Author: Prerona Banerjee*
Sanctions are penalties imposed on governments or private persons to chastise a certain act or policy perpetuated or condoned by them. Such sanctions take the form of asset seizures, travel bans, and export restrictions and are designed to impact the financial landscape. While sanctions as such are nothing novel, the recent sanctions imposed on Russia by the United States and European Nations are noteworthy. For one, these sanctions have been called the “most comprehensive and coordinated action” taken against a major world power since the Second World War. For another, Russia’s pre-eminent role as a major international supplier of mineral, energy resources, and other commodities means that the tremors of the sanctions against it have had a far-reaching impact. For example, construction, manufacturing, and supply chains have been adversely affected. The breakdown of the economic machinery has exposed several businesses to risks and has affected their ability to fulfill commercial obligations. The aftermath of such a breakdown has resulted in several affected parties invoking arbitration clauses. Given this background, this post aims to explore how sanctions have incapacitated the arbitration apparatus by impacting the initiation of arbitral claims and the enforceability of awards rendered by tribunals.
Have Sanctions Impacted the Initiation of Arbitral Claims?
- The Obstacles and How Russian Courts Deal with Them
An arbitral agreement is afforded due sanctity under the principles of contract law. To honor the parties’ contractual bargains, all disputes covered by the arbitral agreement must be referred to a tribunal for adjudication. However, the landscape changed significantly for parties involving Russian entities and businesses with the new Amendment to the Russian Commercial Procedure Code (“Amendment”), which took effect on June 19, 2020. The Amendment aimed at establishing exclusive jurisdiction of the Russian Courts with respect to any disputes arising out of contractual relationships with Russian entities and foreign entities subjected to the sanctions (“sanctioned party/parties”), unless there is no dispute resolution clause to the contrary. If a dispute resolution clause exists, the Amendment allows parties to plead that the dispute resolution clause is unenforceable since there are obstacles to access to justice because of sanctions. Additionally, in cases where arbitration had already commenced between the parties, the sanctioned party could file for an anti-arbitration injunction preventing such arbitration from continuing. The Amendment did not specify any qualifiers as to what constitutes said “obstacles,” leaving them open to a multitude of interpretations. The open-endedness of the Amendment appears to unilaterally deprive foreign entities of pursuing their claims through arbitration and takes away a contractually vested right without setting any standards or qualification for accessing such exemption under the law. The Amendment also impairs the fundamental power of the tribunal to rule on its own jurisdiction and likewise, on issues like arbitrability of the matter, even though such a power should not be taken away simply because there is a sanction.
Matters related to the term, “obstacles,” were first adjudicated in Russian courts in the case of JSC Tsargrad Media v. Google (Case No. А40-155367/2020), where the Petitioner submitted that commencing arbitration against Google would not be viable given the travel ban imposed on the beneficial owner of the Petitioner, Mr. Malofeev. The Petitioner argued that such restriction would effectively impair their ability to engage a lawyer or participate in the proceedings. The Moscow City Arbitration Court ruled in the Petitioner’s favor despite the obstacles cited by the Petitioner appearing quite possible to overcome. For example, the United States Office of Foreign Assets Control (“OFAC”) and the United Kingdom Office of Financial Sanctions Implementation (“OFSI”) have issued licenses to lawyers and law firms for representing sanctioned parties. Furthermore, the travel ban imposed on Mr. Malofeev would not stop the Petitioner Company’s other key managerial persons from traveling to the proceedings. The Court’s refusal to reject the Petitioner’s fears as merely theoretical seems overhasty and precipitous considering that, and it had not taken any actual steps to institute the arbitral proceedings.
In another Russian case, JSC Uraltransmash v. PESA (Case No. А60-62910/2018), the Petitioner requested an anti-arbitration injunction against an ongoing arbitration before the Arbitration Institute of the Stockholm Chamber of Commerce. To buttress their claims, the Petitioner argued that the sanctions prevented them from making payments for the arbitration, engaging lawyers, making filings on time, or attending hearings. However, the Arbitration Court for the Sverdlovsk Region noted that the Petitioners had failed to prove any direct link of the sanctions to their ability to continue with the arbitration. The Court went on to hold that the introduction of sanctions alone would not be sufficient to warrant an anti-arbitration injunction; instead, it had to be directly linked to their inability to access justice.
The above-mentioned two cases provide us with divergent standards and fail to clarify Russia’s stand on sanction-affected arbitrations. While the former tips the scale heavily in favor of Russian courts, the latter puts the petitioner to strict proof for Russian courts to exercise their jurisdiction. The conflicting position was finally settled by the Supreme Court of the Russian Federation in the appeal judgment for JSC Uraltransmash v. PESA (Case No. А60-36897/2020), in which it was held that the burden to prove that an arbitration clause was unenforceable does not fall on the sanctioned entities and the mere fact that such sanctions were in place would be enough for Russian courts to exercise jurisdiction. While adopting such an expansive interpretation, the Court ignored amicus curiae submissions from the Vienna International Arbitration Centre (“VIAC”) and the Russian Arbitration Association (“RAA”), both of which advocated for a more restrictive interpretation of the Amendment.
- Overcoming The Obstacles
An expansive interpretation of the Amendment allows the sanctioned parties to selectively enforce the contractually agreed terms. Instead of stripping tribunals of their jurisdiction, the anticipated “obstacles” may be addressed in the following manner:
- Engaging lawyers for a foreign arbitration: There is no bar on a sanctioned party from engaging lawyers in the United States or the United Kingdom. As noted above, a law firm or a legal professional must obtain a license from the OFAC and OFSI in order to represent such a party. Such licenses are now regularly issued, free of cost, and valid for one year. For European Union, Article 6 of the European Convention for the Protection of Human Rights and Fundamental Freedoms guarantees the right to counsel, and Article 47 of the Charter of Fundamental Rights of the European Union guarantees the right to have one’s rights and obligations determined by a fair and neutral body. While European Union’s Council Regulation (EU) No. 269/2014 does prohibit a “transaction” directly or indirectly with sanctioned parties, it does not explicitly curb the right of sanctioned parties to engage lawyers. In fact, VIAC is of the opinion that since legal services are not a transaction, the arbitral institutes and legal professionals fall outside the ambit of the said regulation. A noteworthy novelty in this regard is the judgment of the Eastern Caribbean Supreme Court in the case of JSC VTB Banks v. Taruta & Anr, wherein the lawyers of the sanctioned party applied to the Court to come off the record due to its concerns of being associated with the sanctioned party. The Court rejected the application, noting that “[t]here is nothing in the sanctions legislation to support [. . .] the denial of a right to participate in litigation [. . .] precisely when VTB are stigmatised . . . [they] need the best endeavours of their legal representatives.”
- Restrictions on travel: A corollary of sanctions is a travel embargo restricting lawyers and litigants from traveling for hearings. Yet, opting for arbitration would be more constructive than submitting to the Russian courts, because arbitration allows the parties to conduct the entire proceeding Additionally, notwithstanding the seat of arbitration, the parties can always pick a neutral venue in countries to which none of the parties have difficulty traveling. If sanctioned parties are skeptical of Western institutes (or vice versa), arbitration hubs of the East that have not imposed sanctions against Russia—such as Singapore, Hong Kong, Malaysia, and India—can act as convenient neutral venues. Institutions such as the Singapore International Arbitration Centre (“SIAC”) and the Mumbai Centre of International Arbitration offer the means and the apparatus to conduct successful high-stake international arbitrations and have multilingual secretariats with experience in common and civil law.
- Impartial and independent proceedings: The RAA conducted a survey, in which over 50% of the participants believed that the political climate surrounding Russia “changed the attitude of European arbitrators to Russian companies.” However, such apprehensions could be unfounded to a certain extent, given that international arbitrators are held to high standards and have a duty to disclose any information that may give rise to justifiable doubts apropos their ability to render an impartial decision. With that said, it would be vacuous to suggest that arbitrators come from a utopian land and have no opinion over geopolitics. Nevertheless, their personal views are only relevant if they can possibly hinder the proper conduct of the arbitration. Merely because such arbitrators reside or hold citizenship in states that have imposed sanctions, a shadow should not be cast upon their ability to arbitrate over simple contractual disputes. The success of the process is owed to the faith reposed upon the arbitrators and their ability to transcend political differences.
- Support from arbitral institutions: To address the aforementioned concerns, the London Court of International Arbitration published a notice stating that while it “recognises and supports the use of sanctions as a legitimate tool,” it is taking steps to “perform its obligations in relation to binding arbitration clauses.” Similarly, the Hong Kong International Arbitration Centre (“HKIAC”) published a policy for arbitrations affected by the sanction regime. Institutions such as the International Chamber of Commerce and the VIAC are carrying out “sanction checks” to ensure that the parties to an arbitration are able to make payments to the arbitrators and the institutions involved. Notably, the SIAC and HKIAC are in the process of gathering Russian-speaking staff and arbitrators to make themselves more approachable. This shows that institutions across the world are committed to the integrity of the process.
In view of the above, it may be deduced that sanctions do not prevent any party from accessing justice. However, it might complicate the process. The complications vis-à-vis international arbitration stem from procedural and administrative obstacles that can be overcome through compliance and due diligence.
The Impact of Sanctions During Enforcement
- Can Foreign Parties Enforce an Arbitral Claim in Russia?
Russia has been a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards since 1960, which is relied upon for enforcing a foreign award. Under said Convention, a two-fold challenge can be initiated by the sanctioned party under Article V (1) (B) and Article V (2) (b).
- Inability To Present Case
As per Article V (1) (B), enforcement may be refused if it is proven that the award debtor was “unable to present his case.” Thus, a sanctioned party may claim that their right to present their case effectively before the tribunal was affected adversely by a sanction. Difficulty in hiring counsel, hassles of traveling for hearings or preparing witness statements, sanctions over possible witnesses or biased tribunals could be possible grounds for withholding the execution of an arbitral award. It would then be the prerogative of the executing court to determine the extent to which sanctions affected the outcome of the proceeding without delving into the merits of the award.
- Breach Of Public Policy
By the same token, Article V (2) (b) empowers the national courts of a country to refuse recognition or enforcement if the same “would be contrary to its public policy.” Predominantly, courts across the globe limit such public policy objections to an arbitral award. For example, courts in India restricted such ground from being taken unless the award “shocks the conscience of the Court,” was “induced or affected by fraud and corruption,” or conflicts with the “most basic notions of morality and justice.” Although it is difficult to gauge a uniform public policy that is customized to fit each state’s needs, empirical research available on the Kluwer Arbitration Website shows that the most commonly upheld public policy violations are i) national sovereignty violation, ii) awards tainted by fraud, corruption or duress, iii) disproportionate penalties or extremely high damages, and iv) impartial tribunal or the exclusion of one arbitrator’s deliberations.
However, due to its undefined nature, the “public policy” restraint has become the most lucrative and defendable objection an award-debtor can raise, especially under the garb of international sanctions. It is upon the adjudicating court to draw a line between foreign policy and public policy since the violation of the former would not equate to the breach of the basic notions of morality and justice. International sanctions are temporary and volatile in nature and keep fluctuating depending on a country’s political inclinations. As such, they cannot become a part of a country’s public policy, which should remain static and preserve certain fundamental values. Holding arbitral awards up to such ever-changing policies will undermine arbitration’s reputation as a final and binding dispute resolution mechanism. Courts are required to be more proactive and hold the arbitral award only against standards of best practices in international law. Relatedly, the Ukrainian Supreme Court upheld the order of the Kyiv Appellate Court, wherein it had held that “the mere fact that the claimant is put on the [sanctions] list [. . .] does not mean that the enforcement of the ICAC award [. . .] will violate Ukrainian public order, as the award concerns only private relations between the commercial entities in relation to the performance of a contract they have entered into.”
- Can an Award Be Enforced if a Russian Court Has Passed an Anti-Arbitration Injunction?
The question of whether it is possible to enforce an award against if a Russian Court has passed an anti-arbitration injunction against the arbitration in which the award has been rendered will remain purely academic. While such an injunction would only be of persuasive value before a tribunal seated outside Russia, the procurement of the same by the award-debtor may also endanger the enforcement process since it clearly evidences the award debtor’s inability to present their case successfully before the tribunal and such an award is liable to rejected as discussed herein. Furthermore, Russian courts have the power to order the party in breach of the anti-injunction to pay the sanctioned party an amount that could be the total sum in dispute and legal costs, defeating the economic sensibilities of enforcing such an award.
A party’s choice of dispute resolution mechanism should be guided by business and strategic considerations alone—not by politics, speculations, or fears of bias. While the Amendment could affect the outcome of the arbitration if the award arising from the same need to be enforced in Russia, the challenge posed by it on the arbitral regime can be overcome with the help of the existing frameworks.
At the end of the day, one must remember that arbitration’s success stems from the fact that it allows parties in violent conflict to work towards a binding outcome. It is the mutual convenience of parties and the malleability of procedure which is at the very heart of the arbitral process. It is this feature that makes arbitration the foremost choice to pursue economic ties amidst inter-state conflicts.
* Prerona Banerjee holds a law degree from National Law University Odisha and is currently working at Khaitan & Co.’s Dispute Resolution Team. Prerona’s work primarily involves commercial litigation and domestic arbitrations. She regularly represents her clients before courts and specialised tribunals. In 2021, she attended the Summer Course on International Commercial Arbitration under the aegis of the Arbitration Academy at Paris.