Drafting Arbitration Agreements In Light Of International Sanctions

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In international business, drafting Arbitration Agreements that can withstand the complexities of cross-border sanctions is akin to constructing a legal fortress.

Arbitration Agreements play a pivotal role in protecting a company’s commercial interests by providing a framework for resolving disputes quickly, confidentially, and cost-effectively.

However, sanctions against countries such as Iran and Russia present unique challenges that complicate arbitration proceedings.

In this article, we explore how to draft rigorous Arbitration Agreements that can protect your interests should international sanctions impact your project or venture.

What is the effect of international sanctions on arbitration proceedings?

Sanctions are a range of measures put in place by individual governments, regional groups (for example the European Union or the African Union) or the United Nations to achieve one or more of the following:

  • Prevent escalation of or settle conflicts.
  • Curtail nuclear proliferation.
  • Deal with terrorism and human rights violations.

Types of sanctions include:

  • Economic – impose commercial and financial penalties, for example levying import duties and/or blocking exports of certain goods.
  • Diplomatic – reducing or recalling diplomats or cancelling high-profile international meetings.
  • Sport – preventing the sanctioned country’s athletes from competing in international events.
  • Targeted/smart sanctions – imposes travel bans and asset freezing orders on individuals, companies, or other entities such as terrorist organisations.
  • Military sanctions – these are used as a last resort and can involve targeted military strikes and arms embargoes.

Sanctions can negatively affect arbitration proceedings in the following ways:

  • Enforcement Issues: Sanctions can render Arbitration Awards unenforceable if courts in sanction-enforcing jurisdictions refuse to recognise them.
  • Choice of Arbitrators: Selecting Arbitrators can be problematic if their involvement breaches sanction rules.
  • Logistical Barriers: Conducting hearings and investigations may be challenging due to travel restrictions, limited access, and prohibitions on financial transactions.
  • Evidence Gathering: Collecting evidence in sanctioned countries is often a tangled process due to regulatory obstacles.

What Is an Arbitration Agreement?

An Arbitration Agreement is the cornerstone of any arbitration proceedings. It outlines the framework by which disputes will be resolved and often includes the following key components:

  • The law governing the agreement.
  • The jurisdiction that determines the procedural law governing the arbitration.
  • Whether the arbitration will be institutional, whereby the process is administered by an arbitration body, or ad hoc, where the arbitration is conducted independently.
  • The procedural rules that govern how the arbitration is conducted.
  • The language in which all arbitration proceedings and documents are communicated.
  • How the Arbitrator will be appointed and the expertise they must have.

How can Arbitration Agreements be drafted?

When drafting Arbitration Agreements that can withstand the rigours of international sanctions, it’s crucial to anticipate potential issues. Here are some strategies to consider:

  • Inclusion of a Sanctions Clause: A robust sanctions clause explicitly addressing potential restrictions and outlines how the parties will handle logistical challenges. This could include substituting alternative Arbitrators or venues and specifying the conditions under which an Arbitral Award can be enforced.
  • Choice of Jurisdiction: Selecting an arbitration seat in a neutral jurisdiction that is less susceptible to sanctions ensures better enforceability. Jurisdictions such as England and Wales or Singapore are preferred because of their impartiality and predictable legal systems.
  • Institutional Framework: Involving a well-recognised arbitration institution, such as the London Court of International Arbitration (LCIA), provides procedural oversight and established rules to navigate the complexities of sanctions.
  • Choice of Rules and Governing Law: Selecting procedural rules and governing law that provide flexibility ensures that the agreement is adaptable to changing circumstances.
  • Fallback Clauses: Include fallback clauses that specify alternative venues and arbitrator selection processes if the primary options are affected by sanctions.
  • Multi-tier Dispute Resolution Mechanisms: Incorporating multi-tier dispute resolution mechanisms such as mediation before arbitration can help resolve issues at an early stage.

What are the best practices when drafting an Arbitration Agreement where sanctions may impact proceedings?

To further protect your commercial interests when drafting an Arbitration Agreement, consider these practical measures:

  • Regularly reviewing and updating the agreement will ensure it reflects current sanctions policies and changing geopolitical landscapes.
  • Protect sensitive commercial information through secure communication channels, confidentiality protocols, and Non-Disclosure Agreements (NDAs).
  • Clearly specify the enforcement mechanisms to reduce uncertainties, and choose institutions with a track record of handling disputes related to sanctions.

Final words

In light of the geopolitical challenges presented by international sanctions against countries such as Iran and Russia, drafting a robust Arbitration Agreement is crucial for businesses engaged in cross-border transactions and ventures. The agreement must be carefully crafted to address enforcement issues, logistical barriers, and potential Arbitrator challenges.

Incorporating fallback clauses, multi-tier resolution mechanisms, and choosing neutral jurisdictions can help mitigate obstacles and the potential for further disputes. By regularly reviewing and updating your Arbitration Agreements, you can robustly protect your best interests.

To discuss any points raised in this article, please call us on +44 (0) 203972 8469 or email us at mail@eldwicklaw.com.

Note: The points in this article reflect sanctions in place at the time of writing, 14th May 2024. This article does not constitute legal advice. For further information, please contact our London office.

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