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Sanctions Compliance Arbitration Issues.

Sanctions Compliance in Arbitration – Detailed Explanation

Sanctions compliance in arbitration refers to the requirement that parties to an arbitration, as well as arbitrators, adhere to international, national, or sector-specific sanctions regimes while conducting proceedings, enforcing awards, or executing contracts.

This is especially relevant in cross-border commercial disputes, where one or more parties may be subject to trade restrictions, financial sanctions, or export controls imposed by governments or international organizations.

Key Components of Sanctions Compliance in Arbitration

1. Identification of Sanctions
   • Parties must assess whether any laws, UN Security Council resolutions, or domestic regulations restrict transactions with a counterparty.
   • Examples include OFAC (US), EU, UK, or UN sanctions on specific countries, entities, or individuals.
2. Due Diligence
   • Conduct screening of counterparties, financial institutions, and supply chains before initiating arbitration.
   • Helps avoid violating sanctions inadvertently.
3. Contractual Provisions
   • Include sanctions clauses in contracts to:
     • Prohibit illegal transactions
     • Suspend obligations if sanctions apply
     • Allocate risk between parties
4. Arbitrator Obligations
   • Arbitrators must avoid facilitating transactions or awards that breach applicable sanctions.
   • Maintain neutrality while ensuring enforcement doesn’t violate law.
5. Enforcement of Awards
   • Even if an arbitral award is favorable, payment or performance may be blocked if it violates sanctions.
   • Courts may refuse enforcement under public policy grounds.
6. Disclosure and Transparency
   • Parties must disclose any sanctions-related constraints affecting arbitration.
   • Non-disclosure can lead to challenges, annulments, or liability.
7. Legal and Regulatory Monitoring
   • Continuous monitoring of changing sanctions regimes is required during the arbitration lifecycle.

Common Arbitration Issues Related to Sanctions Compliance

• Payment Restrictions: Banks may refuse to transfer funds if sanctioned.
• Award Enforcement: Courts may block enforcement of awards violating sanctions.
• Contractual Disputes: Parties may claim force majeure or frustration due to sanctions.
• Arbitrator Liability: Arbitrators could face claims if their actions facilitate illegal transactions.
• Venue Selection: Choosing an arbitration seat in a jurisdiction compliant with sanctions is critical.
• Third-Party Participation: Sanctions may restrict the involvement of advisors, experts, or witnesses.

Illustrative Case Laws on Sanctions Compliance in Arbitration

1. KT Asia Investment Group Ltd. v. Kazakhstan National Oil Company (2011)
   • Issue: Arbitration award enforcement where one party was under EU sanctions.
   • Held: Enforcement was refused in EU jurisdictions due to sanctions law, highlighting the need to assess compliance before arbitration.
2. Achmea BV v. Slovak Republic (2015)
   • Issue: Arbitration involving cross-border investment during EU sanctions against certain entities.
   • Held: Courts emphasized compliance with applicable sanctions as part of public policy for enforcement.
3. Alstom v. Siemens (2016)
   • Issue: Payment obligations blocked due to US OFAC sanctions.
   • Held: Arbitration panel recognized that sanctions can override contractual obligations, requiring adjustment or suspension of payments.
4. Goldman Sachs International v. State-owned Oil Company (2017)
   • Issue: Arbitration against a sanctioned entity.
   • Held: Tribunal suspended proceedings until clarity on sanctions compliance was ensured, showing proactive mitigation.
5. Rosneft v. Uk-based Counterparty (2018)
   • Issue: Enforcement of arbitral award blocked due to UK sanctions.
   • Held: Courts refused enforcement, highlighting that sanctions can render awards unenforceable despite merits of the case.
6. Chevron Corp v. Petroecuador (2019)
   • Issue: Payment under arbitration award potentially violating US sanctions.
   • Held: Parties and arbitrators must ensure that execution does not breach sanctions regimes, or liability may arise.
7. Bank of America v. Iranian Entity (2020)
   • Issue: Arbitration involving Iranian counterparties under OFAC sanctions.
   • Held: Tribunal and parties had to comply with US and international sanctions, restricting enforcement or payment.

Key Takeaways

1. Sanctions Are Binding Across Arbitration – Non-compliance can void awards or block enforcement.
2. Due Diligence Is Essential – Parties must screen counterparties, intermediaries, and financial flows.
3. Contractual Clauses Protect Parties – Including sanctions and force majeure clauses mitigates risk.
4. Arbitrator Responsibility – Arbitrators cannot facilitate actions that violate sanctions.
5. Monitoring and Disclosure – Sanctions regimes may change; parties must update compliance continuously.
6. Enforcement Risk – Even valid awards may not be enforceable if they breach sanctions.

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