Author: Binsy Susan*, Sambhav Sharma*
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Introduction
In today’s geopolitically charged global economy, imposition of tariffs and sanctions by countries is not uncommon. While the purposes may vary, including promotion of domestic economic interests, demonstration of soft power, as well as economic warfare, we are witnessing a rise in the frequency and gravity of these State actions.
Normally, a tariff announcement is like bad weather, sporadic and short-lived. However, today’s geopolitical ‘climate’ is far worse. Large world powers are routinely weaponizing tariffs and sanctions under the garb of ‘national security’, causing tension between sovereign nations. They arrive with little warning, and by the time their legality is tested in court, the commercial damage is often irreversible.
The economic and political impact of tariffs and sanctions has been widely discussed. But not whether such constant shifts in the geopolitical landscape have a long-lasting impact on international trade, commerce and dispute resolution. For businesses, the volatility attached to erratic imposition of tariffs and sanctions destabilises long-term bargains. For dispute resolution systems, it raises a deeper concern: what happens when geopolitics becomes an implied party to a commercial contract?
In arbitrations across jurisdictions, one hears variations of the same story. The contract was viable when signed. The parties performed diligently. Then a trade measure intervened, and the numbers stopped adding up. The dispute is no longer about breach in the ‘traditional’ sense. It is about whether the law will acknowledge that the goalpost has shifted, clarify parameters apply to the decision on who bears the burden, and what mechanisms should apply to deal with the changed circumstances.
The Political Subtext
The recent resurgence of unilateral trade measures, particularly by the United States, has transformed tariffs from regulatory tools into strategic political instruments. Behind every tariff or sanctions notification lies a political calculation that rarely appears in pleadings or awards, but is acutely felt by those who must live with the consequences. Trade law, in this moment, is less about regulation and more about leverage.
A month before the White House announced the ‘Interim Agreement’ with India in February 2026, the United States Congress affirmed what has been called the ‘Sanctioning Russia Act of 2025’, a bill that would authorise upto 500% tariffs on countries that continue to import Russian petroleum products. The aim, its sponsors said, is to penalise nations whose energy purchases indirectly finance Russia’s ‘war’ with Ukraine.
Large economies can absorb the collateral damage of trade measures easier than smaller or export dependent ones. For many Indian businesses, tariffs imposed by foreign governments are existential threats, with potential to destabilise entire industries. As a major buyer of discounted Russian crude, the political signal is stark for India.
Such tariffs and sanctions, capable of upending commercial contracts and placing private parties in the crosswinds of strategic statecraft, is the core point of this article. Indian exporters operating in sectors such as steel, textiles, chemicals, pharmaceuticals and automotive components are often caught mid-performance when tariffs are imposed without notice. Prices that were commercially viable at the time of contracting become uneconomic, margins evaporate, and the underlying bargain is strained. This volatility is compounded by legal uncertainty on which party bears the cost escalation burden.
From the perspective of international commercial arbitration, this volatility has become a structural feature, creating a paradox. Arbitration is asked to remain neutral in a world that is increasingly non-neutral; expected to deliver certainty while operating within an environment of deliberate uncertainty; and avoid political judgment while managing the commercial fallout of political decisions.
How can contracts be insulated against these shocks? This article analyses how Indian law treats arguments based on change-in-law, force majeure and frustration, how geopolitics is reshaping arbitrator appointment and party autonomy, and how arbitration as a system can adapt to preserve its legitimacy.
Insulating Contracts Against Tariff Volatility
The first line of defence is contract design. Historically, most cross-border contracts were entered into on the assumption that regulatory regimes are not prone to erratic shifts and therefore, a commercial bargain will remain unaffected by governmental disagreements. The maximum volatility that parties anticipated was change in domestic law and instances of force-majeure, which could be addressed by well-known principles. That assumption no longer holds. Contracts now need to be drafted assuming that tariffs and sanctions may change materially during the life of a long-term agreement, and established principles of change-in-law and force majeure fall short of being the perfect solutions.
Practically, this requires express allocation of risk in contracts rather than leaving it to chance:
First, tariff adjustment or pass-through-clauses can specify which party bears the burden of increased duties, and may provide formulae for price recalibration for threshold changes. In sectors where margins are narrow and supply chains are global, these can avoid disputes about who should absorb the financial shock.
Second, Change-in-law clauses must be drafted with particular care. Under Indian law, these are interpreted strictly. The Indian Supreme Court has held that a change-in-law clause would cover only domestic law changes and would not extend to change in foreign laws affecting contractual performance. [1] For Indian parties, this means that foreign tariffs, sanctions or export controls will be irrelevant to a change-in-law clause under an Indian-law governed contract, unless otherwise agreed. If parties wish to treat foreign measures as legally relevant change-in-law events, they must be expressly included within the clause.
Third, parties may incorporate hardship clauses with structured renegotiation mechanisms. Internationally, the UNIDROIT Principles recognise the doctrine of hardship where events fundamentally alter the economic equilibrium of the contract and render performance excessively onerous.[2] In case of hardship, the disadvantaged party is entitled to request renegotiation of the terms of the agreement, albeit without withholding performance of the contractual obligations. If renegotiations fail, the disadvantaged party may resort to the contractual dispute resolution mechanism.[3]
Fourth, contracts must expressly account for force majeure events resulting from imposition of tariffs. Many tariff related disputes may ultimately turn on whether a party can be excused from performance. Two provisions of the Indian Contract Act, 1872 (Contract Act) are central.
The Indian Supreme Court has held that when parties have contractually allocated the risk of supervening events, the case must be decided under Section 32 of the Contract Act and not under Section 56.[4] Ordinarily, commercial hardship or impact on profitability itself cannot constitute a force majeure event. While addressing a change in Indian policy for import of jute from Pakistan, the Indian Supreme Court held that a contract cannot be deemed frustrated merely because the circumstances in which it was made are altered.[5] Indian courts do not have a general power to absolve a party from performance of the contract because its performance has become onerous.[6]
Where a contract expressly provides for contingencies that may trigger force majeure, such provisions are construed strictly and exhaustively. It is impermissible for courts to import a different provision than what is expressly stipulated in the contract. This is based on the principle that where there is an express term, the court cannot find, on construction of the contract, an inconsistent implied term.[7] As such, contracts must explicitly provide for frustration events arising out of change in tariffs and international trade policies.
When there is no force majeure clause, Section 56 of the Contract Act applies.[8] The Indian Supreme Court has held that impossibility or frustration of contract is not limited to ‘literal impossibility’.[9] If contractual performance becomes ‘impracticable and useless’ when tested against its object and purpose, totally upsetting the very foundation upon which the parties rested their bargain, a contract is rendered impossible to perform.[10] However, mere imposition of tariffs leading to financial hardships and reduced profitability, without proving erosion of the contractual foundation its original object, may not attract Section 56.
This judicial restraint shifts responsibility back to contract design. Parties failing to allocate tariff-risk explicitly do so at their own peril. Increasingly, sophisticated contracts read less like expressions of trust and more as manuals for turbulence.
In arbitrations, when tariffs or sanctions change, tribunals expect detailed, dated and quantified evidence. Under Indian law, this evidence is critical to show causal link and material impact, and not simply commercial inconvenience. Indian courts interpret force majeure clauses narrowly and parties are generally required to adhere to contractual terms. [11] Non-performance of a contract is excused only in exceptional situations. [12] Therefore, the party invoking force majeure must show a direct link between the supervening event and its inability to perform. The affected party must document the date of change, financial impact, mitigation steps and full communication trail to effectively invoke force majeure.
Read together, these authorities indicate that tariff measures will rarely qualify as force majeure or frustration under Indian law unless expressly incorporated in the contract, or if they render performance ‘impossible’. A foreign tariff that increases the landed cost of goods or reduces margins is unlikely to meet that threshold. Therefore, relief from tariff-related-hardship must be dealt with contractually, with reasonable foresight regarding how the burden will be borne.
Arbitration in a Politicised World
Tariffs and sanctions also affect the procedural architecture of arbitration. Neutrality and party autonomy, long regarded as arbitration’s twin-pillars, are increasingly constrained by geopolitical alignments. Sanctions regimes determine who may be sued, who may adjudicate, who may be paid, and which institutions can administer a dispute. This has direct implications on how parties select arbitrators, institutions and seats. More unsettling are decisions where enforcement of awards has been refused because the arbitrators belonged to states considered ‘politically unfriendly’.
Perceived neutrality of arbitrators
A striking illustration is the Russian Supreme Court’s decision in C. Thywissen v Novosibirskhleboproduct.[13] Here, dispute arose from a contract between a Russian Supplier and a German Buyer, for the supply of Russian-grown linseed. English laws governed the contract, with a London-seated arbitration before the Federation of Oil, Seeds and Fats Association. The arbitrators were nationals of Ukraine, Great Britain, and Denmark. The German Buyer received a favourable award and sought enforcement in Russia against the Russian Supplier.
The initial request for enforcement was granted by the first and second-instance Russian courts. However, the Russian Supreme Court overturned these decisions on public policy grounds, citing Article V(2)(b) of the New York Convention and Articles 234-244 of the Russian Arbitrazh Procedure Code.
The Supreme Court refused to enforce the award because the tribunal comprised arbitrators from so-called “unfriendly” states – countries that had imposed sanctions against Russia. The Court presumed bias based solely on the arbitrators’ nationality and observed “the absence of impartiality and objectivity in the consideration of this case by such a panel of judges is presumed, until there is evidence to the contrary”.
This approach starkly contradicts international standards of testing arbitrator impartiality, that apparent bias must be assessed by asking whether a fair minded and informed observer would conclude that there was a real possibility of bias.[14]
Sanctions also restrict party autonomy more directly. Arbitrators, counsel and institutions may be prohibited from acting for or being paid by sanctioned parties unless licences are obtained. The UK government is entitled to impose sanctions under the UK Autonomous Sanctions Regulation, which identifies Designated Persons as individuals or entities subjected to sanctions. On 22 October 2025, the UK Office of Financial Sanctions Implementation issued a General License[15] which carves out conditions for provision of legal services to Designated Persons, including legal advice and/or representation in court, whether provided within the UK or another jurisdiction. Payments to or from Designated Persons may require authorisation from the Office of Financial Sanctions Implementation.
Similarly, the US Office of Foreign Assets Control issues specific licenses to authorize transactions that otherwise would be prohibited under the domestic sanctions policies. These requirements can delay appointments of arbitrators or engagement of counsel, hearings and payments, and may dissuade some arbitrators or firms from accepting mandates.
Arbitral institutions’ response
Arbitral institutions have responded by building compliance into their rules and practice. The London Court of International Arbitration has published the ‘LCIA Guidance Note for Parties and Arbitrators’, which confers on it a right to refuse where compliance with sanctions would be compromised. It also acknowledges delays in arbitration proceedings due to LCIA’s bank’s internal policies and procedures relating to processing payments involving sanctioned entities.
Similarly, on 10 October 2025, The International Court of Arbitration issued the ‘Note to Parties and Arbitral Tribunals on ICC Compliance’ requiring robust due diligence before accepting cases involving sanctioned entities. It provides guidelines on bank transfers and how those may be impacted due to sanctions/ tariffs, including transfer of arbitrator fees. The result is a narrowing of the once expansive scope of party autonomy. The parties’ preferred arbitrator, institution or seat may in practice be unavailable or impractical because of sanctions-compliance-constraints.
In doing so, arbitral institutions are not merely enforcing compliance, but expressly acknowledging the disruptive impact of tariffs and sanctions on arbitral proceedings. By formally recognising these constraints and building them into institutional practice, institutions are attesting to the reality that geopolitical measures now shape the conduct of arbitration.
Public statements by arbitrators: New consideration for determining impartiality
Another emerging challenge is the increasing scrutiny of arbitrators’ public statements. Commentary on conflicts, humanitarian crises or sanctions, once viewed as part of routine academic engagement, may now be invoked to challenge arbitrator neutrality. For instance, the statement ‘Calling for the Creation of a Special Tribunal for the Crime of Aggression Against Ukraine’ or the ‘Declaration of the Institute of International Law on Aggression in Ukraine’, although framed in scholarly terms, have been signed by prominent arbitration practitioners and may be cited by parties who perceive such positions as indicative of bias in disputes involving sanctioned states.
This trend highlights a difficult tension between freedom of expression and the duty of neutrality. Arbitrators are not expected to be without personal convictions, but the credibility of the system requires measured restraint where public advocacy risks creating an appearance of partiality. The challenge lies in preserving a space for legitimate professional discourse while ensuring that arbitral independence remains beyond reasonable doubt.
India addresses impartiality through the Fifth and Seventh Schedules to the Arbitration and Conciliation Act 1996, which list circumstances that give rise to justifiable doubts or automatic ineligibility. These schedules focus on financial, professional and familial connections rather than public expression. The statutory framework does not yet address the new pressures exerted by international policy shifts. Therefore, one must now navigate both the statutory provisions and these evolving international tensions when considering arbitrator selection.
Practically, several measures can help address these challenges. Parties and counsel should undertake more rigorous due diligence when selecting arbitrators, extending their assessment to potential sanctions implications, connections with state-linked entities and publicly available statements that may assume relevance. Arbitrators, in turn, should adopt a broader approach to disclosure, including non-traditional factors that could reasonably raise doubts in the specific geopolitical context of the dispute. Institutions can support this process by issuing guidance that distinguishes general expressions of personal opinion from comments that bear directly on the subject matter.
Ultimately, the system requires a calibrated balance. Safeguarding both freedom of expression and the appearance of impartiality is crucial to maintaining confidence in the process.
How Can Arbitration Adapt
Arbitration cannot pretend that these pressures do not exist. Nor can it abandon the principles that give it legitimacy. This brings us to the final question: how should arbitration adapt?
From both an Indian and international perspective, arbitration remains indispensable. It offers neutrality in a world where domestic courts may be perceived as politically aligned, offers enforceability through the New York Convention, and permits the appointment of arbitrators with expertise.
At the same time, tariff-and-sanctions-related disputes expose some limitations of traditional arbitration. Many such disputes require rapid intervention to prevent supply chain collapse or cascading defaults. Emergency arbitrator mechanisms have helped, but their powers are sometimes limited and their availability can affect access to national courts.
Arbitration also tends to be structured around the issuance of a final award that resolves disputes at a fixed point in time. Tariff and sanctions measures, by contrast, can alter the economic balance of a contract repeatedly over its life. For such disputes, hybrid processes may be used to supplement the finality of arbitrations:
First, arbitral tribunals would benefit from explicit guidance on addressing disputes prompted by sovereign trade measures. These cases frequently require tribunals to assess the commercial consequences of tariffs, while carefully avoiding any inquiry into the legitimacy of the sovereign act itself. Arbitral institutions can play a constructive role by issuing rule-based guidance or constituting specialised panels for such matters. This would enable tribunals to maintain neutrality without allowing that neutrality to devolve into undue restraint.
Second, certain components of these disputes are more efficiently resolved through alternative mechanisms. Issues such as tariff computations or the application of cost-escalation formulas are often more expeditiously addressed through expert determination. Parties may agree to submit technical questions such as the impact of sanctions on pricing structures, profit margins, or cost-allocations to binding expert determination, thereby streamlining and narrowing the scope of arbitration to determination of legal rights and obligations of parties.
Third, where the impediment is fundamentally regulatory or political, arbitration alone cannot provide a complete remedy. If performance is obstructed because a licence has been suspended or a payment channel frozen due to sanctions or trade controls, a final and binding award on liability cannot, by itself, remove those external constraints. Resolution may require parallel engagement at the state-to-state or institutional level to address the sovereign measures that render performance difficult or impossible.
Fourth, mediation warrants far greater utilisation. Many disputes in the trade-sanctions environment arise not from sudden economic dislocation and not bad-faith. A contract may become commercially imbalanced due to tariff increases, the withdrawal of exemptions, or other shocks. Mediation offers a neutral forum for parties to recalibrate pricing, timelines, or risk-sharing mechanisms, and preserve viable commercial relationships before they deteriorate into adversarial proceedings.
While hybrid mechanisms can provide valuable interim solutions, arbitration ultimately remains indispensable. After the technical assessments are completed, the regulatory position clarified, and any commercial renegotiation exhausted, parties still require a neutral, authoritative, and enforceable forum to resolve the legal issues that persist. Arbitration fulfils this role. It adjudicates questions such as whether a tariff adjustment constitutes change-in-law, whether export-control restrictions amount to force majeure, and how contractual risk was originally intended to be allocated. No other dispute-resolution mechanism offers the same degree of cross-border enforceability or certainty.
Conclusion
The lesson that emerges is a practical one. The only meaningful protection to commercial parties lies in foresight, disciplined drafting, and an acceptance that some risks must be consciously allocated rather than optimistically ignored.
Arbitration must resist the temptation to retreat into formalism. Its credibility depends on an honest engagement with the commercial consequences of political decisions, even as it refrains from judging their legitimacy. Arbitration remains the best forum capable of keeping reason, restraint, and legality in the conversation. That is no small responsibility. But it is precisely the responsibility for which arbitration was created.
[1] Energy Watchdog v. CERC, (2017) 14 SCC 80; Jaipur Vidyut Vitaran Nigam Ltd. v. Adani Power Rajasthan Ltd., (2021) 18 SCC 478
[2] Article 6.2.2, UNIDROIT Principles of International Commercial Contracts 2016
[3] Article 6.2.3, UNIDROIT Principles of International Commercial Contracts 2016
[4] Energy Watchdog v. CERC, (2017) 14 SCC 80
[5] Naihati Jute Mills Ltd. v. Khyaliram Jagannath, 1967 SCC OnLine SC
[6] Alopi Parshad & Sons v. Union of India, (1960) 2 SCR 793
[7] Naihati Jute Mills Ltd. v. Khyaliram Jagannath, 1967 SCC OnLine SC 10
[8] Energy Watchdog v. CERC, (2017) 14 SCC 80
[9] Satyabrata Ghose v. Mugneeram Bangur & Co., (1953) 2 SCC 437
[10] Satyabrata Ghose v. Mugneeram Bangur & Co., (1953) 2 SCC 437
[11] Halliburton Offshore Services v. Vedanta Ltd., 2020 SCC OnLine Del 2068
[12] Halliburton Offshore Services v. Vedanta Ltd., 2020 SCC OnLine Del 2068
[13] C. Thywissen v. Novosibirskhleboproduct, Case No. A45-19015/2023, dated 26 July 2024
[14] Halliburton Co v. Chubb Bermuda Insurance Ltd, [2020] UKSC 48
[15] INT/2025/7323088, effective from 29 October 2025 to 28 April 2026
* Binsy Susan is a Senior Partner in the Arbitration and Dispute Resolution practice at Shardul Amarchand Mangaldas & Co., New Delhi, India. She is empaneled as an arbitrator with the American Arbitration Association – International Center for Dispute Resolution (AAA-ICDR) and is a director on the Board of the Nani Palkhivala Arbitration Centre, India. She has more than two decades of experience in institutional arbitrations under the rules of AAA, ICC, SIAC, LCIA and CAM-CCBC, as well as domestic ad hoc proceedings in India. She has acted for leading global corporations across sectors including technology, media, telecom, construction, infrastructure, oil & gas and aviation, in arbitrations seated in New York, London, Singapore, São Paulo, and India. She regularly advises on high-value disputes, including large-scale construction contracts, shareholder rights and M&A transactions, enforcement of arbitral awards across jurisdictions, and technology-related disputes. She holds a Master of Laws degree from New York University (NYU) Law School.
* Sambhav Sharma is an Associate in the Arbitration and Dispute Resolution practice at Shardul Amarchand Mangaldas & Co., New Delhi, India and a former Law Clerk-cum-Research Associate to Hon’ble Justice Sanjiv Khanna, 51st Chief Justice of India.