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Arbitration of Disputes Involving Sanctioned Companies

Date of publication: 15 May 2023

Marina Riashchenko, Attorney at Law, Counsel

Source: Yurydychna Gazeta

Since the beginning of the Russian military aggression on the territory of Ukraine in 2014, both in our country and in the world, special sanctions were introduced against Russia, Belarus and a number of their individuals and legal entities, which are involved in resolving, supporting and facilitating the military aggression of the Russian Federation and the Republic of Belarus against Ukraine. The list of sanctions and the individuals to whom they apply has been significantly expanded since the full-scale Russian invasion in 2022, and these lists are constantly updated. As a result, the execution of numerous foreign economic contracts turned out to be impossible, which leads to disputes, which, in the event of the impossibility of their peaceful settlement, are ultimately referred to international arbitration. And this is where a number of difficulties arise.

Grounds for terminating the contract

It should be noted that the introduction of sanctions does not mean that the party to the contract may not fulfill its contractual obligations. Sanctions, by their nature, are a temporary mechanism of influence. Sanctions imposed on a party to the contract stop its execution for the duration of their validity, and therefore, the party to the contract cannot demand its automatic termination before the expiration of the sanctions. However, if the party still wants to withdraw from the contract with the sanctioned person, it is necessary to refer to the clause of the contract on force majeure circumstances (force majeure), which, among other things, can include the application of sanctions to the party. Despite the fact that force majeure circumstances do not exempt from the need to fulfill contractual obligations, but only serve as a basis for exemption from liability for their violation and the postponement of their fulfilment, quite often this clause contains a provision that allows the parties to terminate the contract without additional penalties if the force majeure circumstances last more than a certain period.

Procedural difficulties

If the dispute is referred to international arbitration, the parties and arbitration may face a number of difficulties. First, the introduced individual sanctions, as a rule, significantly limit the financial solvency of the party to which they are applied. Therefore, the first problems may arise even at the stage of paying the mandatory registration and arbitration fees for filing a claim in arbitration. If the sanctioned party is a defendant and is unable (or most often unwilling) to pay its part of the arbitration fee, the secretariat of the arbitral institution may offer the claimant to pay the arbitration fee instead of the defendant. The issue of reimbursement of arbitration costs will then be resolved in an arbitration award on the merits of the dispute or, at the claimant’s request, in a separate award.

In the event that the sanctioned person is the claimant, then his claim will not be accepted for consideration for non-payment of registration and arbitration fees. If a party, due to the sanctions applied to it, cannot pay the mandatory registration and arbitration fees, they may be paid instead by its legal representative. In this case, the next question arises: the search for a legal representative. In the arbitration process, the parties have the right to defend themselves on equal terms within limits of the norms of procedural law. However, the provision of services and financial relations with Russian companies may be limited by countries at the legislative level. In addition, after the full-scale Russian invasion of Ukraine, law firms refuse to represent the interests of sanctioned companies, and Ukrainian law firms refuse to work with companies of the occupying country at all. However, international arbitration and court practices show that sanctions do not affect the procedural rights of an individual, and therefore, the applied sanctions applied are not an obstacle to considering a dispute involving sanctioned companies.

Execution dilemma

Even if the sanctioned company participated in the arbitration process, this does not mean at all that the arbitration award against it will be enforced. According to the 1958 New York Convention, recognition and enforcement of an arbitral award may be refused if its enforcement is contrary to public policy. Modern judicial practice, both in Ukraine and in the world considers sanctions as a component of public order. Individual sanctions most often include blocking of assets, recovery of assets of sanctioned persons into state revenue, prevention of the withdrawal of capital, suspension of the fulfillment of economic and financial obligations, a complete or partial ban on transactions in securities, etc. In such a case, the execution of the arbitration award providing for the payment of funds in favor of the sanctioned person, directly contradicts public policy. If the execution of the arbitral award will provide for the withdrawal of capital from the country, this may serve as a basis for appealing the rendered arbitral award in the national court. Practical difficulties may also arise in enforcing an arbitral award against a party subject to assets freezing or blocking sanctions.

Currently, a request for enforcement of arbitration awards at the expense of the debtor’s frozen assets can only be permitted in exceptional cases provided for by law and will largely depend on the conditions and actual circumstances of the case. In Ukraine, courts are already developing judicial practice, according to which the issue of enforcement of the arbitration award is considered through the prism of public policy. At the same time, the courts note that control over the application of sanctions to the party should be carried out at the stage of implementation of the arbitration award and is within the competence of the enforcement service. One should not hope for the recognition and successful enforcement of arbitration awards made against sanctioned persons on the territory of the Russia and the Republic of Belarus.

First, back in 2020, amendments to the Russian Arbitration Procedure Code were adopted in Russia, which placed the resolution of disputes involving sanctioned persons under the exclusive jurisdiction of Russian courts. It also allows Russian companies to apply to a national court for an injunction against going to a foreign court or international arbitration in disputes involving them and not actually complying with foreign arbitral awards. Secondly, as all of us, unfortunately, could see that the law does not apply to Russia. The probability that a Russian court will recognize and allow the execution of an international arbitration award on the territory of the Russian Federation is close to zero. In such a case, the party in whose favor the arbitration award is made against the sanctioned company may apply for its recognition and granting permission for its execution to the national courts of other countries where the debtor has property.