Issues concerning economic sanctions in international arbitration frequently arise. Economic sanctions are a commonly-used tool of foreign policy which can have a significant impact on the performance of parties’ contractual rights and obligations. While there are many ways in which economic sanctions may interfere with international arbitration, we will focus on the issue of the arbitrability of disputes involving economic sanctions. Debate regarding the arbitrability of disputes involving sanctions arises from the fact that sanctions touch upon issues of public policy as overriding mandatory provisions – a limitation that may have an impact on the scope of arbitration.
“Arbitrable”, in its widest sense, means capable of being resolved by arbitration. Thus, “arbitrability” generally refers to the characteristic of being subject to arbitration or not. Disputes that are non-arbitrable are usually defined by national legislation and judicial decisions. There are some uncertainties regarding the choice of law applicable to non-arbitrability issues, which arise from the fact that these questions can arise at different stages of the arbitral process and/or during the enforcement stage. However, in principle, the law of the seat of arbitration and the law governing the arbitration agreement are the most relevant to determine whether a dispute is arbitrable prior to the enforcement stage.[1]
Economic Sanctions in International Arbitration: The Prevailing View
The prevailing view in literature and arbitration practice is that disputes involving economic sanctions are arbitrable.[2] However, a number of national court decisions have held otherwise, invoking public policy exceptions and giving preference to the overriding mandatory provisions of its national laws to hold that certain disputes involving sanctions are not arbitrable.
In the well-known Mitsubishi v. Soler Case, the U.S. Supreme Court confirmed that an arbitration clause related to a distribution agreement was valid and that the dispute was arbitrable, despite the application of antitrust rules as overriding mandatory rules. The same reasoning applies to economic sanctions in international arbitration as well.
In the Fincantieri v. Ministry of Defense of Iraq case before Swiss Federal Tribunal,[3] the defendants objected to the jurisdiction of the arbitral tribunal on the ground that the dispute was inarbitrable due to UN sanctions against Iraq, which had also been implemented in Swiss and Italian Law. The Tribunal in Geneva confirmed it had jurisdiction to hear the case in its interim decision, distinguishing between the application of sanctions regime as a matter of mandatory law to the merits and the arbitrability of the dispute, concluding the sanctions did not undermine the arbitrability of a dispute with its seat in Switzerland.[4] The claim for annulment was rejected based on Article 177(1) of Swiss Private International Law Act, which permits any dispute of financial interest to be subject to arbitration. The Swiss Federal Tribunal concluded that economic sanctions on Iraq might raise a question of impossibility of performance, but did not automatically lead to the conclusion that the dispute was inarbitrable.
Another important decision where similar reasoning was applied was in Air France v. Libyan Airlines, where the Cour d’appel du Québec held that UN sanctions against Libya did not hinder the arbitrability of the dispute and that the tribunal did not violate international public policy by declaring itself competent to adjudicate the dispute.[5]
The above-cited cases show the general view in international arbitration, which is that the presence of overriding mandatory provisions, which include economic sanctions, does not impact the arbitrability of a dispute.
This is, however, different to the question of arbitrability which might arise at the recognition and enforcement stage under Article V(2)(a) of the New York Convention on Recognition and Enforcement of Foreign Arbitral Awards, where enforcement may be refused if the court of the country of recognition and enforcement finds that the dispute is not capable of being resolved by arbitration. Despite the predominant view in doctrine, there have been several decisions of national courts where courts nevertheless rejected the arbitrability of a dispute involving sanctions based on overriding mandatory provisions.
Economic Sanctions in International Arbitration: Other Views
German courts, for example, have considered that if there is a risk that an arbitral tribunal would avoid application of mandatory rules, the invalidity of an arbitration agreement can still be established.[6] In another German case, the Oberlandsgericht in Munich held that overriding mandatory provisions could not be derogated from by an agreement conferring exclusive jurisdiction to Californian courts, since there was a danger that the court in a third country would not enforce German mandatory provisions.[7]
Furthermore, in the above-cited Fincantieri case, Italian shipbuilders, in parallel to the proceeding before Swiss courts, referred the case to Italian courts to obtain a declaratory judgment that the arbitration clause was invalid. The court of first instance confirmed the arbitrability of the dispute, but the decision was overruled by the Court of Appeal of Genoa. The Court of Appeal ruled that Italian mandatory rules were applicable to the case and that because of the “unavailability” of the rights at stake, the dispute was inarbitrable.[8] The reasoning was highly criticized in France and the French Cour d’appel de Paris refused to enforce the Italian decision.[9] In another case before the Supreme Court of Cassation of Italy, an arbitration clause was found to be null and void and the dispute to be inarbitrable.[10] The reasoning was similar to that of the Court of Genoa, finding that the sanctions had a supranational character and could undermine the arbitrability of the dispute.
Therefore, while the general view in doctrine and the practice of arbitral tribunals is to consider disputes involving economic sanctions in international arbitration to be arbitrable, the practice of certain States and national courts heads in the opposite direction. Frequently enough, national courts consider a dispute involving economic sanctions to be inarbitrable and give preference to the overriding mandatory provisions of their own laws.
[1] Gary B. Born, Choice of Law Governing International Arbitration Agreements – D. Choice of Law Governing Non- Arbitrability, International Commercial Arbitration, (Kluwer Law International 2009) p. 503.
[2] T. Szabados, EU Economic Sanctions in Arbitration, in Maxi Scherer (ed), Journal of International Arbitration, (Kluwer Law International; Kluwer Law International 2018, Volume 35 Issue 4) p. 445; see also Marc Blessing, Impact of the Extraterritorial Application of Mandatory Rules of Law on International Contracts 58–59 (Helbing & Lichtenhahn 1999).
[3] Fincantieri Cantieri Navali Italiani SpA and OTO Melara Spa v ATF (25 November 1991) ICC Award Nr 6719 (Interim Award) Journal du droit international (1994) 1071; see also Gary B. Born, International Commercial Arbitration (Second Edition) (Kluwer Law International 2014) p. 993.
[4] Fincantieri Cantieri Navali Italiani SpA and OTO Melara Spa v ATF (25 November 1991) ICC Award Nr 6719 (Interim Award) Journal du droit international (1994) 1074.
[5] The case is unpublished but was reported in the literature, see for example Geneviève Burdeau, ‘Les embargos multilatéraux et unilatéraux et leur incidence sur l’arbitrage commercial international – Les états dans le contentieux économique international, I. Le contentieux arbitral’ (2003) 3 Revue de l’Arbitrage 753, 762 ff.
[6] T. Szabados, EU Economic Sanctions in Arbitration, in Maxi Scherer (ed), Journal of International Arbitration, (Kluwer Law International; Kluwer Law International 2018, Volume 35 Issue 4) p. 448, citing Sophie Mathäß, Die Auswirkungen staaten- und personenbezogener Embargomaßnahmen auf Privatrechtsverhältnisse 60-61 (Nomos 2016)
[7] OLG München, 17 May 2006 – 7 U 1781/06, IPRax 322 (2007).
[8] Fincantieri-Cantieri Navali Italiani SpA v Iraq (1994) Riv. Dell’arb 4 (1994) (Corte di Appello di Genova/Genoa Court of Appeal, Italy) 505; see Eric De Brabandere and David Holloway, Sanctions and International Arbitration, in Larissa van den Herik (ed.), Research Handbook on Sanctions and International Law (Cheltenham: Edward Elgar, 2016)
[9] Legal Department of the Ministry of Justice of the Republic of Iraq v. Fincantieri-Cantieri Navali Italiani (15 June 2006) Rev Arb (2007) (Cour d’Appel de Paris/ Paris Court of Appeal, France)p. 87.
[10] Government and Ministries of the Republic of Iraq v. Armamenti e Aerospazio S.p.A. et al., Italy No. 189, Supreme Court of Cassation of Italy, Case No. 23893, 24 Nov. 2015, cited in XLI Yearbook of Commercial Arbitration 2016, p. 503 (Albert Jan van den Berg ed., 2016).
