Risk Management of Sanctions in Arbitration

The Vice-Presidency for Research and Technology News Desk of the University of Tehran:

Dr. Sepideh Razi, Ph.D. in Private Law from the University of Tehran, whose research focuses on commercial law and arbitration, has completed her postdoctoral research on “Risk Management of Sanctions in Arbitration” under the support of the Shahid Chamran Award of the National Elites Foundation, hosted by Dr. Laya Joneydi, professor of the Faculty of Law and Political Science at the University of Tehran. Below, Dr. Razi discusses the dimensions of this research and its findings.

Upon the occurrence of a dispute—and even before a dispute arises—parties consistently seek to select a low-risk, efficient, and appropriate mechanism for resolving their disputes in light of the nature of their relationship. This choice assumes even greater importance in international commercial relations, where disputes may arise within different legal, economic, and political environments, and becomes a fundamental concern in the context of sanctions. Sanctions affect not only the commercial and economic relations between contractual parties, but may also affect the dispute resolution mechanism itself. Accordingly, choosing a dispute resolution method entails selecting a mechanism that must, from the outset, have the capacity to address the risks arising from sanctions.

Against this background, arbitration, as a transnational mechanism independent of state judicial systems, has become a preferred method of dispute resolution due to its structural flexibility and capacity to adapt to the complexities arising from sanctions. Nevertheless, sanctions may expose arbitration itself to various risks, from its commencement through the recognition and enforcement of the arbitral award.

At the commencement stage, sanctions-related risks associated with the payment of arbitration costs—including blocked accounts, banks’ refusal to process transactions, and the need to obtain sanctions-related licences—may effectively prevent arbitration from commencing. At the level of participants, arbitrators, counsel, experts, and arbitral institutions themselves may be subject to sanctions-related restrictions, potentially affecting the parties’ right to present their case, equality of the parties, and the impartiality of the proceedings. At the stage of determining the applicable law, where the chosen law treats sanctions as part of its public policy, the arbitrator may face additional pressure between giving effect to the parties’ contractual arrangements and complying with sanctions.

Finally, at the recognition and enforcement stage, the arbitrability of the dispute, the relationship between sanctions and the public policy exception, and the blocking of assets and accounts may prevent recognition of the award or, even where the award is legally valid and recognizable, prevent the award creditor from obtaining the expected economic outcome at the enforcement stage.

In this research, a three-level framework for assessing “risk before action,” developed by the ICC Commission on Arbitration and ADR, has been employed to assess these risks. Under this framework, risk is not assessed merely through a general estimation of the likelihood of an event occurring; rather, its effects are examined at three levels: potential costs, measurable consequences, and non-measurable consequences. Applying this model in the context of sanctions makes it possible to identify and assess sanctions-related risks not in a fragmented or case-by-case manner, but within a unified analytical framework.

Some of the proposed measures include the use of escrow accounts for the payment of arbitration costs; resort to currencies issued by non-sanctioning states; the design of phased and flexible payment mechani

Dr. Razi-Post Doctra: sms; the selection of seats adopting a narrow interpretation of sanctions-related public policy and not recognizing unilateral sanctions as mandatory rules; the selection of governing laws under which sanctions do not form part of the applicable legal order and compliance with them is not legally required; providing for the possibility of changing the arbitral institution or seat; and appointing arbitrators with sanctions expertise to ensure the careful drafting of the arbitral award.

One of the fundamental proposals is to consider the capacity of sanctioned legal systems, such as Iran, as a “supportive seat or governing law.” Under this approach, choosing the governing law or seat of arbitration in a legal system that regards unilateral and secondary sanctions neither as part of its public policy nor as a ground for invalidating an arbitral award may reduce the risk that sanctions will be invoked to undermine the effectiveness of the arbitration. This approach is, however, contingent upon designing in advance a reliable enforcement route in a neutral jurisdiction with a financially dependable enforcement environment. If accompanied by institutional strengthening and the development of judicial practice in the sanctioned state, such a model could both enhance the effectiveness of arbitration for sanctioned parties and contribute to strengthening that state’s position in the development of arbitration.

This shift in perspective requires the arbitration agreement, payment arrangements, choice of seat and governing law, and defence strategies at the recognition and enforcement stage to be designed on the basis of an ex ante risk assessment and through the analytical models proposed in this research. In this way, arbitration can function as a flexible, transnational mechanism that remains, to the extent possible, independent of political developments and can become an effective instrument for resolving disputes arising from international commercial relations in the context of sanctions.

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