The Role of Blocking Regulations in International Arbitration: A Ground for Mandatory Rules?

Authors: Niyati Ahuja* and Naimeh Masumy**

In May 2018, the European Union amended its blocking regulations to counteract the extraterritorial reach of the recently re-imposed sanctions by the United States.[1] The blocking regulations were instituted to safeguard EU citizens from the far-reaching applications of the U.S sanctions regime.[2] However, the role of blocking regulations in the context of international arbitration is yet to be explore extensively. Owing to the paucity of cases where blocking regulations were applied in the realm of arbitration, a number of speculations regarding their nature and scope of application have arisen. Thus far, none of these speculations have sufficiently found basis and have remained elusive.

This post briefly analyzes the legal nature of blocking regulations in the context of international arbitration by examining blocking regulations in light of the available case laws.

AMBIVALENT NATURE OF MANDATORY RULES

The role of blocking regulations in international arbitration is not clearly defined/determined. However, there exists the need to recognize its role within the context of international arbitration, in particular when arbitrators are confronted with a dispute involving blocking regulations. Blocking regulations, like many analogous EU regulations, may hinge on underlying disputes irrespective of the law governing the contract due to its mandatory nature.  Blocking regulations has become an increasingly fundamental topic for consideration in international arbitration proceedings where arbitrators ought to decide whether these regulations may hinge on underlying disputes irrespective of the law governing the contract due to its mandatory nature.[3]

The answer to this question is not straightforward due to a number of factors. Mandatory rules do not have a uniform definition within the context of international arbitration.[4] Despite the cursory reference to the notion of mandatory rules in the 1980 ICC draft recommendation where it grants arbitrators discretion to apply a country’s relevant mandatory rules[5], the drafter fails to further conceptualize this notion. Similarly, UNCITRAL provides guidelines on how to apply mandatory rules although the test for identification and interpretation has not been elaborated upon.[6] As a result, there is a notable lack of sound theoretical framework for arbitrators to assess mandatory rules. In the absence of a readily identifiable formula, it remains unclear what weight different factors should be given to identify a designated regulation that amounts to being “mandatory”.

Whilst the precise method of assessment is yet to be determined, this post argues that different considerations regarding the applicability of mandatory rules should rely on the “essential” nature of arbitration. The underlying nature of arbitration as a consent-driven mechanism which is based upon party autonomy confirms that arbitrators are not primarily entrusted with the mission of defending public interests like judges may be. Thus, when arbitrators are confronted with foreign mandatory rules, which are designed to safeguard the essential political, economic or social interest of a particular state, they ought to take into account a balance of considerations that recognize the competing interests in this regard.[7] To determine the appropriateness of applying mandatory rules, the arbitrators first should give weight to party autonomy and the choice of law in contracts.   However, in doing so, it should not blindly follow the parties’ direction.  This is due to the pragmatic concern of enforceability. There exists a legitimate expectation that the tribunal take reasonable steps in rendering an enforceable award. This sentiment has been memorialized in Article 26 of the 1975 ICC Rules of arbitration.[8] In line with the aforementioned, Mayer has noted that ‘arbitrators should give effect to mandatory rules of law out of a sense of duty to the continuation and development of international arbitration as an institution’.[9]

However, the fear of enforceability of an arbitral award should not give complete control to the state so as to motivate them to enforce their parochial and unjustifiable state interests through these rules. Most importantly, state legal expansionism should not be encouraged as it may run the risk of inhibiting international commerce, trade and commercial order which arbitrators have a duty to safeguard.  Therefore, in seeking to evaluate the viability of mandatory rules, arbitrators enjoy a margin of appreciation by taking into account the will of the parties while giving weight to enforceability. Granting discretion to arbitrators seems intuitive in allowing different considerations to be carefully balanced against each other. However, without knowing what weight each consideration deserves, there is potential for such an approach to be applied inconsistently. This could be detrimental to the longevity of international arbitration as much of the success of international arbitration depends on its ability to provide consistent outcomes.

The application of a mandatory rule must not be solely justified by an arbitrator’s need to make enforceable awards, but ample consideration must be given to the limits imposed by the equally important general principles of transnational public policy standards. It is uniformly accepted that arbitrators must apply mandatory rules that reflect transnational public policy standards.[10] These standards represent values that are superior to those of a particular state and, even if not universal, are common to the various national legal systems. These standards uphold minimum standards of conduct and behavior which must be complied with in international commercial relations.  It has been contended that arbitrators ought to recognize and apply these standards because there is broad consensus regarding the viability of them in international community. As concluded by Derains, arbitrators as an international judge may have to apply Los de Polic.[11] Therefore, application of mandatory rules that embody “truly international public policy” will give some weight to the degree to which those standards are universally accepted.

In light of party autonomy being a principal benchmark, there has to be a nexus between the mandatory rules and the law chosen by the parties.[12] For instance, Gaillard and Savage opined that “virtually no cases where the arbitrators have relied on the application of a mandatory rule to justify a decision other than that would have resulted from the application of the law chosen by the parties”.[13] To this end the abovementioned nexus is also of a significant importance.

Based on the foregoing analysis, to justify applicability of a mandatory rule, arbitrators must first inquire into the purpose and nature of the rule, then establish how much the rule is universally recognized and finally identify the nexus between the rule and the underlying disputes.

Accordingly, the nature and importance of the mandatory rules constitute an important prong of assessing whether mandatory rules trump party autonomy. To this end, the “nature and purpose” along with “universal acceptance” test is to an extent based on courts’ approach towards mandatory rules issues. Thus, to consider how arbitrators should use and apply these tests, it is logical to look at the approach taken by national courts.

For this, the next section will look into the existing case law to assess how courts view and apply blocking regulations and whether, in their approach, blocking regulations may qualify as mandatory rules.

THE EXISTING PARADIGM AND THE INCONSISTENT CASE LAW

While the EU blocking regulations are not frequently tested in the context of international arbitration, recent cases involving blocking regulation-related disputes may provide some clarity on the interpretation and application of these measures.

It is evident that the existing case law relating to the interpretation and application of blocking regulations have not held a uniform outcome. An unpublished Italian case[14] holds that if a company faced a real risk of going insolvent due to the re-imposition of sanctions, the termination of the contract without notice would be permitted. In a German case, blocking regulations provided the ground for interim measures to be granted. Furthermore the court dismissed the claim of sanctions as it believed that the complications imposed by sanctions were not adequately explained and that the breaching party did not sufficiently demonstrate this reason for them.[15] In another German case, the court observed that that the risk of the threat of sanctions should have an immediate impact on the operation of entity.[16] In this case, the court held that whilst EU Blocking regulations prohibit people from complying with extraterritorial sanctions, that does not mean that they compel EU business to continue trading with Iranian entities. Similarly, a Dutch case opined that mere exposure to the risk of U.S sanctions is not a viable ground for terminating a contract. It also added that the position would be different if the contract became practically unfeasible because of the U.S sanctions.[17]

While the enforcement of blocking regulations is still in its embryonic state, the aforementioned cases demonstrate the significant discretion exercised by judges to adequately determine the scope of Blocking Regulations. In essence, the judges engage in a close examination of the effect of sanctions with extraterritorial reach and decide how detrimental their impact is by taking into account the commercial realities of the industry. The commercial impact of U.S. sanctions is carefully weighed against the purpose of establishment of blocking regulations. It may be argued that if the risk is onerous and commercially burdensome, the judges might disregard the provisions stipulated in the blocking regulations. Both Dutch and Italian courts have taken a strict textual stance as to the interpretation of EU blocking regulations whereas the German courts have taken a more practical approach.

These cases demonstrate that the EU blocking regulations do not oblige European entities to continue trade and business with sanctioned states. Their purpose is rather to ensure that EU business have the freedom to do so. Furthermore, the cases highlight that the scope of the application of EU Blocking Regulation is contingent on the facts and nature of a dispute and may result in inconsistent application. On the basis of these judgments, we can infer that Member States have adopted different interpretations and penalties for the violation of Blocking Regulations.

Therefore, it is apparent that European courts do not treat the provisions stipulated in the blocking regulations as mandatory but as standards that one is free to derogate from.

CONCLUDING REMARKS

The above analysis demonstrates how blocking regulations and their unique nature may cause this instrument to be applied inconsistently. The existing paradigm shows how adjudicators take into account different considerations while making a determination on sanction-related disputes and do not mechanically effectuate the provisions of blocking regulations. This may imply that an arbitrator may disregard blocking regulations while taking notice of the conducts that are complying with secondary sanctions and, in doing so, simultaneously analyze the surrounding circumstances in light of truly international public policy.

[1] Commission Delegated Regulation (EC) 2018/1100 of 6 June 2018, amending the Annex to Council Regulation (EC) No 2271/96 protecting against the effects of extraterritorial application of legislation adopted by a third country, and actions based thereon or resulting therefrom, annex, 2018 O.J. (L 199) 1, 1.

[2] Id.

[3] Andrew Barraclough & Jeff Waincymer, Mandatory Rules of Law in International Commercial Arbitration, 6 Melb. J. of Int. L. 205, 207 (2005).

[4] Commission Green Paper on the conversion of the Rome Convention of 1980 on the law applicable to contractual obligations into a Community instrument and its modernization, at 33-34, COM(2002) 654 final (Jan. 14, 2003).

[5] See GARY B. BORN, INTERNATIONAL COMMERCIAL ARBITRATION 2183 n. 365 (2d ed. 2009) (discussing the draft recommendations of a working group of the ICC Commission on Law and Commercial Practices).

[6] UNCITRAL, Notes on Organizing Arbitral Proceedings, para. 6 (2016), https://uncitral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/arb-notes-2016-e.pdf.

[7] UNIDROIT Principles of International Commercial Contracts, art. 1.4 (2016), https://www.unidroit.org/instruments/commercial-contracts/unidroit-principles-2016; David Oser, The UNIDROIT Principles of International Commercial Contracts: A Governing Law? 7, 10 (2008).

[8] ICC Rules of Conciliation and Arbitration, art. 26 (1975), https://www.international-arbitration-attorney.com/wp-content/uploads/1975-ICC-Rules-of-Arbitration-English.pdf.

[9] Pierre Mayer, Mandatory Rules of Law in International Arbitration, 2 Arb. Int. 274, 279 (1986).

[10] Barraclough & Waincymer, supra note 3, at 211, 215.

[11] Francesco Trezzini, The Challenge of Arbitral Awards for Breach of Public Policy According to Art. 190 para. 2 lit. e) of the Swiss Private International Law, in Three Essays on International Commercial Arbitration, para. 27 (citing Yves Derains, L’ordre public et le droit applicable au fond du litige dans l’arbitrage international, 1986 Rev. Arb. 43, 59).

[12] Stavros Brekoulakis, Arbitral Decision-Making: An Issue of Consistency and a Response to Bias, Kluwer Arb. Blog (June 12, 2008), http://arbitrationblog.kluwerarbitration.com/2018/06/12/arbitral-decision-making-issue-consistency-response-bias/?doing_wp_cron=1595471619.7527909278869628906250.

[13] Alexander K.A Greenawalt, Does International Arbitration Need a Mandatory Rules Method?, 18 Am. Rev. of Int. Arb. 103, 115 (2007) (quoting Fouchard Gaillard Goldman on International Arbitration 856-57 (Emmanuel Gaillard & John Savage eds., 1999)).

[14] Maya Lester QC, Italian Judgments on the EU Blocking Regulation, European Sanctions: Law, Practice and Guidance (Oct. 2, 2019), https://www.europeansanctions.com/2019/10/italian-judgments-on-the-eu-blocking-regulation/.

[15] Landegericht Hamburg [LG Hamburg] [Hamburg District Court] Nov. 28, 2018, 319 O 265/18, http://www.rechtsprechung-hamburg.de/jportal/portal/page/bsharprod.psml?showdoccase=1&doc.id=JURE180019279&st=ent.

[16] Landegericht Hamburg [LG Hamburg] [Hamburg District Court] Oct. 15, 2018, 318 O 330/18, http://www.rechtsprechung-hamburg.de/jportal/portal/page/bsharprod.psml?showdoccase=1&doc.id=JURE180018807&st=ent.

[17] Hof The Hague 25 juni 2019, zaak- / rolnummer: C/09/573240 / KG ZA 19-430 (PAM International N.V./Exact Software Nederland B.V.).

*Niyati Ahuja is an associate in Diamond McCarthy’s New York office. She represents international corporations in commercial and investor-state arbitration proceedings in a range of industries, including energy, oil and gas, and other commodities. Niyati received her Master of Laws from the University of California, Berkeley School of Law where she also graduated with a Certificate of Specialization in Business Law and a Distinction in Pro Bono Pledge. She received a Bachelor of Business Administration and Laws in New Delhi, India. Following her LL.M., Niyati attended the International Arbitration Academy in Paris where she was awarded the runner up prize for Laureate of the Academy.
Prior to joining the Firm, Niyati worked as an international arbitration intern at Busse Disputes, Germany and Alston & Bird LLP, New York. She was also a legal intern with the General Counsel of Bay Area Rapid Transit (BART) in Oakland, California.
**Naimeh serves as a legal counsel and a research fellow at ACIC. She has been advising and assisting clients on issues relating to international trade, regulatory compliance, and enforcement, as well as  international arbitration under ICC and UNCITRAL rules.  In her private practice, she focuses on energy-related disputes providing advice with respect to, inter alia, natural gas and LNG sale and purchase agreements, EPC and joint venture disputes.  Naimeh graduated from the University of Pennsylvania in International Legal studies and holds a master’s degree from UCL in international banking and finance law.