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Economic sanctions in International Investment Arbitration

I. Definition

1.

International economic sanctions are politically motivated1 restrictive economic measures that target various States and individuals, limiting their economic interests and/or rights.2 Typical examples are: trade embargoes,3 asset-freezing measures4 or investment restrictions.5 Given their impact on investors, economic sanctions (or their imposition) may be challenged before arbitral tribunals by      foreign investors considering such measures contrary to obligations owed to them by the host State.

II. Jurisdiction issues

2.

In the Stati v. Kazakhstan case, the respondent argued that the tribunal lacked jurisdiction ratione personae because, among others, the investor used proceeds derived from its investment in Kazakhstan to fund an economic activity which violated United Nations (UN) sanctions in South Sudan.6 The specific reference to the claimant’s activities in a State targeted by sanctions, however, did not seem to constitute the main argument against jurisdiction. In fact, in its context, the reference to sanctions comes across as a rhetorical tool used to try to strengthen the main legal arguments that the claimant was not an investor under the applicable investment treaty, rather than a self-standing legal argument. It becomes clear, then, why the tribunal, nonetheless, upheld its jurisdiction - because the claimant satisfied the necessary condition to be considered an investor under the Energy Charter Treaty. In this case, it was the nationality issue which had to be satisfied.7

3.

The jurisdiction of an arbitral tribunal may also be impacted when restrictive measures pursuant to the UN Charter’s Chapter VII powers are challenged. The Security Council may impose sanctions that are to be subsequently implemented by  UN Members.8 Given the range of debates in other fields when it comes to the possibility of a tribunal to review such measures,9 this is bound to raise questions of jurisdiction in ISDS, as well.10

4.

Some treaties even contain express provisions allowing the host State to deny the benefits of the treaty to an investor if that investor is controlled by a third-party national whose home State is targeted by international sanctions adopted or maintained by the denying party.11

III. Impact on the merits of a dispute - standards of protection

5.

Investors may argue that the imposition of sanctions breached one or more investment protection standards. illegal expropriation (even indirect expropriation)  may be claimed in the case of asset freeze measures.12 Moreover, Qatar Airways claimed illegal expropriation because it was denied access to the airspace of the  United Arab Emirates, Bahrain, Saudi Arabia and Egypt,13 as a result of a blockade against its home State.14 The investor also claimed violation of other standards of   protection, such as non-discrimination; full protection and security; and fair and equitable treatment.15

6.

The fair and equitable treatment standard was also relied on in order to challenge not the sanctions themselves, but the manner in which such measures were imposed.16 The violation of the fair and equitable treatment standard was claimed even in the case of extraterritorial effects of sanctions, although in a State-to-State case.17

IV. State defences

7.

The State will usually cite security issues,18 or considerations of public order, to justify its sanctions. To this end, investment treaties contain clauses carving-out space for the State to act in pursuance of its security interests,19 or to act in order to safeguard public security and order, as was the case in von Pezold and other v. Zimbabwe (although said defense was not applicable to treatment contrary to      the fair and equitable treatment standard, at issue in that instance).20 Another treaty-based defense allows the State to limit the transfer of payments relating to the investment, if tied to international sanctions.21 See further Emergency clauses in BIT.

8.

The State could also theoretically rely on defenses found in the customary law on State responsibility, with legal countermeasures (assuming that countermeasures can be invoked against the investor) the most relevant for present purposes.22

V. Annulment proceedings and requests to stay the enforcement of the award

9.

Zimbabwe sought annulment of an award rendered against it because the presiding arbitrator also acted as Chairman of the World Bank Sanctions Board (with the respondent constantly subjected to international sanctions). The State argued that its status as a target of international sanctions rendered the Chairman of the World Bank Sanctions Board unfit to act as presiding arbitrator, since he would be unable to act in an independent and impartial manner.23 Consequently, Zimbabwe based its annulment application - as regards the aforementioned issue - on the improper constitution of the tribunal. The challenge was dismissed, however, because it was made too late and, in any case, the Sanctions Board did not target States and officials.24 In turn, this raised the question whether the challenge would have succeeded if the arbitrator had been involved in a committee which imposed sanctions on Zimbabwe and if the challenge had been duly raised.

10.

It was during the same annulment proceedings that Zimbabwe tried to obtain a continued stay of enforcement of the award, citing the economic impact of sanctions as one of the reasons, together with the consequences that would be caused by enforcement.25 The tribunal, however, lifted the stay, because it considered Zimbabwe not to have aptly explained how the stay was necessary to avoid dire economic consequences.26

VI. Recognition and enforcement obstacles

11.

Barriers to enforcement and execution may arise even when it comes to sanctions-related ICSID awards, in spite of the obligation of ICSID members to enforce such awards as if those were final domestic judgments.27 A common issue here is the possibility to stay the enforcement of an award, with one US court rejecting such a proposition,28 and considering a different state organ better suited to determine such issues.29 Another court, however, stayed its proceedings (although sanctions were only part of the reason for this).30

12.

A different issue relates to the commercial exception to sovereign immunity, with Venezuela arguing in one case before the US courts that its property could not be attached in aid of execution since it was subject to sanctions. As such, it could not be used for commercial purposes (something which would have triggered one of the exceptions to immunity from attachment).31 Because certain commercial uses of the property were still possible, however, the argument was rejected.32

13.

Nonetheless, the forum State may consider that the obligation to enforce an ICSID award pursuant to the ICSID Convention was rendered inapplicable in the case of awards which could violate UN-based sanctions. This is because of Article 103 of the UN Charter.33 Of course, establishing that the enforcement of an ICSID award does indeed violate UN-based sanctions must be clearly determined.

14.

Non-ICSID investment treaty awards can be subjected to even more enforcement obstacles, as they are normally enforced under the umbrella of the 1958 New York Convention on the Recognition and Enforcement of Arbitral Awards. Most often, this will come down to either the public policy of the forum State34 or the non-arbitrability of sanctions-based disputes.35 See further Enforcement and Recognition of non-ICSID awards.

Bibliography

Ahn, T., The Applicability of Economic Sanctions to the Merits in International Arbitration Proceedings: With a Focus on the Dynamics between Public International Law Priniples, Private International Law Rules and International Arbitration Theories, Pepperdine Dispute Resolution Journal, Vol. 18, 2018, p. 299.

Bechky, P.S., Sanctions and the Blurred Boundaries of International Economic Law, Missouri Law Review, Vol. 83, Issue 1, Article 5, 2018.

Böckstiegel, K.-H., Applicable Law in Disputes Concerning Economic Sanctions: A Procedural Framework for Arbitral Tribunals, Arbitration International, Vol. 30, Issue 4, 2014, p. 605.

De Brabandere, E. and Holloway, D., Sanctions and international arbitration, in van den Herik, L. (ed.), Research handbook on UN sanctions and international law, Edward Elgar, 2017, pp. 304-29.

Dupont, P.-E., The Arbitration of Disputes Related to Foreign Investments Affected by Unilateral Sanctions, in Marossi, A.Z. and Bassett, M.R. (eds.), Economic Sanctions under International Law, T.M.C. Asser Press, 2015, pp. 197-217.

Ghodoosi, F., Combatting Economic Sanctions: Investment Disputes in Times of Political Hostility, a Case Study of Iran, Fordham International Law Journal, Vol. 37, 2014, p. 1731.

Hunt, C., Trehearne, C. and Kadota, E., The Challenge of Sanctions for Arbitral Participants, Kluwer Arbitration Blog, 2015.

Lee-Thibault, S., Lifting of Iran Santions: A Time for Cautious Optimism? Background to the Iran Sanctions Legislation, Kluwer Arbitration Blog, 2015.

LeMay, T., Protecting International Petroleum Investments During Geopolitical Unrest: Arbitrating Disputes Under Economic Sanctions, Texas International Law Journal, Vol. 53, 2018, p. 307.

Menkes, M.J., The Legality of US Investment Sanctions against Iran before the ICJ: A Watershed Moment for the Essential Security and Necessity Exceptions, Annuaire canadien de droit international 2018, p. 328.

Ruys, T. and Ryngaert, C., Secondary Sanctions: A Weapon Out of Control? The International Legality of, and European Responses to, US Secondary Sanctions, The British Yearbook of International Law, 2020.

van Aaken, A., International Investment Law and Decentralized Targeted Sanctions: An Uneasy Relationship, Columbia FDI Perspectives, No. 164, 2015.

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