How can international sanctions and international arbitration be reconciled?

In a decision dated 3 June 2020, the International Chamber of the Paris Court of Appeal (the Paris Court) dealt with the impact of US, UN and EU economic international sanctions against Iran on the validity of an arbitral award.

Here, we cover the background to the case, explain why it is an important decision, and provide key takeaways to consider when dealing with international sanctions.

Case background

A French company informed its Iranian contracting party that the banks had refused to extend bank guarantees necessary under the contract due to various international sanctions against Iran. As a result, the Iranian company terminated the contract based on breach of contract. This prompted the French company to initiate arbitration proceedings under the ICC Rules in Paris for wrongful termination of the contract.

Since the tribunal dismissed the claim and ordered the French company to pay approximately 1 million USD, the French company applied for an application to set aside the award before the Court. This was done largely on the basis that the tribunal allegedly failed to take into account the impact of international sanctions against Iran, which made it impossible for the French company to perform its obligation.

Why does this case matter?

This is an important decision because it considers:

• whether US, UN and EU economic sanctions against Iran could fall under the qualification of (French) international public policy, and
• should this be the case, what conditions could lead to an annulment and/or refusal of enforcement of an award.

There is little guidance currently available to clarify whether economic sanctions constitute part of the public policy of the enforcing EU Member State, and if so, whether they outweigh the enforcing State’s policy in favour of the finality and enforceability of arbitral awards. Ultimately, the Paris Court rejected the application to set aside the award.

In doing so, it differentiated between the different sanctions and held that:

• The unilateral sanctions taken by the US authorities against Iran could not be regarded as the expression of an international consensus, since the extraterritorial scope of those sanctions is disputed by both the French and the EU authorities. Accordingly, the French Court found that the unilateral sanctions do not fall under the qualification of French international public policy.
• The UN Security Council Resolutions imposing economic sanctions against Iran do form part of international public policy, "in so far as they are intended to contribute to the maintenance or restoration of international peace and security" and "embody rules and values whose disregard must be considered to be incompatible with the French legal system" (despite these Resolutions having no direct effect on domestic law of the Members States involved).
• The EU Regulations imposing international economic sanctions and incorporated into national law can be assimilated into French policing laws, as they contribute to the international peace and security, and can be equally integrated with the French conception of international public policy.

Even so, the French Court nevertheless rejected the plea for annulment. It noted that the international sanctions emanating from the UN and the EU were materially and temporally not applicable to the contractual relationship at issue. Therefore, any award which didn't take them into account couldn't be set aside for having disregarded international public policy.

Key takeaways

Important points to note from this case include:

• Violation of unilateral sanctions taken by the US authorities against Iran cannot serve as the basis for an award annulment plea before the Paris Court.
• However, violation of UN Security Council Resolutions – as well as EU Regulations that impose economic sanctions against Iran – can be used as the basis for a plea for annulment, because they fall under French international public policy.
• In the latter scenario, annulment presupposes that the violation of international public policy is "effective" and "concrete", and that it must therefore be assessed in the light of the material and temporal scope of the sanctions relied on.

What's more, the ruling of the Paris Court is a reminder for arbitrators and affected parties to pay close attention to the potential application of international sanctions, the authorities these sanctions emanate from, and the sanctions' material and temporal scope. This will allow them to determine whether there could be an "effective" and "concrete" violation of international public policy.

Finally, it's worth noting that the claimant also based their application for setting aside the award on the alleged insufficient reasoning of the award. The Paris Court rejected this argument, recalling an established principle that even if an arbitral tribunal has to give reasons for its award, “arbitrators are not required to follow the parties in the detail of their arguments".

If there's not a detailed answer in the award to one party’s argument, it implies that the arbitral tribunal “implicitly but necessarily considered that this argument was neither relevant nor necessary to the solution of the dispute”.

Find out more

To discuss any of the issues raised in this article in more detail, please reach out to a member of our International Arbitration team.