Key Sanctions Issues in Civil Litigation and Arbitration

Economic sanctions issues can create added complexities for parties who wish to engage in litigation or arbitration or who find themselves defendants or respondents in such proceedings. This chapter explores the legal representation of parties subject to sanctions, the judicial challenges available to parties who become sanctioned, how economic sanctions issues arise more broadly in litigation and arbitration, and issues that parties should be aware of to minimise their risks of becoming embroiled in sanctions-related adversarial proceedings.

While this chapter focuses primarily on the role of US economic sanctions in litigation and arbitration, the sanctions regimes of many other jurisdictions and international bodies, such as the European Union and its Member States, the United Kingdom, Australia, Canada and the United Nations, may also pose unique issues in disputes, and merit careful consideration where implicated.

Key sanctions issues in litigation

Can I represent a sanctioned party in a US litigation?

Authorisations for provision of legal services

All current US sanctions programmes authorise the legal representation of sanctioned parties as plaintiffs or defendants in US litigation (as well as US administrative proceedings) by ‘general licences’.^[2] General licences, published on the website of the US Department of the Treasury’s Office of Foreign Assets Control (OFAC) or in sanctions regulations, authorise certain dealings that are otherwise prohibited under the applicable sanctions.^[3] General licences authorising legal representation of sanctioned parties in US litigation typically do not authorise all types of dealings that might arise in the course of authorised legal representation.^[4] For example, a specific licence is ordinarily required to execute a settlement agreement or enforce any lien, judgment, arbitral award, decree or other order that would transfer or otherwise alter or affect blocked property or interests in property.^[5] Additionally, many general licences, particularly those involving payments for authorised legal services, require submission of initial and periodic reports to OFAC.^[6]

Legal services not expressly covered by a general licence can only proceed through a specific licence. OFAC has discretion to issue specific licences authorising an otherwise prohibited dealing. Importantly, a specific licence should be secured before entering into any engagement or fee agreement for legal representation that is not otherwise authorised, as OFAC may deem agreements concluded prior to authorisation as sanctions violations. If there are arguments that the legal representation is covered by a general licence but there is doubt in that regard, the party wishing to engage in the representation can request interpretive guidance from OFAC that no specific licence is required or, if the representation is prohibited, that OFAC issue a specific licence.

Payment of legal fees by sanctioned parties

A separate licence may be required for receipt of payment of legal fees if the client is blocked or otherwise subject to sanctions affecting its assets and debt obligations. Many sanctions programmes offer general licences for payment of legal fees for authorised representation from non-blocked funds located outside the United States,^[7] whereas other programmes require a specific licence for the receipt of payment of legal fees.^[8] A specific licence is generally required if the payment will originate from blocked funds and the payment involves a US person or other US nexus.^[9] OFAC will consider issuing a specific licence, case by case, for payment of fees from blocked funds if those fees relate to challenging the client’s designation.^[10] If OFAC authorises this use of blocked funds, it may nonetheless limit the amount of blocked funds that may be used for those fees.^[11]

Many general licences authorising receipt of payment of legal fees for authorised legal services state that US persons receiving the payment do not need to obtain separate, specific authorisation to contract for services or receive payment for services that are ordinarily incident to the authorised payment or services, such as contracts for expert witnesses and private investigators.^[12]

EU licensing requirements

EU sanctions do not impose a formal requirement for attorneys to obtain a licence or other authorisation to represent sanctioned parties. However, the receipt of payment requires a licence for clients subject to an EU asset freeze. EU asset freeze sanctions typically provide licensing grounds for Member State authorities to consider applications for exemption that would authorise payment for legal representation and other related fees. Moreover, Article 6 of the European Convention for the Protection of Human Rights and Fundamental Freedoms guarantees the right to counsel and the right to a determination of one’s rights and obligations before a neutral tribunal to all legal and natural persons.^[13]

Can sanctions designations be challenged in US courts?

Challenging a party’s designation or sanctions law or regulations

Persons subject to sanctions restrictions and other interested parties can seek to overturn designations, asset freezes or sanctions provisions through litigation. Cases challenging OFAC actions, in particular, can be difficult to win because US courts are extremely deferential to OFAC given that OFAC operates ‘in an area at the intersection of national security, foreign policy, and administrative law’.^[14] Although they are rarely successful, plaintiffs can challenge OFAC action by asserting many claims, including that:

• designation to the List of Specially Designated Nationals and Blocked Persons (the SDN List) violates the Fifth Amendment Due Process Clause;^[15]
• comprehensive country sanctions violate the Fifth Amendment right to travel;^[16]
• asset freezes are unreasonable Fourth Amendment seizures^[17] or Fifth Amendment takings;^[18]
• the designation authority for provision of material support violates the First Amendment;^[19]
• OFAC’s authorising statute or rules and regulations are unconstitutionally vague;^[20] or
• designations or asset freezes are arbitrary and capricious.^[21]

Designations contested in court may originate with other agencies besides OFAC. In the recent case Xiaomi Corp. v. Department of Defense,^[22] the plaintiffs successfully contested the designation by the Department of Defense (DoD) of Xiaomi Corp. (Xiaomi) under Section 1237 of the National Defense Authorization Act for Fiscal Year 1999, as amended (Section 1237).^[23] The court found the plaintiffs showed a high likelihood of success in their claims based on the Administrative Procedure Act (APA), and so granted a preliminary injunction against enforcement of the designation and resulting prohibitions.^[24] Specifically, the court found that the DoD decision memo explaining the basis of the designation failed to explain why Xiaomi met the statutory criteria of Section 1237, and so the designation qualified as ‘arbitrary and capricious’;^[25] that Xiaomi did not, in fact, meet the statutory criteria for designation under Section 1237;^[26] and that the designation did not rest on ‘substantial evidence’ as required by the APA.^[27] The DoD did not appeal the decision, and the court issued a final order vacating the designation as an improper agency action under the APA.^[28] In a subsequent case, Luokung Tech. Corp. v. DOD,^[29] the court relied heavily on the analysis in Xiaomi in issuing a preliminary injunction against the Section 1237 designation of another Chinese technology company.^[30]

Challenging OFAC blocking orders

In Al Haramain Islamic Foundation Inc v. United States Dep’t of the Treasury, a US non-profit entity designated to the SDN List successfully argued that OFAC needed a warrant to block its assets pending investigation (pre-designation) under Executive Order 13224 and could not rely on the ‘special needs’ exception or ‘general reasonableness’ test of the Fourth Amendment.^[31] The Ninth Circuit reasoned that OFAC’s national security aims were not rendered impracticable by a warrant requirement prior to blocking the plaintiff’s assets, given the domestic plaintiff’s strong interest in freedom from a blocking order’s broad seizure.^[32] The court did ‘not address the requirements under the Fourth Amendment for other situations [beyond blocking a US person’s assets pending investigation] including, for example, designations of [non-US] entities or designations [of domestic entities] by executive order.’^[33] But on remand, the lower court ruled the violation was harmless.^[34]

In Zarmach Oil Services v. United States Dep’t of the Treasury, the District Court for the District of Columbia dismissed the plaintiff’s claim that OFAC’s refusal to release blocked funds was arbitrary and capricious and in excess of its statutory jurisdiction.^[35] Even though the sanctioned party only had an indirect future or contingent interest in the relevant funds^[36] – which the plaintiff argued was extinguished when a third party satisfied the contract under which the funds were originally owed to the sanctioned party – the Court deferred to OFAC’s determination that unblocking would be inconsistent with OFAC policy.^[37]

First Amendment challenges to provision of ‘material support’ to designated persons

Interested persons can raise free speech and association challenges regarding the prohibitions on non-designated party dealings with designated parties. A seminal US Supreme Court case on this topic is Holder v. Humanitarian Law Project (HLP).^[38] HLP involved a free speech and association challenge to the Anti-Terrorism Act’s criminal prohibition on the provision of material support to designated terrorists.^[39] The Court held that the prohibition, as applied to the plaintiff’s activities, did not violate the plaintiff’s First Amendment rights, because the government adequately substantiated its determination that prohibition of the plaintiff’s activities was necessary to serve the government’s urgent objective of preventing terrorism.^[40] The specific planned training and services bore a real risk of furthering terrorism, even though the supporters meant to promote only the group’s non-violent ends.^[41] While criticised as overly broad and unsupported,^[42] the Court did limit its ruling, stating that (1) future targeting of speech or advocacy as material support may not survive First Amendment scrutiny, and (2) the holding does not suggest that ‘Congress could extend the same prohibition on material support at issue here to domestic organizations’.^[43]

In Al Haramain Islamic Foundation, Inc. v. US Department of the Treasury, a US non-profit entity, the Multicultural Association of Southern Oregon (MCASO), successfully argued that OFAC’s prohibition on providing services to AHIF-Oregon – an OFAC-designated terrorist organisation – violated MCASO’s First Amendment rights.^[44] MCASO’s proposed activities concerned a blocked domestic branch of an international organisation, rather than a non-US terrorist organisation as in HLP, and there was little evidence that the ‘pure-speech activities proposed by MCASO’ (activities such as co-sponsoring events in the United States) would aid the terrorist purposes of the international parent organisation.^[45]

In Open Society Justice Initiative v. Trump (OSJI),^[46] the plaintiffs sought relief against a prohibition on making ‘any contribution or provision of funds, goods, or services’ to any person designated under Executive Order 13928, which had provided for sanctions directed at the International Criminal Court (ICC) over certain investigations of US military forces.^[47] The plaintiffs had worked with ICC officials sanctioned under Executive Order 13928 on matters besides those ICC investigations at issue in Executive Order 13928, and wished to continue doing so but for the prohibition.^[48] The plaintiffs alleged, among other claims, a violation of their First Amendment rights. The court, finding that the ‘restrictions prohibit or chill significantly more speech than . . . is necessary to achieve their end’, and that the plaintiffs were likely to succeed on their First Amendment claim, issued a preliminary injunction.^[49]

Challenging other economic restrictions under US law

Recent litigation has tested the limits of Executive Branch authority to restrict certain economic activity under the International Emergency Economic Powers Act (IEEPA).^[50] On 6 August 2020, then-President Trump issued a pair of Executive Orders requiring the Secretary of Commerce to ‘identify’ prohibitions on certain transactions involving two Chinese-owned mobile applications (apps) – specifically, the video app TikTok, and the communications app WeChat.^[51] The prohibitions eventually identified by the Commerce Department were designed to ‘eliminate access’ to the apps and ‘significantly reduc[e] their functionality’.^[52]

Plaintiffs challenged the WeChat prohibitions in one case, and the TikTok prohibitions in two separate cases.^[53] All plaintiffs sought preliminary injunctions, alleging that the prohibitions violated the plaintiffs’ constitutional rights, violated the APA and exceeded Executive Branch authority under IEEPA.^[54] In the WeChat case, the district court granted a preliminary injunction based on the plaintiffs’ likelihood of success in showing a First Amendment violation – namely, that the prohibitions ‘are the equivalent of censorship of speech or a prior restraint on it’.^[55] In the two TikTok cases, both district courts issued a preliminary injunction based on the plaintiffs’ likelihood of success in showing that the prohibitions violate IEEPA’s ‘Berman Amendment’, which expressly ‘exempt[s] the regulation of informational materials from the Executive’s congeries of powers’.^[56] One court further found that the plaintiffs were likely to succeed in showing violations of IEEPA’s prohibition on the regulation of personal communications,^[57] as well as in showing that the prohibitions were arbitrary and capricious under the APA.^[58] In both TikTok cases, the courts declined to reach the plaintiffs’ constitutional arguments, but noted that constitutional issues were present.^[59] The Trump Administration appealed all three preliminary injunctions, but as of the time of writing the government has successfully petitioned to hold the appeals in abeyance as the Biden Administration ‘conducts an evaluation of the underlying record justifying these prohibitions’.^[60]

EU challenges to designations

Much like US court challenges to OFAC action and regulations, the Court of Justice of the European Union (CJEU) has heard a number of cases challenging EU sanctions designations. In particular, the Kadi cases have proven instrumental in shaping the EU sanctions framework by increasing the judicial scrutiny on EU Council decisions imposing asset freezes. Following the Kadi precedent, the Council must provide ‘individual, specific and concrete’ grounds to justify each asset freeze. In addition, a ‘sufficiently solid factual basis’ must exist to substantiate the grounds for listing.^[61] However, actions for asset freeze annulment have not necessarily provided substantial assistance to sanctioned plaintiffs, as the Council regularly relists those plaintiffs even if annulment is granted by the Court, by simply providing additional grounds for their relisting. This risk of redesignation, coupled with the lengthy CJEU procedures to obtain initial annulment, may have a chilling effect on sanctioned parties challenging EU designations.

What types of cases are filed in US courts against sanctioned parties or that involve sanctions issues?

Enforcement of arbitral awards

Sanctioned party defendants face many typical causes of action in US litigation, such as breach of contract claims. But one overarching claim is for the enforcement of awards or judgments against the blocked assets of sanctioned parties.^[62] Recent US litigation involving Venezuela and its national oil company illustrates how sanctions may affect arbitral award enforcement proceedings. In the Crystallex case, the judgment holder sought to attach shares of the US subsidiary of Venezuela’s state-owned oil company Petróleos de Venezuela, SA (PdVSA).^[63] The shares in question were the subject of Executive Orders restricting transfer of Venezuelan or PdVSA-controlled assets in the United States.^[64] Although the Third Circuit held that the judgment holder could attach the subsidiary’s shares in satisfaction of its arbitral award against Venezuela, the Third Circuit also held that, in keeping with OFAC guidance, any attachment and execution of the shares would ‘likely need to be authorised by [OFAC]’.^[65] After various proceedings on remand, the district court ordered that procedures for the sale of the shares could be established and followed to ‘the maximum extent that can be accomplished without a specific license from OFAC’.^[66]

Enforcement of terrorism-related judgments

Plaintiffs who obtain terrorism-related judgments against designated state sponsors of terrorism (typically default judgments where the state does not appear to defend) may seek to enforce their judgments against certain assets of the state held in the United States by the state, its agencies or instrumentalities, or third parties. Such plaintiffs may invoke the Terrorism Risk Insurance Act^[67] to seek attachment or execution of any blocked assets of the state or its agencies or instrumentalities. Iran has appeared in several such actions to defend its interests.^[68]

Challenges to OFAC’s enforcement authority

Parties subject to OFAC enforcement actions for alleged sanctions violations may choose to challenge that enforcement on US constitutional or APA grounds. For example, in Exxon Mobil Corp v. Mnuchin, Exxon challenged a US$2 million civil penalty for allegedly violating OFAC’s Ukraine-related sanctions regulations.^[69] OFAC had found that Exxon committed a sanctions violation by dealing with SDN Igor Sechin when he signed a contract with Exxon in his capacity as president of Rosneft OAO, a non-designated entity.^[70] The district court vacated the penalty, ruling that public statements from the Executive Branch and guidance from OFAC did not provide fair notice that Exxon’s conduct would be viewed as illegal, and hence the penalty violated Exxon’s Fifth Amendment Due Process rights.^[71]

Notably, the court considered Exxon’s failure to seek OFAC’s guidance a relevant factor, but not dispositive, because OFAC ultimately bears the burden of conveying its interpretation to the public.^[72]

In another case, Epsilon Elecs., Inc. v. United States Dep’t of the Treasury,^[73] the plaintiff brought a successful APA claim against part of a civil penalty assessed by OFAC for alleged violations of the Iranian Transactions and Sanctions Regulations (ITSR). The court held that for five of 39 penalised transactions, OFAC violated the APA’s arbitrary-and-capricious standard in determining that the plaintiff had reason to know that several shipments of its goods would violate the ITSR, despite the existence of countervailing evidence.^[74]

Contract disputes

Both sanctioned parties and interested parties (e.g., contractual counterparties) face breach of contract disputes when the United States, the European Union or the United Kingdom imposes sanctions that prevent contract completion. Contract defendants may invoke force majeure defences (which sometimes expressly cover the imposition of sanctions), contract illegality, compliance with contract representations and frustration, among other things. For example, a California state appellate court held in Kashani v. Tsann Kuen China Enterprise Co. that the non-performance of contract requiring shipment of US-manufactured computers to Iran did not give rise to a claim, because the agreement was illegal under US sanctions and against public policy.^[75] Additionally, the court rejected the plaintiffs’ assertion that the potential availability of specific licences gave the contract legal effect, because the regulations indicated that a specific licence was a prerequisite to entering into a contract that would otherwise violate sanctions.^[76] In Lamesa Investments Ltd v Cynergy Bank Ltd, the English High Court excused the defendant debtor from liability resulting from failure to pay its sanctioned party lender because its Facility Agreement contained a requirement that performance should comply with ‘mandatory provisions of law’, which the Court interpreted to include compliance with the applicable US sanctions.^[77]

The EU Blocking Regulation, which prohibits EU and UK^[78] persons from complying with US sanctions on Iran and Cuba (akin to an anti-boycott rule), may pose challenges to successfully invoking US sanctions as a defence to breach of contract claims before courts in EU jurisdictions and the United Kingdom.^[79] The Blocking Regulation affords EU and UK persons protection from enforcement of judgments relating to covered US sanctions in the European Union and the United Kingdom and provides the right to recover legal costs and damages caused by actions based on, or resulting from, such sanctions.^[80]

Disputes involving the Blocking Regulation have increased in EU national courts. In one EU contract case, a Dutch national court considered whether a Dutch company could invoke force majeure to terminate a software distribution contract with Cuban state-owned entities after a US investment firm purchased the Dutch company, thereby subjecting it to the prohibitions of US sanctions against Cuba.^[81] In the spirit of the Blocking Regulation, the court held that the termination was not fair and reasonable, and prevented the Dutch company from invoking a US sanctions claim of force majeure to avoid the contract, despite the risk of OFAC enforcement.^[82]

Notably, the CJEU received a request in 2020 to issue a preliminary ruling in a German case addressing the Blocking Regulation and the effect of US secondary sanctions on a contract between a German telecommunications provider and the EU branch of an Iranian bank.^[83] This pending EU Court ruling (which is expected sometime in 2021) is expected to have a significant effect on both EU law arbitrations and cases pending before national EU Member State courts, which are also considering how US secondary sanctions will be viewed under the Blocking Regulation.

US courts have yet to consider the conflict of law posed by the EU, UK and US regulations. At the time of writing, the authors are aware of only one reported US case substantively dealing with the Blocking Regulation and US sanctions. In United States v. Brodie, the Eastern District of Pennsylvania rejected a motion by EU, UK and Canadian criminal defendants to dismiss their sanctions-related indictment because EU, UK and Canadian blocking regulations compelled defendants’ exports to Cuba in contravention of US sanctions.^[84]

Helms-Burton private right of action

Title III of the Helms-Burton Act provides a new private right of action in the sanctions realm. Although it was enacted in 1996, the Act was partially suspended until 2019, when the Trump Administration lifted the suspension of the private right of action.^[85] Title III enables US nationals to file suit in a US federal court against any third party they allege is ‘trafficking’ in their property confiscated by the Cuban government after the Cuban Revolution.^[86] As Title III’s definition of ‘trafficking’ is quite broad – and the Act makes provision for treble damages in some cases – an initial wave of plaintiffs rushed to file soon after the right of action became available on 2 May 2019. However, the law’s complex requirements present significant hurdles for plaintiffs.^[87]

For example, in Gonzalez v. Amazon.com, the plaintiff alleged he was the rightful owner of land that had been confiscated from his family in 1964, and that the defendants began selling charcoal produced on that land in 2017.^[88] The court dismissed the claim in March 2020, without prejudice and with leave to amend, for failure to allege an actionable ownership interest and failure to allege that defendants knowingly and intentionally trafficked in the agricultural property.^[89] The plaintiff filed an amended complaint containing additional information about the history of his family’s property interest.^[90] In May 2020, the court dismissed the claim again, but with prejudice, for failure to allege an actionable ownership interest.^[91] The court held that the plaintiff failed to show, as Title III requires, that he had acquired the property before 12 March 1996. On appeal, the Eleventh Circuit affirmed the district court’s decision in a brief, per curiam, unpublished opinion.^[92] Although Gonzalez provides useful precedent for evaluating ownership claims under Title III, neither the district court nor the Eleventh Circuit provided guidance for addressing claims that a person ‘traffics’ in confiscated Cuban property.

More than 30 lawsuits similar to Gonzalez have been filed under Title III,^[93] most of them in the Southern District of Florida. These cases largely feature claims that US and EU defendants allegedly benefit in some way from commercial activities involving the plaintiffs’ purported confiscated property. Defendants have sought dismissal on grounds including subject matter and personal jurisdiction, standing, and failure to satisfy Title III requirements. As in Gonzalez, district courts in some cases have granted motions to dismiss.^[94] In at least three Title III cases involving the plaintiff Havana Docks Corporation, however, the court has allowed the cases to proceed.^[95] Notably, Title III provides that the re-suspension of the right of action by the President shall not affect suits commenced before the date of such suspension.^[96] Therefore, any reinvocation of the waiver by President Biden likely would not extinguish claims that have already been filed.

Even if future Title III claims are successful, plaintiffs may face difficulty in enforcing awards outside the United States. The European Union, United Kingdom and Canada have all expressed opposition to Title III suits against their nationals, which they consider to be extraterritorial applications of unilateral Cuba-related measures that are contrary to international law. Both Canada’s and the EU’s blocking regulations target the Helms-Burton Act, and may protect defendants from Title III award enforcement in those jurisdictions.

Terrorism claims premised on allegations that defendants provided ‘material support’ to state sponsors of terrorism, designated terrorists or terrorist organisations

The US and other sanctions regimes are often implicated in suits brought under US statutes creating private rights of action for terrorism-related claims.^[97] Such claims are typically brought by victims of terrorism or their estates or survivors, and may involve allegations that the defendants caused terrorist acts or provided support for such acts. The defendants in such actions may include private entities (particularly including financial institutions),^[98] as well as sovereign states.^[99]

The sanctions designation of an entity may satisfy a precondition for a terrorism-related actions,^[100] or otherwise bear on questions of scienter, for example, whether a defendant knew it was providing material support to a terrorist organisation in violation of US law.^[101] However, in the context of terrorism-related claims against financial institutions, courts have held that a counterparty’s status as designated entity alone is not sufficient to establish scienter,^[102] or to establish liability under an aiding-and-abetting or conspiracy theory.^[103]

In suits where the designated entity itself is the defendant, courts have also held that designation is not sufficient in itself to establish that a designated entity purposefully engaged in misconduct for the purpose of furthering terrorist aims.^[104]

In Linde v. Arab Bank PLC, the Second Circuit established a three-element test for determining aiding and abetting liability in the context of terrorism-related suits.^[105] Some courts have since held that claims against financial institutions satisfy the Linde test,^[106] while other courts have held that the banking activities of financial institutions failed to satisfy the Linde test.^[107] The question of what level of publicly available information regarding activities of a terrorist counterparty may establish liability of a financial institution under an aiding-and-abetting theory has been certified for interlocutory appeal.^[108]

Criminal prosecution for violation of sanctions

The US government may pursue individuals and entities for alleged wilful sanctions violations, including individuals and entities not targeted by sanctions.^[109] These criminal proceedings typically involve charges including violating or conspiring to violate one or more of OFAC’s authorising statutes (such as IEEPA), or additional financial crimes charges such as bank fraud and money laundering.

In United States v. Huawei Technologies Co., Ltd.,^[110] the Chinese telecommunications company Huawei and co-defendants including company chief financial officer Meng Wanzhou face charges including alleged violations of US Iran-related sanctions in the early 2010s. The defendants potentially could face steep fines and incarceration on the sanctions charges alone. At the time of writing, Meng is living in Canada and challenging the request for her extradition to the United States in Canadian court.

The United States has also prosecuted numerous individuals and Turkish state-owned bank Halkbank for an alleged scheme to violate US Iran-related sanctions.^[111] The district court hearing the case rejected Halkbank’s argument that, as an instrumentality of a foreign state, it is immune from prosecution under the FSIA.^[112] The case is currently on appeal.^[113]

Where does arbitration’s intersection with sanctions differ from litigation?

Can I represent a sanctioned party in arbitration?

In general, US sanctions programmes permit legal representation of a sanctioned party in a US arbitration, but typically not representation of a sanctioned party in an arbitration outside the United States.^[114] Under the EU or UK sanctions regime, there is no formal requirement for legal counsel to obtain a licence to represent a sanctioned party in any arbitration, within or outside the European Union or the United Kingdom.

The Iranian Transactions and Sanctions Regulations contain a unique authorisation for the initiation and conduct of arbitral proceedings and proceedings before international tribunals, within or outside the United States, that are otherwise prohibited by the sanctions.^[115] However, the arbitral proceedings must be either (1) to resolve disputes between the government of Iran or an Iranian national and the United States or a US national, or (2) ‘contemplated under an international agreement’, or (3) involve the enforcement of awards, decisions or orders resulting from point (1) or point (2).^[116] OFAC does not provide formal guidance on the meaning of arbitral proceedings ‘contemplated under an international agreement’ in this general licence. The phrase could be construed to cover treaties that specifically contemplate the arbitration at issue (e.g., if two countries establish an arbitral venue for specific claims). It might also cover proceedings contemplated under multilateral treaties establishing arbitral bodies, such as the ICSID Convention, or disputes arising under bilateral investment treaties. Finally, there is also an argument that ‘international agreement’ extends to cover international commercial contracts with an arbitration clause.

May I serve as an arbitrator if arbitration participants are sanctioned parties?

Yes. However, US persons serving as arbitrators may need a specific licence, depending on the specific restrictions applicable to the sanctioned party.^[117] Although OFAC has not issued formal guidance on the subject, OFAC could reasonably view serving as an arbitrator as a prohibited provision of services to the sanctioned party, thereby requiring a licence. The general licences on the provision of legal services on their face do not extend to the provision of arbitrator services. Note that both the sanctioned party’s counsel and the arbitrators may need licences before agreeing to engage in arbitration involving a sanctioned party.

Under EU and UK sanctions, serving as an arbitrator does not require a licence, but payment of arbitrators’ fees requires a licence when a paying party is subject to an EU or UK asset freeze. If an arbitrator is a sanctioned party, depending on the sanctions restrictions applicable to them, a US specific licence may be needed to appear before them for the arbitration, and EU, UK and US licences may be needed for the parties’ payment of the sanctioned arbitrator’s fees.

Can I participate in an arbitration with the arbitral seat in a sanctioned country?

Sanctions prohibitions may prevent participation in an arbitration that has a seat in a sanctioned country or region absent a licence to the extent that the participation requires engagement with individuals in, the sanctioned country or region. As at the time of writing, the United States maintains comprehensive sanctions against Cuba, Iran, North Korea, Syria and the Crimea Region of Ukraine. Comprehensive sanctions generally prohibit US persons from engaging in any commercial activity with or within comprehensively sanctioned jurisdictions. These activities can include, but are not limited to, the key elements of an international trip: travelling to or from these jurisdictions, dealings with government agents at the border, carrying laptops or other technology into the country, and paying for essentially anything in country, such as accommodation, taxis and food.^[118]

Whereas the comprehensive sanctions in some countries and regions explicitly authorise (or do not prohibit) some of this activity, travel to a sanctioned country merits careful analysis to ensure that all intended activity would be exempted from or authorised under sanctions and would not implicate other legal restrictions. For example, although the North Korea Sanctions Regulations do not prohibit transactions ordinarily incident to travel to or from North Korea,^[119] the US Department of State restricts the use of US passports to travel into, in or through North Korea absent special validation,^[120] effectively prohibiting US persons from travelling to North Korea. Unlike the United States, the European Union and United Kingdom do not apply comprehensive sanctions on countries (or territories) and, therefore, sanctions issues concerning the seat of arbitration are unlikely when there is only an EU nexus.

Do arbitral awards involving sanctioned parties face challenges in US court?

US efforts to enforce arbitral awards both paid to and paid by sanctioned parties may face challenges under treaties and the Federal Arbitration Act – for example, the defence that enforcement would be ‘contrary to [US] public policy’.^[121] Sanctioned parties have successfully overcome this public policy defence, which applies only to awards that ‘would violate the forum state’s most basic notions of morality and justice’.^[122] For example, in Ministry of Defense and Support for the Armed Forces of the Islamic Republic of Iran v. Cubic Defense Systems, Inc., an award in favour of the sanctioned creditor, Iranian Ministry of Defense, survived the public policy defence owing to the United States’ strong public policy interest in recognising arbitral awards and the availability of a general licence for payment of the award (where the award would not frustrate sanctions).^[123] Courts have also relied on OFAC’s ability to prevent award payments,^[124] or OFAC’s licensing of legal proceedings or arbitral awards,^[125] in declining to find that payment of an award would violate public policy.

Conclusion

The intersection of economic sanctions laws and dispute resolution poses unique challenges for parties and their attorneys. These challenges in litigation and arbitration may include procedural hurdles and complex legal frameworks, and parties may face sanctions barriers in dispute resolution or award enforcement. With careful consideration of sanctions regulations and relevant precedent, parties and their counsel may zealously and creatively engage in sanctions-related dispute resolution proceedings.

Footnotes