Resolution of international commercial disputes in times of war: considerations for minimising risks

Luis A Perez, Ildefonso P Mas, Andrew J Dominguez, and Odette Ponce
Akerman, Miami

All is not fair in war. We have all witnessed this fundamental truth materialise over the past several years.

The recent increase of war or threats of armed conflict have been well documented and reported in the news. War in Ukraine. War in the Middle East. Armed conflicts in the Red Sea. Armed conflicts in Latin America between governments and cartels, and a looming conflict between China and Taiwan. Businesses have been affected by these developments. They have borne significant risks and suffered great loss from recent global conflicts.[1] It goes without saying that business losses and risk have been coupled with even greater human loss and tragedy.

Policymakers and lawyers have joined the fray. Wartime sanctions and greater cooperation among nations to enforce sanctions have brought these wars to the doorstep of companies who do business in conflict zones, have ties to state actors involved in war, or are dependent on warring jurisdictions for materials and supplies. The risks of doing business or being involved with financial transactions tied to Russia or Hamas, for example, are well known and documented.[2] Governments tout the effectiveness of sanctions and the attempts to expand the jurisdictional reach of those sanctions to legally protect their nation’s businesses and citizens engaging in activities abroad. In times of war, however, sanctions and traditional legal forums have their jurisdictional and other limits.[3] As a result, we expect an increase in arbitration proceedings, as arbitration can be an effective tool given the ability of parties to contractually minimize the inherent risks of dispute resolution in wartime and in war zones. More specifically, arbitration further helps parties minimize risks relating to choice of law, choice of forum, and judgment (or award) enforcement, all of which are pronounced litigation risks during times of war.

The limits of litigation and government enforcement actions to protect business dealings

In the United States and many European countries, there have been broad efforts to use sanctions and prosecutorial efforts to apply significant pressure on businesses to play fair in war time. On the heels of Russia’s invasion of Ukraine, the United States announced its launch of a taskforce for seizing and encumbering the financial assets of Russian elites and their allies.[4]

The US Department of Justice (DOJ) and its allies abroad have expanded their international reach successfully in promoting fair and secure channels of international commerce, seizing countless assets, and placing pressure on countries that skirt international rules and treaties.[5] For example, the DOJ has provided incentives for companies that disclose criminal activity occurring overseas and, conversely, penalties for those that fail to disclose.[6] The US has further expanded and enforced its criminal laws to target bad and unfair actors connected to ongoing wars or conflicts.[7] Just recently, DOJ officials announced a new pilot program providing incentives to whistleblowers who alert DOJ to criminal conduct that would assist DOJ in US Foreign Corrupt Practices Act prosecutions, including information that might help DOJ in ‘developing foreign corruption cases outside the jurisdiction’ of certain US regulators.[8] International courts and domestic courts in other countries have also exercised their authority and made clear their willingness to punish unscrupulous war time individuals and businesses.[9]

Sanctions, international organisations, and government actors, however, run up against jurisdictional limits. Courts are reluctant to unnecessarily involve themselves in war-related disputes which are better resolved by political branches of government.[10] Thorny choice of law considerations also complicate efforts for parties seeking certainty and fairness in commercial disputes impacted by armed conflicts.[11]

Our law firm has witnessed firsthand how sanctions, litigation, and traditional legal processes, which are sometimes necessary to achieve fairness and justice, can be strengthened by engaging with positive forces in an adversarial country to sow seeds of change and constructive dialogue with those who look to heal the divisions of conflict.[12] Of course, this begs the question, how can companies with war time exposure engage positive forces in areas affected by war through voluntary means yet still have avenues for legal recourse? Arbitration may provide a powerful solution in the right circumstances.

Considerations for businesses navigating uncertainty in times of war

Arbitration is on the rise, but still overlooked in times of war as parties oftentimes look to the legal equivalent of brute force, in the form of government sanctions and litigation domestically and in international courts.

Arbitration is generally established by contract, but parties may agree to arbitrate their disputes when they arise, even if their contracts do not require arbitration. Establishing legal recourse contractually to ensure fairness in business disputes is an attractive option during wartime.

Arbitration traditionally keeps disputes private and confidential and allows the parties to agree on the rules and scope of the dispute, including the forum and choice of law for the dispute. In contrast to litigation in public courts, this can be more attractive for companies dealing with sensitive issues or disputes in war zones.

Parties can further reduce risks given the prevalence of third-party funders for international arbitration proceedings. The increasing availability of third-party funding for international arbitration proceedings provides options for a party with a substantive claim, but limited financial resources, to pursue arbitration.  While third-party funding arrangements vary, one common way to share the risk is to give the funder a contingency of any award recovered in exchange for funding the expenses of the arbitration. One of the advantages of arbitration is that arbitral awards are widely enforceable because of the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which has been ratified by 158 countries,[13] expanding the jurisdictions where parties can enforce an arbitral award or pursue legal remedies against an actor not subject to their home country’s jurisdiction.  Likewise, 20 Latin American countries, as well as the United States, are signatories to the Panama Convention (1975), which reaffirms the principles of recognizing and enforcing arbitral agreements and awards.

For example, Russian and Iranian companies are not beyond the reach of orders enforcing arbitration awards against those companies.[14] Indeed, Russian companies have had large arbitration awards issued against them based upon improper seizure of assets connected to the war in Ukraine.[15] That has not stopped Russian courts from using their own legal tools of war—granting injunctions prohibiting arbitration and enforcement of arbitration awards in Russian courts. But those tools, like DOJ sanctions and international and local court proceedings, have jurisdictional limitations.[16] Additionally, the New York Convention and other laws and treaties recognizing and upholding arbitration awards provide enforcement options in various countries where assets could be located and potentially avoid piecemeal suits in several local courts to obtain legal recourse. Given the large exodus and expulsions of foreigners from war zones, with many yet to file suit for lost assets and lost contractual expectations, there could be a significant wave of arbitration on the horizon to compensate for economic losses caused by war. Whether these arbitration claims are brought under investment treaties (Finnish energy company Fortum Oyj recently filed a significant investment treaty arbitration claim against Russia[17]), contractual agreements, or by agreement of the parties, arbitration may prove to be a fair and effective tool to achieve fairness and justice in a world increasingly scarred by wars and associated economic injustices.

Although the use of arbitration can be an effective tool in resolving commercial disputes, as noted above in the example of Russian courts issuing anti-arbitration injunctions, enforcement of arbitral awards can be difficult unless assets can be found outside of the warring nations’ jurisdiction. After all, arbitral awards rely upon the jurisdiction of the courts where assets are located for their recognition and enforcement. Arbitration treaties, however, have made judgments enforceable in many jurisdictions across the globe. That said, parties should be careful when drafting arbitration clauses in their contracts so as to ensure that arbitration is available, effective, and any resulting arbitration award is enforceable if a dispute arises. That way arbitration, if it does occur, limits the risks that would otherwise exist based on one’s exclusive reliance on traditional litigation and government sanctions to ensure fair legal proceedings involving matters in war zones or businesses with ties to state actors or assets connected to war.