Introduction

Sanctions regimes present significant risks for parties engaged in cross-border contracting and arbitration. This practice note outlines the principal issues that sanctions raise in arbitral proceedings and award enforcement, offering practical observations and drafting considerations aimed at reducing uncertainty and managing exposure in international contracts.

Arbitration and Sanctions: Key Challenges

1. Handling Disputes in Arbitral Tribunals

• Impact of sanctions on performance:
  • Sanctions may render contractual obligations illegal or impossible (e.g., prohibiting payments, delivery of goods, or use of financial systems).
  • Tribunals often assess whether sanctions constitute force majeure or frustration of purpose, depending on the governing law.
  • Some tribunals adopt a pragmatic approach, distinguishing between sanctions that make performance illegal versus those that merely make it more difficult or costly.
  • Parties may argue that sanctions are external, unforeseeable events beyond their control, but tribunals scrutinize whether the affected party took reasonable steps to mitigate.
• Neutrality and legitimacy concerns:
  • Tribunals must balance contractual rights with compliance obligations under international public policy.
  • Arbitrators may face challenges if one party is a sanctioned entity, raising questions about impartiality and enforceability.

2. Limits on Enforcement of Awards

• Recognition and enforcement hurdles:
  • Courts in jurisdictions with active sanctions regimes may refuse enforcement if compliance would breach domestic or international sanctions laws.
  • Even if an award is valid under the New York Convention, enforcement can be blocked on public policy grounds.
  • Banks and financial institutions may decline to process payments linked to sanctioned entities, effectively undermining enforcement.
  • Awards involving sanctioned parties may be unenforceable in the EU, US, UK, and other jurisdictions with strict sanctions regimes.
• Fragmentation risk:
  • Enforcement may succeed in neutral jurisdictions but fail in sanctioning states, creating uneven outcomes.
  • This undermines the predictability and uniformity that arbitration is meant to provide.

3. Drafting Arbitration Clauses Mindful of Sanctions

• Choice of seat and institution:
  • Select arbitral seats and institutions in jurisdictions less likely to be affected by sanctions (e.g., Switzerland, Singapore).
  • Avoid seats in countries with aggressive sanctions policies if counterparties may be exposed.
• Flexibility in governing law:
  • Consider laws that recognize sanctions as force majeure or allow adaptation of contracts.
  • Include clauses permitting renegotiation or suspension if sanctions materially affect performance.
• Payment and enforcement safeguards:
  • Provide for alternative payment mechanisms (escrow accounts, non-sanctioned currencies, or third-party intermediaries).
  • Anticipate enforcement risks by drafting clauses that allow awards to be satisfied in jurisdictions not bound by sanctions.
• Sanctions compliance clauses:
  • Explicitly state that parties must comply with applicable sanctions regimes.
  • Include carve-outs or termination rights if sanctions make performance illegal.
  • Provide for arbitration rules that allow tribunals to adapt or suspend obligations in light of sanctions.

Practical Takeaways

• Tribunals generally strive to uphold contracts but cannot override mandatory sanctions laws.
• Enforcement remains the most vulnerable stage, as courts and financial systems act as gatekeepers.
• Careful drafting of arbitration clauses—anticipating sanctions risks, choosing neutral seats, and embedding compliance safeguards—can mitigate exposure.

Disclaimer: This practice note is for informational purposes only and does not constitute legal advice. Users should consult qualified legal professionals for advice tailored to their specific circumstances.