Economic sanctions and investment arbitration: substantive, jurisdictional and enforcement issues
2023 International Arbitration Outlook Uría Menéndez, n.º 11
Economic sanctions are restrictive measures that limit the economic rights of a targeted State, entity or individual with the aim of exerting pressure on – and ultimately modifying – its conduct. Over the past year, the plethora of international sanctions that both States and international organisations have imposed has become an increasingly important consideration in international trade and therefore a relevant factor to take into account in international arbitration. This trend is expected to continue.
This article addresses how sanctions may impact investment arbitrations. Specifically, it covers substantive and jurisdictional issues that may result from sanctions, as well as potential obstacles investors may face when enforcing an award that is affected by sanctions.
It is worth noting from the outset that there are an array of other practical considerations that must be carefully analysed prior to starting an arbitration. Specifically, all actors involved in an arbitration (including the parties, counsel, arbitrators, arbitral institutions and any other participants such as experts or witnesses) must consider whether they are subject to sanctions (whether as the target of a sanction or as a party obliged to give effect to a sanction) and determine whether they require any licences to participate in the arbitration.
To the author's knowledge, there are no publicly available investment awards deciding on the imposition of international sanctions by States. But some past non-ISDS disputes against States involving economic sanctions could help identify some of the main issues that might be raised in investment arbitrations.
The first substantive issue in view of these decisions involves identifying the prevailing applicable law in cases in which different regimes of international law apply. One clear example of such overlapping regimes is the decision in Bosphorus, which was a case concerning the impounding of a Boeing aircraft that a Turkish airline, Bosphorus Hava Tollari ('Bosphorus') had leased from Yugoslav Airlines, and was temporarily located in Ireland for maintenance. The Irish authorities ordered its impoundment pursuant to Council Regulation (EEC) No 990/93, which implemented UN Security Council Resolution 820 imposing asset freezes on aircraft 'in which a majority or controlling interest is held by a person or undertaking in or operating' from the Federal Republic of Yugoslavia.
Bosphorus challenged Ireland's decision before the European Court of Human Rights ('ECHR') alleging that it violated Article 1 of Protocol No 1 to the European Convention on Human Rights (i.e. right to protection of property). The ECHR decided that an interference with property had indeed occurred, but that the interference was based on Ireland's compliance with its obligations under the Council Regulation, which compliance constituted a 'legitimate interest' justifying Ireland's interference with Bosphorus' right to property under the European Convention on Human Rights.
A similar example occurred in Kadi, a case in which the UN Security Council had named Mr Kadi, a Saudi resident, as a potential supporter of Al-Qaida and made him subject to UN sanctions, which were transposed into EU law. Mr Kadi challenged the asset freeze before the Court of Justice of the European Union ('CJEU') claiming that the measure infringed his rights to property, to a fair hearing and to seek judicial review. This was one of a series of cases challenging EU regulations implementing UN sanctions.
The CJEU was once again tasked with deciding which set of norms should prevail: the UN Security Council resolution or general principles of EU law. Although the answer to this question is not the focus of this article, in brief, the General Court of the CJEU refused to review the EU regulation based on its lack of jurisdiction to review Security Council resolutions, while the Court of Justice decided on appeal that all EU regulations must respect fundamental rights, regardless of whether or not the relevant Security Council resolution is lawful, and concluded that Mr Kadi's right to effective judicial review and right to property had been infringed.
It is not difficult to imagine how the facts in Bosphorus and Kadi could give rise to investment treaty claims on the grounds of expropriation, denial of justice or fair and equitable treatment ('FET').
In fact, at least two cases have been reported regarding claims under bilateral investment treaties ('BITs') in connection to sanctions. In 2020, Qatar Airways launched four investment arbitrations against Saudi Arabia, Bahrain, Egypt and the UAE after being denied access to those countries' airspace as a result of a blockade imposed on Qatar for allegedly supporting terrorism. Similarly, in Dayyani v South Korea the investor claimed that South Korea's implementation of UN sanctions exceeded the scope of the corresponding UN Security Council resolution and justified an FET claim, which the tribunal reportedly granted.
In Bosphorus and Kadi, the courts had to decide whether UN Security Council resolutions prevailed over EU law or the European Convention on Human Rights. Arbitral tribunals could easily find themselves deciding whether such resolutions (or EU sanctions) prevail over investment treaties. Thus, the law applicable to sanctions disputes, as well as the issue of hierarchy of norms, are both substantive issues that are likely to be raised in sanctions-related investment arbitrations.
Once these issues are settled, arbitral tribunals will also have to decide on whether specific State defences apply to determine whether the sanctions infringe the standards of treatment enshrined in the corresponding BIT. These defences are likely to include emergency clauses, which generally establish that the BIT may not preclude the application of measures necessary to protect 'essential security interests' (or other concepts, such as 'national security'). Other State defences may involve principles of customary international law, such as the necessity defence.
It is also easy to envisage States asserting jurisdictional objections based on sanctions. Firstly, as Kadi shows, questions may be raised regarding jurisdiction ratione materiae, as respondent States may argue that arbitral tribunals lack jurisdiction to review measures imposed by the European Union (as recent ECT cases have shown) or the UN Security Council.
Similarly, many BITs contain provisions that define protected investments as being those that are made in accordance with the host State's laws or include a separate clause requiring the protected investment to be made in such a manner. Some arbitral tribunals have even considered a legality requirement to be presumed in cases in which the applicable treaty did not contain such a provision. In fact, some international treaties, such as the Canada-EU Trade agreement ('CETA'), expressly deny the benefits of the treaty to an investor who is controlled by a sanctioned party. States could certainly invoke these provisions when objecting to the arbitral tribunal's jurisdiction.
Finally, sanctions may also raise admissibility issues in investment arbitrations based on allegations of violations of international public policy or the 'clean hands doctrine'. However, arbitral tribunals have held that these violations 'must be (i) serious and widespread and (ii) bear a close relationship to the claims'  for the claim to be deemed inadmissible.
Even after all substantive and jurisdictional hurdles are overcome and an award is finally rendered, the investor may face challenges when seeking enforcement. These final challenges may be (at least partially) surmounted by opting for an ICSID arbitration if the applicable treaty allows it, since Article 54(1) of the ICSID Convention establishes that Contracting States must recognise such an award 'as binding and enforce the pecuniary obligations imposed by that award as if it were a final judgment of a court in that State'.
That said, two points should be taken into consideration. The first is that several jurisdictions have established that, under exceptional circumstances, courts may refuse to recognise ICSID awards and the supremacy of EU law has been successfully raised on several occasions to challenge the enforcement of an ICSID award that violates EU law. The second is that States could arguably refuse to enforce awards that violate UN sanctions based on Article 103 of the UN Charter, which establishes that, whenever a conflict of laws arises, the UN Charter prevails.
For non-ICSID awards, Article V of the 1958 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards ('New York Convention') establishes that courts may refuse to enforce an award, among other grounds, if the subject matter cannot be settled by arbitration (i.e. it is not arbitrable) or if the award is contrary to the public policy of the State in which enforcement is sought. These grounds also serve to justify annulling an award under Article 34(2) of the UNCITRAL Model Law.
The prevailing view in both case law and academic literature is that imposing sanctions against one party does not compromise the arbitrability of the dispute, although courts have in some instances taken the opposite view.
As regards public policy, the approach courts take will often depend on the source of the sanction. In general, UN-imposed sanctions will be considered as forming part of public policy given that UN Security Council resolutions are considered public policy among member states.
However, domestic courts have taken disparate views on sanctions imposed by States and international organizations other than the UN, notably as in the case of sanctions imposed on Russia. For instance, the United States has adopted a particularly restrictive interpretation of public policy, with US courts stating that non-UN sanctions (e.g. US-imposed sanctions) should not be considered as forming part of public policy. On the other hand, the CJEU has stated that EU mandatory provisions must be considered as part of EU public policy and legal scholars have often taken the position that this reasoning should also include economic sanctions.
On a final note, even when enforcement is not refused under the New York Convention, investors may encounter other practical obstacles to enforcement. For instance, the attachment of frozen assets may require a licence in many jurisdictions. This will be relevant to both ICSID and non-ICSID awards given that licence requirements also apply to domestic judgments.
 Bosphorus Hava Tollari (BHY) v Ireland, ECHR Grand Chamber Decision (30 June 2005) ('Bosphorus').
 CJEU, Joined Cases C-402/05 P and C-415/05 P, P. Kadi and Al Barakaat International Foundation v Council and Commission, judgment (Grand Chamber) (3 September 2008), ECLI:EU:C:2008:461 ('Kadi').
 It is unclear whether these cases are still pending or have been settled following the end of the blockade against Qatar.
 Mohammad Reza Dayyani and others v Republic of Korea (I), PCA Case No 2015-38, Award, 5 June 2018 ('Dayyani v South Korea').
 Micula and others v Romania, judgment of the Supreme Court of the United Kingdom (19 February 2020), para 78.
 See e.g. Littop Enterprises Limited, Bridgemont Ventures Limited and Bordo Management Limited v Ukraine, SCC Case No V 2015/092, Final Award, 4 February 2021; Fraport AG Frankfurt Airport Services Worldwide v Republic of the Philippines (II), ICSID Case No ARB/11/12, Final Award, 10 December 2014; Phoenix Action Ltd v Czech Republic, ICSID Case No ARB/06/5, Award, 15 April 2009; Gustav F W Hamester GmbH & Co KG v Republic of Ghana, ICSID Case No ARB/07/24, Award, 24 September 2007; and SAUR International v Argentine Republic, ICSID Case No ARB/04/4, Decision on Jurisdiction and Liability, 6 June 2012.
 CETA (2016), Art 8.16. Similarly, Art 17 of the 2012 US Model BIT states the following: '1. A Party may deny the benefits of this Treaty to an investor of the other Party that is an enterprise of such other Party and to investments of that investor if persons of a non-Party own or control the enterprise and the denying Party: (a) does not maintain diplomatic relations with the non-Party; or (b) adopts or maintains measures with respect to the non-Party or a person of the non-Party that prohibit transactions with the enterprise or that would be violated or circumvented if the benefits of this Treaty were accorded to the enterprise or to its investments.' (emphasis added) Similarly, Art 17 of the ECT states the following: 'Each Contracting Party reserves the right to deny the advantages of this Part to: [...] (2) an Investment, if the denying Contracting Party establishes that such Investment is an Investment of an Investor of a third state with or as to which the denying Contracting Party: (a) does not maintain a diplomatic relationship; or (b) adopts or maintains measures that: (i) prohibit transactions with Investors of that state; or (ii) would be violated or circumvented if the benefits of this Part were accorded to Investors of that state or to their Investments.'
 Bank Melli Iran and Bank Saderat Iran v The Kingdom of Bahrain, PCA Case No 2017-25, Final Award, 9 November 2021.
 Micula and others v Romania, judgment of the Supreme Court of the United Kingdom (19 February 2020).
 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958), Article V.II.a.
 Id at Article V.II.b.
 Fincantieri Cantieri Navali Italiani SpA et OTO Melara Spa v ATF, Tribunal Fédéral of Switzerland (23 June 1992); Legal Department of the Ministry of Justice of the Republic of Iraq v Fincantieri-Cantieri Navali Italiani, Court d'Appel de Paris (15 June 2006); La Compagnie Nationale Air France v Libyan Arab Airlines, Cour d'Appel du Québec (31 March 2003).
 Fincantieri-Cantieri Navali Italiani SpA v Iraq, Corte di Appello di Genova, Italy (7 May 1994).
 Parsons & Whittemore Overseas Co. v Societe General de l'Industrie du Papier (RAKTA), 508 F2d 969, 977 (2d Cir 1974); Ministry of Defense of the Islamic Republic of Iran v Gould Inc, 887 F.2d 1357 (9th Cir 1989).
 CJEU, Case C-126/97, Eco Swiss China Time Ltd v Benetton International NV, judgment (1 June 1999), ECLI:EU:C:1999:269.