Sanctions and commercial arbitration: The impact of the invasion of Ukraine on questions of jurisdiction and merits

Julie Bédard and Reem Hussein¹
Skadden, Arps, Slate, Meagher & Flom, New York

When we participated in the 22nd IBA Arbitration Day in March of 2019, few could have predicted the five years to come. A mere twelve months after the Conference, a global pandemic forced much of the world’s population into lockdown, taking millions of lives along the way. Two years later, Russia invaded Ukraine. 

The US and EU sanctions that followed were severe. Russian banks were banned from the SWIFT system, gas prices skyrocketed, and hundreds of companies exited the Russian economy.² No sector, industry or profession was spared – least of all, international commercial arbitration. Indeed, economic sanctions have impacted arbitral proceedings at every stage, from counsel and arbitrator selection to merits and enforcement, forcing counsel, arbitrators and institutions alike to adapt to a new reality.³  As such, discussion of sanctions and their impact – a theme of the 2019 Conference – has become essential. This article will focus on the effect of sanctions on two phases of arbitral proceedings: jurisdiction and merits.

Jurisdiction in a polarised world

If a dispute is covered by an arbitration clause, it will be adjudicated in the specified arbitral tribunal. In 2019, such a statement would have been axiomatic, but with Russia’s response to sanctions, it is no longer so. In 2020, the Russian Parliament passed Federal Law No. 171-FZ, granting Russian commercial “arbitrazh” courts exclusive jurisdiction over disputes involving sanctions or sanctioned entities. Under this regime, parties may still refer relevant disputes to arbitral tribunals. But parties concerned about unfair treatment can apply for an injunction with Russian courts, barring or halting any arbitral proceedings. In case of noncompliance with the injunction, the court may award the “injured” party the full amount claimed in the arbitration. In other words, Law No. 171-FZ provides a party with the right to disregard negotiated arbitration agreements.⁴

At first, the law’s application was limited. To issue anti-suit injunctions, courts required applicants to show that sanctions presented an obstacle to fair adjudication or access to justice. But in December of 2021, the Supreme Court of the Russian Federation held in JSC Uraltransmash v. PESA that the imposition of sanctions was, in and of itself, sufficient to invalidate arbitration agreements.⁵

Then, in June 2023, the Arbitrazh Court of St. Petersburg took it a step further. In Linde v. RusChemAlliance, it held that even arbitral institutions in non-sanctioning states may be considered non-neutral under the law.⁶  The dispute in Linde arose from a construction contract between German and Russian parties. The contract, governed by English law, provided for Hong Kong International Arbitration Center (HKIAC) arbitration.⁷  Following the EU’s imposition of sanctions against Russia in 2022, the relationship between the parties broke down, and RusChemAlliance (RCA) brought a claim in the Arbitrazh Court of Saint Petersburg. The court was then quick to invalidate the contact’s arbitration clause and assume jurisdiction over the dispute.⁸  In parallel, RCA also launched separate proceedings before the Arbitrazh Court of Saint Petersburg, seeking an anti-suit injunction to halt the ongoing HKIAC proceedings. The court granted the injunction in April 2024.⁹   

Linde is one of several examples in which Russia exercised its “exclusive jurisdiction” over sanctions-related disputes. In UniCredit v. RCA, the Arbitrazh Court of St. Petersburg also agreed to adjudicate RCA’s claim against UniCredit, despite the existence of an arbitration agreement between the parties.¹⁰  More recently, in March 2024, a Russian court ordered Uniper to discontinue its Stockholm Chamber of Commerce (SCC) arbitration against Gazprom after the parties severed ties in the wake of the invasion of Ukraine.¹¹  Multiple other cases follow this pattern.¹²  

Naturally, courts and tribunals have given little credence to the Russian decisions. In Linde, Hong Kong’s Court of First Instance affirmed the validity of the arbitration clause and ordered the Russian proceedings to be stayed.¹³  Similarly, in UniCredit, the Court of Appeal in England, affirmed by the UK Supreme Court, issued an anti-suit injunction in January 2024, requiring RCA to discontinue proceedings in Russia.¹⁴ 

However, these denials of Russian jurisdiction have not entirely ridded Law No. 171-FZ of its teeth. Penalties for noncompliance with the Russian anti-suit injunctions can be astronomical – reaching the order of USD 15 billion in Uniper.¹⁵  This is not to mention the cost and complexity that the law has added to arbitrations, as parties and arbitrators are forced navigate parallel proceedings and judgements, as well as Russian decisions that run counter to arbitral norms and practices. More broadly, the law has betrayed a most basic tenet of commercial arbitration – the sanctity of contract – and risked influencing other nations to follow suit. This, of course, is just a snippet of the effect of sanctions on arbitration. It does not begin to unpack their impact on merits.

International sanctions and force majeure

The effects of Russia’s invasion of Ukraine on contract performance cannot be understated. Facing trade limitations and asset freezes, impacted parties have had to reassess their contractual relationships, triggering a wave of sanctions-related arbitrations. Indeed, nearly 25% of International Chamber of Commerce (ICC) cases in the first quarter of 2024 have involved sanctions.¹⁶  In many such disputes, parties seeking relief from their obligations start by looking towards the terms of their contracts – namely, their force majeure clauses. Recent examples of this approach abound, from GAIL v. SEFE in the LCIA to RWE v. Gazprom in the ICC, among others.¹⁷  Whether the approach succeeds, however, depends on the wording of the clause and the facts of the case.  

Contracts usually define force majeure as an event or circumstance that prevents or impedes a party’s performance of its contractual obligations. The impediment must typically be unforeseeable and beyond the party’s control. Force majeure clauses also tend to list examples of force majeure events. If the list includes sanctions, the affected party’s task will be relatively straightforward. That said, in many cases, force majeure clauses will add an additional prong to the definition: that the affected party “could not reasonably have [...] avoided or overcome” the effect of the impediment.¹⁸  This prong has caused much debate in recent years – especially when it comes to currency of payments. 

Where a contract requires that payments be made in US Dollars, and sanctions prohibit payment in USD but not in another currency, are parties required to accept to transact in that other currency? The UK Supreme Court, in RTI v. MUR Shipping, held that they do not. RTI involved a freight agreement between the claimants and respondents, under which claimants would pay respondents for goods in US Dollars. The contract contained a force majeure clause that specified, as a criterion, that the event in question “cannot be overcome by reasonable endeavors from the party affected.”¹⁹  After the claimants’ parent company was sanctioned, payments in U.S. Dollars became increasingly difficult, leading the respondents to invoke force majeure. In response, claimants commenced an ad hoc Arbitration. The Tribunal, applying English law, held in favor of the claimants, finding that respondents could have accepted payment in Euros - a “completely realistic alternative” that would have caused them “no detriment”.²⁰  The UK Court of Appeal affirmed the Tribunal’s judgement, but the UK Supreme Court overturned it, stating that respondents had the “undoubted right to insist on payment of freight in US Dollars and to refuse payment in any other currency”. Reasonable endeavors, the Court added, did not mean “accept[ing] the offer of non-contractual performance.”²¹  

In Gasum v. Gazprom, an ad hoc tribunal chaired by Juan Fernandez-Armesto agreed, holding that the claimant was not required to pay respondent for supplies in Rubles instead of Euros, despite a March 2022 Russian presidential decree mandating it to do so. That said, the panel also found that the decree constituted force majeure, and that respondents were entitled to suspend gas supplies in response to claimants’ refusal to pay.²² 

These decisions come at a time where multiple arbitrations are raising the same question. In Europol Gaz v. Gazprom, for example, respondents, citing sanctions, requested that payment be made in Rubles. Europol refused.²³  CEZ v. Gazprom follows a similar fact pattern.²⁴  The tribunals’ treatment of this question will be interesting to follow, especially given that the requirement to pay in Rubles came from a Russian decree in response to sanctions, rather than the sanctions themselves. 

Much has changed since 2019. Russia’s invasion of Ukraine has repeatedly made sanctions front-page news and forced parties, tribunals, and institutions to grapple with an increasingly complex reality. How tribunals respond to this challenge will have a notable impact and be a hot topic for Arbitration Days to come. 

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1 Julie Bédard is partner and head of the international litigation and arbitration group for the Americas, and Reem Hussein is an associate at Skadden, Arps, Slate, Meagher & Flom LLP. Ms. Bédard co-chaired the Montreal 22nd IBA Arbitration Day in 2019. 
2 The Economic Impact of Russia Sanctions, CONGRESSIONAL RESEARCH SERVICE (Dec. 13, 2022), https://crsreports.congress.gov/product/pdf/IF/IF12092; A Market Mechanism to Limit Excessive Gas Price Spikes, EUROPEAN COUNCIL (Feb. 8, 2024), https://www.consilium.europa.eu/en/infographics/a-market-mechanism-to-limit-excessive-gas-price-spikes/; Christian Perez, What Does Russia’s Removal From SWIFT Mean for the Future of Global Commerce?, FOREIGN POLICY (March 8, 2022), https://foreignpolicy.com/2022/03/08/swift-sanctions-ukraine-russia-nato-putin-war-global-finance/ 
3 Elena Gillis, Marc Henry et al., Economic Sanctions and Arbitration: A Practical Guide for Parties, Counsel and Arbitrators, UNION INTERNATIONALE DES AVOCATS (Sept. 2023), https://www.uianet.org/sites/default/files/uia_-_economic_sanctions_and_arbitration_guide_en.pdf. 
4 Jürgen Mark and Olena Oliinyk, The consequences of sanctions against the Russian Federation and of the Russian countermeasures for international arbitration and litigation, GLOBAL LITIGATION NEWS (July 27, 2022), https://globallitigationnews.bakermckenzie.com/2022/07/27/the-consequences-of-the-sanctions-against-the-russian-federation-and-of-the-russian-countermeasures-for-international-arbitration-and-litigation/  
5 Id.; Stephanie Tsang, Sanctions in Current Geopolitical Climate: Challenges to International Arbitration in the Context of the Russia-Ukraine War, KLUWER ARBITRATION BLOG (April 4, 2024), https://arbitrationblog.kluwerarbitration.com/2024/04/04/sanctions-in-current-geopolitical-climate-challenges-to-international-arbitration-in-the-context-of-the-russia-ukraine-war/ 
6 Tsang, supra at n. 5; Decision of the Arbitrazh Court of St. Petersburg and Leningrad Region A56-129797/2022 (June 8, 2023).
7 Linde GMBH v. RusChemAlliance LLC, Decision of the Court of First Instance of the High Court of Hong Kong [2023] HKCFI 2409 (Sept. 27, 2023); Tsang, supra at n. 5.
8 Linde GMBH v. RusChemAlliance LLC, Decision of the Court of First Instance of the High Court of Hong Kong [2023] HKCFI 2409 (Sept. 27, 2023); Tsang, supra at n. 5. 
9 Decision of the Arbitrazh Court of St. Petersburg and Leningrad Region A56-13299/2024 (April 15, 2024). 
10 Decision of the Arbitrazh Court of St. Petersburg and Leningrad Region A56-74595/2023 (Nov. 10, 2023); Decision of the Court of Appeal of England and Wales [2024] EWCA Civ 64 (Feb. 2, 2024).
11 Christoph Steitz and Tom Käckenhoff, Uniper appeals Russian court ruling as legal tussle with Gazprom drags on, REUTERS (May 7, 2024), https://www.reuters.com/business/energy/unipers-q1-core-profit-falls-lower-gas-prices-outlook-confirmed-2024-05-07/. 
12 See e.g., Russian Railways v. Siemens, Decision of the Supreme Court of the Russian Federation No. 305-ES23-19401 (Oct. 18, 2023); First National Petroleum v. Tyumenneftegaz (IV), Decision of the Tyumen Arbitration Court А70-26488/2022 (Feb. 20, 2023); Airbus v. Avia Capital, Decision of the Moscow Arbitration Court А40-94700/2023 (Aug. 28, 2023). 
13 Tsang, supra at n. 5; Linde GMBH v. RusChemAlliance LLC, Decision of the Court of First Instance of the High Court of Hong Kong [2023] HKCFI 2409 (Sept. 27, 2023).
14 Case details: UniCredit Bank GmbH (respondent) v RusChemAlliance LLC (Appellant), THE SUPREME COURT, https://www.supremecourt.uk/cases/uksc-2024-0015.html; Sam Tobin, Gazprom subsidiary ordered to stop Russian lawsuit against UniCredit, REUTERS (Apr. 23, 2024), https://www.reuters.com/legal/gazprom-subsidiary-must-stop-russian-lawsuit-against-unicredit-uk-supreme-court-2024-04-23/
15 Steitz and Käckenhoff, supra at n. 11.  
16 Nadia Darwazeh and Sophie Grémaud, 2024 PAW: Sanctions and Arbitration: Lessons Learned and Possible Strategies, KLUWER ARBITRATION BLOG (March 23, 2024), https://arbitrationblog.kluwerarbitration.com/2024/03/23/2024-paw-sanctions-and-arbitration-lessons-learned-and-possible-strategies/
17 GAIL seeks $1.8 bn from former Gazprom Unit, THE ECONOMIC TIMES (Dec. 1, 2023), https://economictimes.indiatimes.com/industry/energy/oil-gas/gail-seeks-1-8-bn-from-former-gazprom-unit/articleshow/105660299.cms?from=mdr; RWE v. Gazprom (III), JUS MUNDI (May 11, 2023), https://jusmundi.com/en/document/decision/en-rwe-ag-v-gazprom-export-llc-iii-introduction-of-the-case-tuesday-1st-november-2022; Julia Payne, Exclusive: Russia’s Gazprom tells European buyers gas supply halt beyond its control, REUTERS (18 July 2022), https://www.reuters.com/business/energy/russias-gazprom-declares-force-majeure-gas-supplies-europe-2022-07-18/; Hristina Todorovic, Gazprom Round-Up: An update on arbitration-related developments involving the Russian gas giant, IA REPORTER (12 July 2023), https://www.iareporter.com/articles/gazprom-round-up-an-update-on-arbitration-related-developments-involving-the-russian-gas-mogul/.
18 ICC Force Majeure Clause, INTERNATIONAL CHAMBER OF COMMERCE (March 2020), https://iccwbo.org/wp-content/uploads/sites/3/2020/03/icc-forcemajeure-hardship-clauses-march2020.pdf. 
19 RTI v. MUR Shipping, [2024] UKSC 18 (May 15, 2024), Para. 4.
20 RTI v. MUR Shipping, [2022] EWCA 1406 (Oct. 27, 2022), Para. 27 (citing Paras. 50-51 of First Partial Award (Dec. 23, 2020)). 
21 RTI, [2024] UKSC 18 at Para. 44. 
22 Jack Ballantyne, Czech energy group brings ICC claim against Gazprom, GLOBAL ARBITRATION REVIEW (Feb. 10, 2023), https://globalarbitrationreview.com/article/czech-energy-group-brings-icc-claim-against-gazprom. 
23 Russian court threatens Poland’s Europol Gaz with $1.57 bln fine over Gazprom lawsuit, REUTERS (Nov. 2, 2023), https://www.reuters.com/business/energy/russian-court-threatens-polands-europol-gaz-with-157-bln-fine-over-gazprom-2023-11-02/ 
24 Ballantyne, supra at n. 22.