as was the case with measures adopted by the Jamaican government further to US sanctions against Venezuela and its State-owned oil company or a company in a non-sanctioning State may have international banking relationships that complicate payment. Sometimes, alternative structures arise to facilitate such transactions, such as the Kimberley Process, which has been used to alleviate concerns related to “blood” or “conflict” diamonds and the sanctioned entities that trade in them. After the recent round of sanctions against Russia, some imports have started paying different currencies, which can help reduce the existence of a dispute or ease enforcement. These disputes also feature fewer defenses. It is more difficult for a buyer to allege impossibility or force majeure in a contract when alternative means of payment exist or sanctions are not technically applicable.
Meanwhile, there will also be “third-level” disputes more indirectly related to the sanctions, which might consist of corollaries of the sanctions arising in legal relations that involve neither the sanctioning State or organization nor the targets of those sanctions, but instead unrelated parties who relied on products, assets or services affected by the sanctions to discharge their obligations under contracts with other unrelated parties. Here, again, the most likely causes of action will be contractual in nature, and the debate will probably involve discussions resounding on theories of “act of God”, force majeure or hardship, and their respective consequences.
Third-level disputes can be the most challenging to resolve because they often involve smaller amounts of money and small to medium-sized businesses that lack the financial wherewithal to litigate the matter.
For example, if sanctions prohibit Shell, a seasoned oil company, from receiving payments from PDVSA, it is unlikely that Shell’s subcontractors will have contractual recourse against Shell, and if they do, they may feel constrained by a lack of desire to sue a major client or the practical challenges of bringing the claim. Recent reporting indicates that Chevron received a limited license to, in part, pay third-party invoices and salaries in spite of the sanctions imposed against Venezuela, where those invoices and salaries had accrued. It is difficult to know the underlying claims that may exist, but this could have likely gone to pay awards or judgments, especially those where Chevron may have wanted to avoid any collection efforts.
ABOUT THE AUTHORS
Diego Brian Gosis is a Partner at GST LLP and has participated as counsel, conciliator, sole arbitrator or chair in more than 100 high value and high stakes disputes. He has represented sovereigns and private parties in international arbitration and annulment proceedings in the Americas, Europe, Africa and Asia. He has extensive transactional experience, including mergers and acquisitions, technology, real estate, arranging and counseling participants at public and private tenders, arranging estate and tax planning structures and advising clients on matters of commercial, administrative and international law.
Quinn Smith is a Managing Partner at GST LLP and has appeared as counsel and arbitrator before more than 45 arbitral tribunals and ad-hoc committees under the rules of the ICC, ICDR, ICSID, UNCITRAL and others. He has advised clients in Asia, Europe, South and Central America, Africa and the United States. Smith maintains an active practice in state and federal courts in the United States as lead counsel in cases from New York to California. He was lead counsel in the first cases staying the enforcement of ICSID awards, despite ad-hoc committees having permitted enforcement.
Ignacio Torterola is a Partner at GST LLP and has served as lead counsel, sole arbitrator, chairman and tribunal member in more than 70 high stakes international arbitrations. Torterola has extensive experience in complex international law matters under the rules of arbitration of the ICC, ICSID, ICSID’s Additional Facility and UNCITRAL. His practice focuses on international litigation and commercial and investment arbitration specializing in water and sanitation, oil and gas, manufacturing, infrastructure, banking and financial services contracts and industry disputes.
Find more data-backed insights in our 2023 Energy Arbitration Report
