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Sanctions pose an increasing risk to the international arbitration process

Russian Supreme Court rules that sectoral sanctions imposed on Russian entities are a basis to avoid international arbitration agreements in favour of the exclusive jurisdiction of the Russian courts.

Move from sanctions complicating the arbitral process to thwarting it

International sanctions cast an increasingly long shadow over international commerce. Recent years have seen a growing number of States issue an increasing array of sanctions, which in turn affect an increasing number of entities and individuals. The UK sanctions regime alone lists more than 3,000 entities and individuals. Further complexity arises from the different forms that sanctions regimes might take—whether, for example, freezing the assets of a person or prohibiting business only in specified sectors (such as defence).

Arbitration is not immune from the impact of sanctions. Users of international arbitration have become accustomed to considering the impact sanctions may have on the merits of a dispute - for example, whether the sanctions may give rise to force majeure or frustration defences. Sanctions have also led to challenges to the arbitral process such as arbitrators sometimes requiring regulatory consent before receiving payments. To date, however, the arbitration process has been hampered but rarely thwarted completely (although there have been exceptions).

International Arbitration Review 2022: Managing risk and resolving disputes in challenging times

Russian court rules sectoral sanctions provide basis for avoiding arbitration clauses

As we enter 2022, we see sanctions regimes arguably having a more fundamental impact on international arbitration and, indeed, dispute resolution more generally. On 9 December 2021, the Russian Supreme Court rendered a judgment with potentially far-reaching consequences, affecting numerous international arbitrations involving Russian parties. The case of Uraltransmash vs PESA concerned the interpretation of Russian legislation dating from 2020, which provides that:

  • the Russian courts have exclusive jurisdiction in cases involving individuals and entities, including their subsidiaries, targeted by foreign sanctions;
  • this exclusive jurisdiction of the Russian courts exists even if there is an arbitration or jurisdiction clause providing for exclusive dispute resolution outside Russia, where the arbitration or jurisdiction clause is “unenforceable” on the basis that sanctions would “impede access to justice” for the sanctioned person;
  • the sanctioned person - legal or natural - may apply to the Russian court for an anti-suit injunction prohibiting the claimant from commencing or continuing the foreign proceedings; and
  • the Russian court may even make an order against the claimant for payment of the amount in dispute in the foreign proceedings if the Russian anti-suit injunction is ignored.

Uraltransmash is a Russian company subject to EU sectoral sanctions (concerning trading in transferable securities of the company and provision of long-term loans to the company). The contract in question involved a supply of tram cars by a Polish counterparty, which started an arbitration against Uraltransmash in Sweden under the Arbitration Rules of the SCC seeking recovery of unpaid amounts.  It was clear from the outset that the EU sectoral sanctions did: (i) concern or affect the contract that was the subject of the arbitration; and (ii) prevent Uraltransmash from participating in the arbitration proceedings in Stockholm, paying its share of the advance on costs, appointing an arbitrator or hiring legal counsel.

Nevertheless, on application by Uraltransmash, the Russian Supreme Court reasoned that the mere introduction of sanctions against a Russian person is sufficient to conclude that there are obstacles to access to justice for such a person in proceedings in a foreign State that introduced such sanctions (here, Sweden, as an EU Member State). In essence, the Supreme Court concluded that there were justified doubts that the sanctioned person’s due process rights would be observed on the territory of the state that introduced sanctions.  As such, the Russian Supreme Court concluded that Uraltransmash would have been entitled to avail itself of the exclusive jurisdiction of Russian courts but refused to grant the anti-suit injunction, as the arbitration proceedings in Sweden were concluded by the time the case came before the Supreme Court.

Shift seat of arbitration and arbitral institution to mitigate risk

The Supreme Court’s reasoning suggests that a Russian entity subject to any sanctions will be able to opt for the exclusive jurisdiction of the Russian courts if the place of arbitration or administering arbitral institution is located in a State that imposed sanctions against that entity. Accordingly, this judgment puts at risk both existing and future dispute resolution clauses with Russian parties (even those subject to sectoral sanctions only) providing for arbitration in the US, UK or an EU Member State. While the precise impact and reach of the decision remains to be seen, the safest course - as we enter into 2022 - for contracts involving Russian sanctioned parties, short of dispute resolution in Russia, seems to be opting for dispute resolution in jurisdictions without Russian sanctions regimes, such as Hong Kong and Singapore.

Against that backdrop, however, it is interesting to note a survey published by the Russian Arbitration Association in January 2022, which discusses the impact of sanctions on commercial arbitration. The results showed that only a minority of users had faced situations where arbitral proceedings had been affected by sanctions. Survey respondents were aware of situations where an arbitral institution refused to administer a dispute (21%) or was unable to accept payments from the sanctioned persons (38.5%). Other impacts recognised included arbitrators refusing to act due to sanctions (18%), and the arbitrators rejecting, or reducing the quantum of, claims because of sanctions (20%). These results suggest that, despite the sweeping nature of the Russian Supreme Court’s decision in Uraltransmash, the actual impact felt by sanctioned parties to commercial arbitrations is more limited.

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