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Law Council of Australia

International Law Section

International dispute resolutions and sanctions

Targeted sanctions are increasingly being used by states in situations of international concern. Such  sanctions have recently been imposed on Russia, and over 850 Russian individuals and companies.  The impact of these sanctions on the Russian oligarchs is obvious. Lesser known are the implications on international commercial dispute resolution where sanctions prevent parties from pursuing litigation or arbitration in part since a party the subject of sanctions may not be able to pay their lawyers.

There are a wide variety of United Nations sanctions that can apply to parties involved in international and cross border disputes.  In addition, states can apply sanctions independently of UN decisions, meaning that parties need to assess the potential sanctions regimes for each country involved in a potential dispute as differing regimes may apply.

This increased use of sanctions highlights the potential ramifications on international dispute resolution.  Participants in the arbitration process (whether institutions, arbitrators or legal practitioners) must be – and are already – considering and addressing these issues pre-emptively to ensure that the arbitration process is not disrupted and proceeds without creating further issues.

There are two sanctions regimes in Australia; the UN sanctions regime (domestically implementing sanctions imposed by the UN Security Council) and the autonomous sanctions regime (allowing Australia to impose sanctions without reference to any UN decision).  Sanctions regimes may apply on a country-specific basis (under both the UN and Australian regime), organisation specific basis (under the UN regime) or on a thematic basis, such as for serious corruption or abuses of human rights (under the Australian regime).  There can be overlap, where both regimes target the same country (but with differing restrictions).

One of the first ways that arbitration can be impacted is practical – if financial sanctions apply to a party to the proceedings, institutions and arbitrators may not be able to accept payments from these individuals without breaching the sanctions regime, and the sanctioned entities may not be able to make the necessary payments for proceedings. This has been directly addressed in the UK, where the London Court of International Arbitration has received a licence to allow it to process payments from parties subject to the financial sanctions against Russia and Belarus.  This provides greater certainty for all parties involved. Additionally, the EU has issued a Council Regulation to clarify the scope of the sanctions package in relation to Russian entities and specifically exempted transactions necessary to ensure access to judicial, administrative or arbitral proceedings in a Member State.  This move has been welcomed by arbitral institutions, such as the Stockholm Chamber of Commerce.

The LCIA licence is subject to limits in that it only relates to the costs of the LCIA and the Tribunal and does not relate to the parties’ own legal costs. This had led some commentators to assert that the licence will not greatly assist sanctioned parties from obtaining legal assistance.

In countries without this certainty, even where it may be legally permitted under a sanctions regime to facilitate these payments, many financial institutions are taking a cautious approach for any transactions involving potentially sanctioned entities or countries. 

This may result in the need to obtain permission from the relevant regulatory authority, such as an indicative assessment or permit provided by DFAT in Australia before any transactions can be processed and arbitration may be significantly delayed as a result.  To apply to DFAT you are required to register through Pax, the Australian sanctions portal.  You can request an indicative assessment from ASO as to whether you may be affected by Australian Sanctions Law or submit an application for a sanctions permit.  This permit acts as an authorisation from the Minister for Foreign Affairs to undertake an activity that would otherwise be prohibited under Australian sanctions law.  This will be provided where specific criteria are met, and these differ for each sanctions regime and type of sanctions.  For UN sanctions, the Foreign Minister may be required to notify or receive the approval of the Security Council before granting a permit.

Other practical issues that need to be addressed include travel bans that prevent a party or key witness to proceedings from being able to attend.  There are ways to address this, including appearing via video-link, but the suitability of this and potential impact on the proceedings needs to be considered ahead of time on a case-by-case basis.  There are other potential legal issues, including whether certifying an award in favour of a targeted entity infringes the sanctions regime because it permits a targeted entity to raise funds or questions of enforceability where the award is sought to be enforced in the sanctioned country (and may be required to uphold an award that released a party from obligations because of the sanctions against that country).

These are some of the issues currently being considered and addressed by arbitration participants around the world, as part of the need to ensure international arbitration continues to operate without significant delay or obstacles to access to justice.