The 2022 Sanction Challenges for International Commercial Arbitration and Methods of Resolving them

Katrovskaya Elizaveta Aleksandrovna Expert on international arbitration of the Arbitration centre at the RSPP; Postgraduate, Department of Private International and Civil Law, Moscow State Institute of International Relations of the Ministry of Foreign Affairs of the Russian Federation 76 Vernadsky Avenue, Moscow, 119454, Russia, Moscow region katrovskaya00@mail.ru

In recent years, international commercial arbitration has become one of the most popular ways to resolve cross-border disputes and has earned the trust of business not only abroad, but also in Russia. Due to its flexibility, supranational nature, confidentiality and speed, arbitration has become a priority way to resolve disputes, and arbitration clauses are increasingly found in contracts. It is important to note that international commercial arbitration is considered not only as an alternative institution for dispute resolution, but also as a full-fledged international scientific community, for which the international character plays a decisive role, which, unfortunately, makes it extremely susceptible to sanctions.

Since 2014, the Russian Federation has faced a large number of restrictive measures concerning not only political, but also commercial relations, in particular, bans on the import and export of various goods, restrictions on crossing foreign borders, freezing of assets of individuals and legal entities, disconnection from the SWIFT system, as well as the suspension of some trade relations in as a whole. According to a Study by the Arbitration Association (RAA) 2022: The Impact of sanctions on Commercial Arbitration, "21% of Users reported that they were aware of situations when AU refused to conduct business due to OOM, 38.5% of Users noted that they were aware of cases when AU (or their banks) could not accept payments from Sanctioned persons, 18% of Users reported that they were aware of cases when arbitrators refused to act in this capacity (to accept an appointment or to arbitrate further when the issue of sanctions arose during arbitration proceedings), 20% of Users reported that they were aware of cases when arbitrators rejected claims or reduced the amount awarded due to OOM restrictions"^[1]. The impact of restrictive measures on international commercial relations and domestic business cannot be overestimated, as a result of which the number of cross-border disputes is only increasing, which means that international commercial arbitration is becoming more than relevant.

As a result, this article will consider the main difficulties faced by the commercial arbitration community in Russia in 2022/2023, as well as current ways of their possible resolution.

It seems logical to start with the changes concerning arbitration clauses, the drafting of which should now be paid special attention to minimize the risks that arise. A properly drafted arbitration clause will allow for and avoid possible difficulties with the subsequent execution of an arbitration award in which the Russian side participates. Increasingly, there are situations when arbitration institutions in unfriendly states or arbitrators themselves refuse to resolve disputes with the Russian side, therefore, provisions should be included in the arbitration clause that would help minimize such risks. Although at the moment it is possible to trace the emergence of positive trends in the access of the parties to arbitration, the withdrawal of international arbitration from sanctions and attempts not to restrict the parties in obtaining legal services, nevertheless, in the current situation it is very difficult to predict the development of events and predict what approach arbitration institutions and foreign jurisdictions will have in a year and next. One of the options for reducing risks is the introduction of a so-called cascade clause (waterfall clause) into the contract, which provides for the transfer of the dispute to several arbitration centers in order of priority. For example, first to the LCIA, and if it is impossible to consider the dispute in it, transfer it to another one. The number of specified arbitration institutions in such a clause usually amounts to 3-4 institutions, and the parties, at the time of the dispute, will be able to choose one of them in the order of priority indicated by them until they are completely sure that their dispute will be considered.

It should be noted that in this context, the qualification of the "impossibility" of considering the dispute causes difficulties. Is it possible to talk about this when the arbitration fee has not been paid? There are no objective criteria or practices on this issue yet, so disputes often arise between the parties whether enough efforts have been made to make such a payment and transfer the dispute to a specific arbitration institution for consideration. A possible way out of such a situation would be the inclusion in the arbitration clause of objective criteria agreed by the parties concerning, for example, the number of payment attempts set in advance. However, this clause also raises various risks associated with disagreements between the parties, for example, deliberate attempts by one party to pay the arbitration fee through sub-sanctioned banks in order to delay the dispute process, referring to the "impossibility" of payment, and to choose an arbitration institution in which this party is more interested, or contradictions of the parties when choosing an institution when one a person is included in the sanctions lists and refuses to choose a certain institution, while his counterparty is not under sanctions and prefers this particular arbitration institution. Thus, we can see that in the conditions of sanctions disputes and risks arise in any case, since there are no uniform rules and practices for getting out of such situations, so the best option for a quick and effective resolution of the dispute is to find a compromise and cooperation of the parties.

The most reasonable solution when drawing up a reservation is also the choice of a neutral arbitration institute or ad hoc arbitration, whose popularity has increased almost 4 times in recent years^[2], which is what most business participants are doing now. Based on this, we can observe a global reorientation towards Asian arbitration institutions. According to information from the Arbitration Association (RAA) Study 2022: The Impact of Sanctions on Commercial Arbitration: "One of the conclusions of the RAA Study on Sanctions 2022 is that the arbitration rules of Asian centers and ad hoc arbitration rules have become real alternatives and are no longer considered as an exotic choice. If this dynamic continues, the arbitration market may witness a significant reorientation of arbitration cases related to Russia and sanctions to some arbitration centers in Asia"^[3]. Among the leading arbitration centers in Asia are the Hong Kong Arbitration, the Singapore Arbitration Center, as well as the China International Trade and Economic Arbitration Commission. The main advantages of these arbitration institutions are that, firstly, they are located in non-"unfriendly" states, and secondly, they are actively trying to create more comfortable conditions for Russian, including sanctioned, individuals. For example, the Hong Kong Arbitration Center adheres to the policy of providing assistance and assistance to sub-sanctioned persons in applying for the permission they need to consider a dispute in arbitration. Accordingly, since at the moment the above-mentioned arbitration centers are extremely positive towards Russian individuals, they are gaining more and more popularity.

 In addition to the absence of a possible risk of refusal to resolve and administer the dispute, Asian institutions attract business participants with lower prices compared to European institutions. This statement is confirmed both in practice and in the analysis of the Regulations of the above-mentioned arbitration institutions, numerous authoritative practicing lawyers also refer to this, for example, in their scientific work Akchurina M.A. and Molfa M. note that "although the cost of arbitration proceedings administered by the GMAC and SIAC is generally comparable to the cost of proceedings based on The parties have the right to choose the method of determining compensation to arbitrators, which gives them the opportunity to optimize their costs for arbitration proceedings depending on the complexity of the dispute and the amount of the claim"^[4].

In the context of drafting an arbitration clause in the conditions of the sanctions agenda, it is impossible not to touch upon the issue of choosing the applicable law. The best option in this situation would be to choose a neutral substantive law, that is, not related to unfriendly jurisdictions. Referring to the RAA Study, it can be concluded that although English law continues to be the preferred and most common when choosing applicable norms, Russian respondents more often turn to national legislation, as well as to the legislation of Singapore, Switzerland or Hong Kong. At this stage, it is important for the parties to the contract to reach a consensus on this part, since the issue of applicable law will subsequently directly affect the enforceability and recognition of the arbitration award, which is in the interests of both parties to the dispute.

It seems not a little important to touch upon the approach of the Russian legislative system and the options for solving the problem that national law offers us. In this case, it is necessary to mention the so-called "Lugovoy's Law", or rather, entire sections in the agro-industrial complex concerning restrictive measures. Initially, the purpose of the adoption of this law was "to establish guarantees of ensuring the rights and legitimate interests of citizens of the Russian Federation and Russian legal entities against whom unfriendly restrictive measures have been introduced by foreign states. In addition, the establishment of the exclusive competence of arbitration courts in the Russian Federation on disputes involving persons to whom sanctions have been applied, regardless of who is the party to the dispute — legal entities or citizens"^[5]. Thus, article 248.1 of the APC established the exclusive competence of the arbitration courts of the Russian Federation in respect of two categories of disputes: disputes involving persons against whom restrictive measures, i.e. sanctions, are applied, and in respect of disputes based on restrictive measures. It is important to note that part 4 of article 248.1 stipulates that the exclusive competence of the Russian court arises and can be established when the arbitration clause is unenforceable due to sanctions. In this case, it is impossible not to notice the conflict that arises between the first and fourth paragraphs, namely, the first paragraph stipulates that if there is an arbitration clause, the parties must apply to the appropriate arbitration institute, and the fourth paragraph establishes that despite the existence of an arbitration clause, the parties can file a lawsuit in a Russian court, if their rights- or otherwise restricted by sanctions. This conflict did not last long, since the Supreme Court in its ruling of 09.12.2021 in the Uraltransmash case (A60-36897/2020)^[6] found that the very fact of imposing sanctions on a person indicates a restriction of his access to justice, which means this is already an exhaustive basis for initiating a dispute in a Russian court despite for the presence of an arbitration clause. All subsequent cases under Article 248.1 of the APC were resolved in a similar way, referring to the above definition. However, such a tough position of the Supreme Court seems to require some adjustments and clarifications, as it creates certain risks for the further cooperation of the Russian Federation with foreign counterparties, since it invalidates any arbitration clause in the contract with a person who has fallen under sanctions, which complicates the process of concluding contracts with the Russian side and makes them less attractive to foreign partners, since the possible consideration of a cross-border dispute in the arbitration court of Russia may alienate them.

Turning to the topic of payment of the arbitration fee in the context of disconnection from the SWIFT system, as well as the refusal of most European institutions to accept payments from Russian citizens, I would like to refer again to the statistical data provided in the RAA Study for 2022, in which it was noted that "38.5% of Users noted that there were many examples when AU (or their banks) could not accept payments from sanctioned individuals. Naturally, the AU or the parties may face similar problems when returning arbitration costs to the parties after the completion of the case"^[7]. Taking into account that the inability to pay the arbitration fee directly affects the possibility of dispute resolution, in order to reduce risks and time, as already mentioned above, the parties should pay attention to ad hoc arbitration or to Asian institutions. However, we can already trace positive changes in this area, for example, in mid-October 2022 OFSI (the regulatory authority for the UK) issued a general license for LCIA (General License INT/2022/1552576 Payments^[8]), this license allows LCIA to receive payments from sub-sanctioned persons. In practice, this license gives a sanctioned person the opportunity to submit a dispute to LCIA arbitration by paying the arbitration fee without any restrictions, and LCIA will be able to use these funds to pay for the services of arbitrators and cover arbitration costs. However, it should be noted that the General License applies only to those disputes that are administered by the LCIA and are considered according to their Rules, if the dispute is only administered by the LCIA, but is considered according to other arbitration rules, the General License is not valid, and the parties still need to apply for individual licenses to the supervisory authority, and the process of obtaining a license can take about 5-6 months or more.

One of the fundamental issues is also the enforceability of an arbitration award in the context of anti-Russian sanctions, namely the possibility of enforcement of an arbitration award concerning a party that is under sanctions, as well as the practice of enforcement of arbitral awards in unfriendly jurisdictions. This issue is regulated by the "Convention on the Recognition and Enforcement of Foreign Arbitral Awards" of 1958, according to which the decisive factor in refusing to enforce a decision is its contradiction to national legislation, public order or the fundamental legal principles of the country in which it is to be enforced. Consequently, if an arbitration award involving a sanctioned party is to be enforced, it may violate public order in the case when enforcement must take place in the country against which sanctions are imposed, or in the country that imposed sanctions. Proceeding from this, quite often the parties are faced with the refusal to enforce the decision or with a banal "delay" of the process. However, in practice we can also see examples of the execution of decisions of Russian arbitration institutions in unfriendly jurisdictions. For example, on 25.04.2022, the decision in the case of the Arbitration Center at the RSPP was recognized as enforceable in the UK. In the Ruling on this case, the High Court of England and Wales stated that the arbitration award was recognized as complying with the requirements of the New York Convention of 1958, as well as article 101 of the Arbitration Act of England of 1996 (Arbitration Act 1996) and enforceable in England, Wales and Northern Ireland "as if it were a decision of the High Court (to be enforced in the same manner as the judgment of this Court)"^[9].

         In conclusion, I would like to touch upon the digitalization of the arbitration procedure as one of the ways to continue the activities of arbitration institutions and international cooperation. Due to the introduction of restrictive measures related to the closure of most borders, as well as the complicated procedure for obtaining visas in unfriendly states, the consideration of disputes involving foreign citizens, arbitrators or persons located abroad, their presence at the place of arbitration becomes impossible. Technological progress and digitalization make it possible to hold meetings from anywhere in the world, including with the participation of foreign arbitrators who are ready to consider disputes with the participation of the Russian side, but I cannot attend in the Russian Federation due to the circumstances that have arisen. Online meetings are often held in programs specially developed by arbitration institutions, which guarantees their confidentiality, allows for the evaluation of evidence, questioning of parties and witnesses. Most of the participants in the process react positively to such innovations, which have already become familiar after the COVID-19 pandemic. It should be noted that this decision has its drawbacks, for example, there are cases from practice when a party joined the meeting from the airport building, or the arbitrator had doubts about the presence of a third party in the room with one of the parties, which is a violation of confidentiality and the Rules of the arbitration institute. However, these issues require more detailed consideration in a separate scientific study.

         All of the above allows us to draw the following conclusions: the sanctions of 2022, compared with the previous ones, undoubtedly affected the world of arbitration, but did not suspend the activities of arbitration institutions as a whole. The 2022 RAA study only confirms that restrictive measures to some extent even pushed domestic arbitration centers and national legislation to positive changes, reforms and development, bringing the Russian Federation to a new level as a place of international arbitration. An increasing number of business participants are turning to Russian institutions, as well as finding new ways of cooperation with foreign partners. It should be noted that the reorientation towards arbitration institutions in Asia strengthens Russia's relations with Asian states and organizations, which has a positive effect on international cooperation and strengthens Russia's position abroad. It should also be noted that there is a tendency to ease sanctions and remove the scope of arbitration from their action, which we can clearly see in practice the enforcement of arbitration decisions of Russian institutions abroad, the lifting of restrictions on the payment of arbitration fees in the UK, as well as a gradual increase in the number of foreign arbitrators and law firms willing to work with Russian persons. I would like to hope for the further development of international commercial arbitration and the complete removal of this area from sanctions, since the emerging political difficulties should not prevail over the right of the parties to justice and judicial protection.