The Impact of Sanctions on International Arbitrations

One of the most important issues facing the parties (or potential parties) to an international arbitration is whether an award will ultimately be enforceable against opposing parties and their assets. The Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “Convention”), usually provides the most direct means to enforce an award. And, as a general rule, the Convention’s application makes enforcement of International Arbitral awards a more straight forward process than judgments from foreign courts. But, parties must remain aware of and consider the limited defenses or obstacles to enforcement that still exist under the Convention, including where enforcement of an award would be contrary to public policy. This “public policy exception” is particularly relevant when issues of international sanctions are involved.

Russian Court Ruling Impact on International Arbitrations

After the Russian invasion of Ukraine, dozens of countries, including the United States, introduced or greatly expanded sanctions against Russia, the Russian President Vladimir Putin as well as high-powered Russian government officials and other influential Russian interests. These sanctions have been extensive, going so far as to prevent Russian banks from using the SWIFT international payment system.

The Russian government responded to these sanctions, in part with the introduction of Federal Law No. 171-FZ, which provides Russian parties to an international arbitration (who are also the subject of Russian sanctions) the opportunity to apply to a Russian court for an injunction prohibiting foreign claimants from continuing the arbitration and receiving an award. The Russian court can also award the sanctioned individual a sum of money that equals the sum of the international award against the sanctioned person thereby eliminating the award against the sanctioned person.

The Russian Supreme Court recently confirmed a broad interpretation of this law in JSC Uraltransmash v. PESA (Case No. А60-36897/2020). The Russian company, Ural Transport Machinery Construction Company contracted with a Polish company, Pojazdy Szynowe PESA Bydgoszcz Spolka Akcyjna, for tramcars. PESA initiated an arbitration action in the Arbitration Institute of the Stockholm Chamber of Commerce in accordance with a valid arbitration clause within the parties’ commercial contract. However, Uraltransmash applied to an arbitration court in Russia for an injunction citing EU and US sanctions as reasons for discontinuing the arbitration. The Russian Supreme Court declared that the law will cover all sanctioned parties and that an injunction may issue even without evidence of any denial of due process or that the sanctions provided an obstacle to justice. All that is required is that the sanctioned party submit the dispute to the Russian court’s jurisdiction. Notably, the decision by the Russian Supreme Court does not apply to agreements that provide for arbitration of disputes via Russian arbitration institutions.

Ruling by the International Chamber of the Paris Court of Appeal

In early 2020, the International Chamber of the Paris Court of Appeals issued an important ruling addressing the impact of international economic sanctions on countries and the validity of an arbitral award in the case, Sofregaz v. NGSC (CA Paris).

The French company, Sofregaz, contracted with Natural Gas Storage Company (NGSC), an Iranian gas company, to convert an Iranian gas field into storage; Iranian law governed the contract and contained an arbitration clause governed by the International Court of Arbitration Rules. During the course of the project, Sofregaz was denied an extension on bank guarantees that were necessary to continue the project due to a variety of international sanctions against Iran. NGSC terminated the contract alleging that Sofregaz purposefully breached by delaying the completion of the project. After terminating the contract, NGSC requested that the bank guarantees be paid; Sofregatz disagreed and successfully obtained an order via lower courts in France that prohibited the bank to make payments under the guarantees. The Paris Court of Appeal overturned the order.

In response, Sofregaz commenced arbitration proceedings in 2014 against NGSC for wrongful termination of the contract. The arbitration tribunal rejected Sofregaz’s claims for wrongful termination and ordered Sofregaz pay a variety of sums plus seventy percent of the costs of the arbitration. Sofregatz then filed an application in the Court of Appeal to set aside the award on three points: first, the tribunal did not comply with its mandate, second, a due process violation, and lastly, that an enforcement of the award would be against international public policy because of international sanctions against Iran. The Court of Appeals ruled there was no violation as to the French notion of international public policy because France did not consider U.S. sanctions as within the scope of French international public policy. There was also no violation as to the United Nations and European Union sanctions as the contract did not fall under the scope of these sanctions. The French Court of Cassation agreed with the Paris Court of Appeals and declared that in order for there to be a violation of international public policy, it must be not only effective and concrete, but within the temporal and material scope of sanctions.

Libyan Sanctions Regulations in the European Union

In late 2022, the French Court of Cassation ruled that sanction law in the European Union prevents creditors from attempting to attach frozen assets basing its decision on a preliminary ruling issued by the Court of Justice of the European Union.

The Libyan Sanctions Regulation is a set of rules put into place by the European Union in order to restrict certain activities involving Libya and individuals/entities involved in the Libyan Crisis. The Regulation restricts the exports and imports of certain goods, to and from Libya, including weapons and equipment that could be used in order to further violence and instability in the region. The Regulation applies to all individuals and companies operating in the European Union regardless of nationality or location – a violation of the regulations can lead to penalties and possible criminal sanctions.

The arbitration dispute between the Libyan Investment Authority (LIA) and its Creditors, began due to an agreement to develop a now defunct tourism project in Libya’s capital, Tripoli. Creditors initiated an arbitration action against the LIA to recover on lost profits. The arbitration panel ordered Libya to pay its Creditors about $937 million USD in order to cover for lost profits on the project. Because the LIA is a designated entity under the EU’s Libyan Sanctions Regulation, its assets are frozen. The Creditors attempted to attach assets of the LIA that were held in French banks, however, the LIA challenged said attachments via the French court system in two different cases. The Paris and Versailles Courts of Appeals issued conflicting judgments, with one court allowing attachment and the other disallowing the attachment. The Creditors and the LIA both challenged the judgments and appealed to the French Court of Cassation.

The issue before the Court of Cassation was that the Creditors were prevented from attaching the LIA’s assets due to the asset freeze stemming from the Libyan Sanctions Regulation, which rendered the arbitration award unpayable. The Court of Cassation stayed its proceedings until the Court of Justice of the European Union (CJEU) issued a preliminary ruling in a factually similar case but pertaining to the EU’s Iran Sanctions Regulations. The CJEU held that under the Iran Sanctions Regulations, an asset freeze would prevent any sort of collection action against an entity recognized under the sanctions, unless previously authorized by a national competent authority. The Court of Cassation then issued a ruling mirroring the CJEU ruling (further supported by the French Supreme Court) – stating that the LIA’s assets could not be attached in this instance due to the Libyan Sanctions Regulations. The French Supreme Court found that the Libyan Sanction Regulations, which prevent threatening the stability and security of the Libyan state, were an objective of utmost importance and therefore attachment at this time, was impossible.

However, this does not mean that creditors do not have recourse against Libyan entities under European Union sanctions law. In order for creditors to receive payments or attach to assets subject to a freeze, creditors must first request authorization from a national competent authority before beginning any sort of collection action. Once such authorization is provided, the creditors will be able to pursue payments even under an asset freeze.

It is essential for foreign companies to not only look at the current relations between countries but also past, in order to determine if a potential arbitration clause and the seat of the arbitration could quickly become unfair to either party.

© 2009- Duane Morris LLP. Duane Morris is a registered service mark of Duane Morris LLP.

The opinions expressed on this blog are those of the author and are not to be construed as legal advice.

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