Economic sanctions are now widely applied in many jurisdictions and affect numerous states, sectors, and market participants. This has become a defining feature of the contemporary geopolitical landscape. Sanctions, which include asset freezes, travel bans, and restrictions on the provision of services, are typically used to exert economic and political pressure.
Consequently, sanctions increasingly intersect with international trade and dispute resolution. Their impact on international arbitration is wide-ranging, affecting every stage of the process: from drafting contracts and conducting arbitration to enforcing arbitral awards. This article examines the key legal and practical aspects of arbitrations involving parties subject to sanctions.
Issues to consider before commencing arbitration
Sanctions Risk Assessment and Due Diligence
Before entering into a contractual relationship, the parties must carry out due diligence to determine whether suppliers, counterparties or their beneficial owners are subject to sanctions, or whether they are linked to sanctioned jurisdictions. Such checks can be carried out using publicly available sources, such as official sanctions lists and databases; specialised screening tools; or with the assistance of legal counsel. Failure to identify sanctions risk at the outset may lead to non-performance of contractual obligations, restrictions on payments and obstacles to dispute resolution.
Drafting Sanctions-Resilient Contracts
From the outset, contracts involving potential sanctions risk must be carefully structured to provide the parties with flexibility and mitigate the risk of disruption should sanctions be imposed or expanded. In practice, this requires not only traditional safeguards but also specific provisions that account for sanctions risks.
(a) Arbitration clauses
Parties should ensure that disputes are referred to arbitration, which offers greater procedural flexibility, neutrality and confidentiality compared to national courts. When drafting arbitration clauses, parties should consider the choice of seat, the institution and the governing law. They should also consider jurisdictions that are less likely to create additional obstacles related to sanctions. In particular, careful selection can mitigate risks associated with the enforcement of awards, access to justice, and the availability of institutions and arbitrators willing and able to act in sanctions-related cases.
(b) Sanctions clauses
Properly drafted provisions on sanctions are a key risk management tool and must be tailored to the specific agreement and relevant jurisdictions. Such provisions must clearly define the impact of sanctions on the performance of contractual obligations, establish the parties’ ongoing obligations regarding compliance, and provide for mechanisms to suspend, amend or terminate the agreement in the event that sanctions are imposed. They should also explicitly address practical issues such as payment restrictions, licensing requirements and the allocation of risks in the event of a delay or restriction in the performance of obligations.
(c) Frustration and Force Majeure
Sanctions may impede the performance of a contract and trigger the application of contractual or legal remedies. For example, they may trigger the application of force majeure clauses and the doctrine of frustration under applicable law.
Under English law, frustration arises where performance becomes impossible or unlawful due to an unforeseeable event occurring after the conclusion of the contract. In the context of sanctions, this may occur where performance would breach the applicable sanctions regime, either under the law governing the contract or under the law of the place of performance.
Nevertheless, this concept is applied restrictively. Once a contract has been signed, parties must comply with sanctions. A party claiming that it cannot do so must prove that it has taken all reasonable steps to perform the contract, including applying for licences or permits where possible. This was demonstrated in Melli Bank plc v Holbud Ltd [2013] EWHC 1506 (Comm), where the court rejected the argument that performance was impossible because the party had not attempted to obtain a licence to make payments.
Although force majeure clauses may also provide a defence, their effectiveness depends on how they are drafted. Whilst some clauses explicitly refer to sanctions or government actions, others are broader in scope, and their applicability will depend on the specific circumstances.
The impact of sanctions on arbitration
Appointment of legal advisers and arbitrators
Provision of services may be restricted due to sanctions. As a result, arbitrators, legal advisers and other participants may be required to obtain licences from government authorities before accepting an appointment or receiving payment. The need to obtain these licences complicates the process and may significantly delay the constitution of the tribunal and the overall progress of the arbitration by several months if not years.
Sanctions may also reduce the pool of available arbitrators, as some professionals may be reluctant to accept appointments in disputes subject to sanctions due to regulatory risks, which may lead to further delays and uncertainty.
Arbitration costs and funding
Payments are one of the most significant practical issues in sanctions arbitration. Parties subject to sanctions often require licences to access frozen funds in order to pay costs associated with arbitration. Furthermore, arbitral institutions, arbitrators and legal representatives may also require authorisation to receive these payments.
In the UK, the Office of Financial Sanctions Implementation is responsible for granting licences. Some of these issues have been resolved by recent legislative changes. For example, in March 2025, a General Licence for Arbitration Costs was issued, allowing persons designated under the sanctions regimes against Russia and Belarus to make payments to arbitrators and arbitration institutions in respect of arbitration costs. Similarly, the General Licence for Legal Services (2025) permits the payment of legal services without a specific licence, subject to certain financial limits. In particular, costs are capped at 10% of the legal fees or £200,000, whichever is lower. Where multiple parts of the licence are used, the overall limit is £400,000. These mechanisms are designed to facilitate access to legal representation and participation in arbitration proceedings, while complying with sanctions requirements.
In addition, specific measures have been adopted in relation to certain institutions. The LCIA has a special general licence allowing it to accept payments from sanctioned parties, as well as to make payments to arbitral tribunals and other participants in arbitration proceedings administered by the LCIA.
US sanctions regimes, particularly those administered by the Office of Foreign Assets Control (OFAC), may apply extraterritorially and further complicate arbitration between international parties. In particular, transactions involving the use of US dollars or the participation of US financial institutions or individuals may fall under the jurisdiction of the United States, even if the place of arbitration is outside the US. This may affect the ability to make or receive payments, engage legal counsel or transfer funds, and may require obtaining special licences or taking compliance measures.
The imposition of sanctions on a claimant may also have consequences for its ability to secure external financing for its claims. Third-party funders, who must themselves comply with sanctions laws in the jurisdictions where they and their investors are based, may be unwilling to assume the regulatory burden and reputational exposure associated with funding a sanctioned party’s case. Even where such funding can be arranged, the terms are likely to reflect a significant risk premium, resulting in materially higher costs for the funded party compared to a non-sanctioned claimant in equivalent circumstances.
Arbitration institutions
Throughout the dispute resolution process, arbitration institutions are required to comply with applicable sanctions rules. To this end, the parties and their beneficial owners must be thoroughly vetted at the initial stage. In reality, these compliance procedures can be complex and lead to delays in case registration, the constitution of tribunals and the overall progress of the arbitration proceedings.
For example, the 2020 LCIA Rules explicitly address sanctions compliance, allowing institutions to refuse to carry out instructions or process payments if this would result in a breach of applicable sanctions. In a broader context, some leading organisations, such as the HKIAC, ICC and VIAC, have developed internal policies on sanctions and guidelines for managing these risks and ensuring compliance throughout the proceedings.
Choice of seat and arbitration institution
Sanctions issues are increasingly influencing the choice of arbitration seat and the institution conducting the proceedings. As the choice of seat and institution can have a direct impact on the feasibility and efficiency of future proceedings, the parties should consider these issues at the contract drafting stage, taking into account legal advice.
According to the Queen Mary University of London (QMUL)/White & Case International Arbitration Survey 2025, 30% of respondents whose arbitration cases were subject to sanctions decided to change the seat in order to ensure their case could be heard. Many of those surveyed cited Dubai, Hong Kong and Singapore as locations increasingly chosen for the resolution of sanctions-related disputes.
Logistical challenges
Sanctions can create significant logistical challenges, including travel restrictions affecting witnesses and legal advisers, the need to conduct hearings remotely, and delays associated with licensing requirements. Individuals who are subject to personal sanctions, including travel bans, may find themselves unable to attend hearings in person. This is particularly relevant for key witnesses whose testimony may be central to the outcome of the proceedings. In some cases, the applicable sanctions regime may include specific exemptions permitting travel for the purpose of participating in legal or arbitral proceedings, though the availability and scope of such exemptions vary considerably. Where in-person attendance is not feasible, remote participation may provide a practical solution. The widespread adoption of virtual and hybrid hearings following the COVID-19 pandemic has made tribunals and parties increasingly comfortable with this approach.
Furthermore, the multilingual nature of international disputes, including the need for oral and written translation, can make remote proceedings even more complex. These factors can increase both the cost and the duration of the proceedings.
Issues of substantive law and jurisdiction
Access to justice
Courts and regulatory authorities in various jurisdictions emphasise that sanctions should not prevent parties from accessing justice.
In the case of Airbus Canada Limited Partnership v Joint Stock Company Ilyushin Finance Co [2024] EWHC 790 (Comm), the English Commercial Court granted an injunction to stay proceedings in Russia that had been brought in breach of a London arbitration agreement. The court rejected the argument that a sanctioned party cannot participate in arbitration, noting that under the current OFSI general licences, sanctioned entities may access frozen funds to pay arbitration costs and engage legal representation.
The same approach is taken in the EU. As explained in the Joint Statement by Arbitration Institutions on the EU’s Seventh Sanctions Package, Regulation (EU) 2022/1269 provides that sanctions do not apply to transactions and services that are strictly necessary to ensure access to judicial, administrative or arbitral proceedings, including the exercise of the right of defence and access to effective legal remedies. However, these exemptions are limited and, particularly with regard to payments, may still require licences or regulatory authorisations.
These developments indicate that, whilst sanctions may create practical and procedural obstacles, both courts and regulatory authorities are seeking to ensure that dispute resolution processes such as arbitration remain accessible.
Rules on exclusive jurisdiction and anti-arbitration measures
At the same time, some jurisdictions have introduced legislative and judicial measures to protect entities subject to sanctions, as this may directly impede agreed arbitration proceedings. Russia is a notable example, as amendments to the Arbitration Procedure Code allow Russian state courts to exercise exclusive jurisdiction over disputes involving Russian parties subject to sanctions, even where an arbitration agreement has been concluded.
The Russian Supreme Court noted that the imposition of sanctions may be sufficient grounds for a finding of a violation of access to justice, allowing sanctioned parties to seek injunctions to restrict foreign proceedings. As a result, this has led to an increase in anti-arbitration injunctions, including cases where courts in Russia have prohibited parties from resorting to arbitration or seeking protection against arbitration claims.
These measures create significant tension in relation to arbitration agreements and raise serious concerns regarding jurisdiction, parallel proceedings and the enforceability of arbitral awards.
Enforcement of arbitral awards
Public policy barriers
Under the New York Convention, enforcement of an arbitral award may be refused if it is contrary to public policy. When it comes to sanctions, such measures form part of domestic public policy considerations relevant to enforcement. However, this defence is generally interpreted narrowly by the courts, and they do not refuse enforcement unless there is a clear and serious conflict with the fundamental principles of the state where the arbitral tribunal is situated.
Practical difficulties with enforcement
Sanctions can create significant practical obstacles, even in cases where enforcement is legally permissible. Asset freezes may prevent the recovery of funds from award debtors, whilst payments under an award may require prior authorisation from a regulatory authority. An award rendered after the respondent has become subject to sanctions may, in some cases, effectively block enforcement.
For example, if an arbitral award is made after the relevant party has been included on the EU sanctions list, the unfreezing of frozen funds may be restricted. This would mean that the creditor would have virtually no possibility of recovering funds under the arbitral award.
Approaches in different jurisdictions
When it comes to sanctions, approaches to enforcement vary depending on the jurisdiction, creating additional uncertainty for the parties.
Courts in Ukraine take a restrictive stance, treating sanctions as part of domestic public policy and national security and refusing enforcement where this could facilitate sanctions circumvention. In its judgment of 18 December 2024 in Case No. 824/107/23, the Supreme Court quashed the decision of the lower court, which had permitted enforcement of the arbitral award, and ruled that private law mechanisms, such as recognition and enforcement procedures, should not be used to evade sanctions or remove assets from their scope. The Supreme Court emphasised that these procedures must serve the interests of the state, rather than the protection of the parties’ private rights.
The English courts, by contrast, have been more accommodating and flexible. In the case of Hulley Enterprises Ltd v Russia [2026] EWHC 456 (Comm), the English Commercial Court approved the partial enforcement of three arbitral awards, which led to the confiscation of assets of the oil company Yukos totalling over US$50 billion. Pursuant to Article 103(3) of the Arbitration Act 1996, the court rejected the argument that enforcement was contrary to public policy, ruling that the alleged illegality of the initial acquisition of Yukos was not sufficiently linked to the subsequent holding of the shares by the claimants to justify a refusal to enforce, with the exception of the award on costs.
Such differences in approach across jurisdictions underscore the importance of carefully assessing the risks associated with enforcing awards at the early stages of sanctions proceedings.
Licensing issues in enforcement and settlement
Separate from the authorisations that may be needed during the course of the arbitration, parties must also consider whether additional licences are required at the stage of enforcing an award or reaching a settlement with a sanctioned counterparty. In a number of sanctions regimes, the act of making or receiving payment pursuant to an award or settlement agreement may itself constitute a prohibited transaction unless specifically authorised. In the ICSID proceedings in ConocoPhillips v Venezuela (Case No. ARB/07/30), the ad hoc committee similarly conditioned the lifting of a stay on enforcement upon receipt of undertakings from the award creditors addressing the US sanctions framework. These examples underscore the importance of mapping out the licensing landscape for enforcement at the earliest possible stage, rather than treating it as an afterthought once the award has been rendered.
Interest and the temporal effect of sanctions
Sanctions are, by their nature, exceptional measures of a temporary character. This temporal dimension raises important questions regarding the accrual of interest on arbitral awards during the period in which a debtor is subject to sanctions. Domestic courts in several jurisdictions have taken differing approaches to this issue. In England, in Ministry of Defence and Support for Armed Forces of the Islamic Republic of Iran v International Military Services Ltd [2019] EWHC 1994 (Comm), the court held that EU Regulation 267/2012 precluded the Iranian Ministry from enforcing the interest component of an award in respect of the period during which it was subject to EU sanctions. However, in the United States, in Ministry of Defence of Iran v Cubic Defence Systems Inc (SD Cal, 2013), the court awarded pre-judgment interest from the date of the ICC award to the date of confirmation, on the basis that the applicable sanctions regime did not exempt the debtor from paying amounts due. These divergent outcomes highlight the need for parties to carefully consider the potential impact of sanctions on interest claims when pursuing enforcement across different jurisdictions.
Conclusions
Sanctions are a key risk factor that can affect the entire lifecycle of a dispute, and they are no longer a marginal issue in international arbitration. Although arbitration remains an effective and often preferable means of resolving international disputes, it requires careful planning, a clear understanding of applicable legal requirements, and strategic decision-making. In an increasingly complex legal environment, practitioners face challenges relating to compliance, procedural fairness and the enforceability of awards.
If you require assistance with arbitration involving parties subject to sanctions, the team at Fortior Law would be pleased to assist. Our lawyers have extensive experience in international arbitration and complex cross-border disputes, including matters involving sanctioned entities, and in advising on compliance with applicable sanctions regimes and the mitigation of sanctions-related risks. For further information or legal support, please contact us at info@fortiorlaw.com.
