Impact of Russian Sanctions on International Arbitration

29 Jul

This article provides a background to the practical and legal problems that UK-based entities may face when engaging in international arbitration with sanctioned Russian parties.

Background

Since the Russo-Ukrainian War began in February 2022, Russia has been subjected to an unprecedented number of sanctions by the UK. As of 26th June 2024, 1,707 individuals and 334 entities have been sanctioned.

Sanctions are implemented to be temporary restrictive measures, which seek to constrain the actions of the sanctioned country by impeding the economic activity of those most closely connected with the regime. To date, the sanctions imposed on Russia include restrictions to:

investments in Russia, Crimea and the non-government controlled area of Ukraine;
oil price caps;
import/export;
financial services, industrial companies and energy.

The sanctions have practical consequences on the conduct of international arbitration, but do not provide a general prohibition on representing Russian parties in arbitration.

International Arbitration

International arbitration involves parties agreeing to resolve their dispute privately, with an independent arbitrator, instead of through domestic courts. It is often regarded as a quasi-legal method of dispute resolution which is binding, enforceable and neutral. Consent is commonly contained in a contractual arbitration clause but may also be agreed ad hoc when a dispute materialises.

Practical Impacts

The practical problems which may occur where a Russian party is sanctioned include:

making payments to the arbitrator;
participating in the arbitration in any capacity;
obtaining any funds belonging to the sanctioned party.

These problems will apply to the sanctioned party on a case by case basis, having regard to the specific sanctions, facts and contracts in place. Should these problems arise, either party may seek to circumvent them by obtaining a specific licence. For UK based entities, the London Court of International Arbitration can issue a specific Office of Financial Sanctions Implementation licence.

If the problem is in regard to legal services, this licence can be applied for by way of a cover letter, with detailed reasons as to why the licence should be granted. This licence will relate to the prohibitions in Regulation 54D of The Russia (Sanctions) (EU Exit) Regulations 2019. The same procedure should be followed for professional and business services under Regulation 54C of The Russia (Sanctions) (EU Exit) Regulations 2019.

Contractual Performance

Where UK entities attempt to resolve disputes with a Russian sanctioned party, including by way of arbitration, the sanctions referred to above may affect that party’s ability to perform certain obligations under contract. For example, where the sanctions have led to the contract’s being impossible to perform, the doctrine of frustration may be advanced. The doctrine is rarely argued successfully and will only apply where performance of a contract becomes impossible or radically different from the original. The courts will consider the context of the particular contract and the circumstances that led to performance being impossible, as was held in Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696. In that case, the fact that the contract could not be performed within the specified time, did not frustrate it. A UK-based party seeking to rely on the fact that a contract has been frustrated should apply for a licence before taking legal action.

Anti-Suit Relief

Anti-suit relief, by way of injunctions, restrict a party from commencing or continuing proceedings, sometimes in another jurisdiction. Should a UK-based entity seek to enforce directions or decisions of an arbitral tribunal, specifically for anti-suit relief, domestic court orders can sometimes provide an avenue for enforcement. For example, s.42 of the Arbitration Act 1996 gives English courts authority to “make an order requiring a party to comply with a peremptory order made by the tribunal”. If granted, these court orders are enforceable against a sanctioned party and their assets.

Conclusion

Whilst Russian sanctions will have practical consequences for UK-based entities engaging in international arbitration, measures are in place to reduce this impact, in the form of specific licences and the potential for domestic court orders.