Economic sanctions in International Investment Arbitration 07.07.

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 Thematic Issues  Economic Sanctions in ISDS

Economic sanctions in International Economic sanctions in In…

I. Definition Investment Arbitration Subsequent citations of

this document as a whole:
 II.
Jurisdictional
and
admissibility
I. Definition
issues
A.
Jurisdictional 1. International economic sanctions are politically motivated 1 restrictive economic
issues
measures that target various States, entities or individuals, limiting their economic
B. interests and/or rights. 2 Economic sanctions can be unilateral (taken by one State)
Admissibility
or multilateral (taken by a group of States or by an international/supranational
issues
organization) in nature. 3 Typical examples are: trade embargoes, 4 asset-freezing
III. Impact on measures 5 or investment restrictions. 6 Given their impact on investors, economic
the merits of a sanctions (or their imposition) may be challenged before arbitral tribunals by
dispute - foreign investors considering such measures contrary to obligations owed to them
standards of by the host State.
protection

IV. State
defences II. Jurisdictional and admissibility issues
V. Annulment
proceedings
and requests A. Jurisdictional issues
to stay the
enforcement
of the award
pending 2. In the Stati v. Kazakhstan case, the respondent argued that the tribunal lacked
annulment jurisdiction ratione personae because, among others, the investor used proceeds
derived from its investment in Kazakhstan to fund an economic activity which
 VI.
violated United Nations (UN) sanctions in South Sudan. 7 The specific reference to
Recognition
the claimant’s activities in a State targeted by sanctions, however, did not seem to
and
constitute the main argument against jurisdiction. In fact, in its context, the
enforcement
reference to sanctions comes across as a rhetorical tool used to try to strengthen
obstacles
the main legal arguments that the claimant was not an investor under the
A. ICSID
applicable investment treaty, rather than a self-standing legal argument. It
arbitrations
becomes clear, then, why the tribunal, nonetheless, upheld its jurisdiction -
B. Non-ICSID

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Economic sanctions in International Investment Arbitration 07.07.24, 19:54

arbitrations 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
Bibliography
had to be satisfied. 8

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. 9 Given the range of debates in other fields when it comes to the
possibility of a tribunal to review such measures, 10 this is bound to raise questions
of jurisdiction in ISDS, as well. 11

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. 12

B. Admissibility issues

5. The violation of economic sanctions by claimants may impact the admissibility of

their claims in accordance with the principles of transnational public policy and
the doctrine of clean hands. 13 However, it has been considered that only
systematic and severe violations satisfy the threshold. 14

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

protection

6. 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. 15 Moreover, Qatar Airways
claimed illegal expropriation because it was denied access to the airspace of the
United Arab Emirates, Bahrain, Saudi Arabia and Egypt, 16 as a result of a
blockade against its home State. 17 The investor also claimed violation of other
standards of protection, such as non-discrimination; full protection and security;
and fair and equitable treatment. 18

7. 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. 19 Sometimes the host State may breach the fair and equitable treatment
even when it is not the one imposing the sanctions, but when it fails to protect the
foreign investor (the target of primary sanctions imposed by a third State) from the
effects of secondary sanctions imposed by that same third State on the foreign
investor’s business partners entering into commercial relations with that investor
on the territory of the host State. A violation of the investor’s legitimate
expectations (as protected via fair and equitable treatment provisions found in
most investment protection agreements) is possible if the host State is under a legal
obligation to prevent outcomes such as the above (for instance, this is the case with
European Union member states and the EU Blocking Statute, 20 designed to
prevent, among others, the effectiveness of secondary sanctions imposed by a third
State), but it systematically fails to apply the relevant legal rules/regulations. 21 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. 22

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Economic sanctions in International Investment Arbitration 07.07.24, 19:54

IV. State defences

8. The State will usually cite security issues, 23 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, 24 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). 25 Another treaty-
based defense allows the State to limit the transfer of payments relating to the
investment, if tied to international sanctions. 26 See further Emergency clauses in
BIT.

9. 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. 27

10. Where the State is a contrario a target of economic sanctions, it might plead the
(contractually-regulated) force majeure defense to excuse its liability for non-
performance of its (contractual) obligations. 28 Whether a responding State (not
necessarily the direct target of sanctions, but also the State imposing sanctions)
may invoke force majeure before an investment arbitral tribunal, as a
circumstance precluding wrongfulness under the customary international law on
State responsibility, is a theoretical possibility, if the State could demonstrate, for
instance, coercion. An example is that of the host State being coerced by a third
State to impose sanctions on a foreign investor (something which could occur in
international affairs when the coerced State is dependent on the coercing State for
its security). But whether this does indeed lead to the impossibility of the coerced
State to perform its obligations could be exceedingly difficult to assess; the lack of
force used by the coercing State in this example may also complicate matters
further, making it complicated to demonstrate impossibility. 29

V. Annulment proceedings and requests to stay the

enforcement of the award pending annulment

11. In Pezold v. Zimbabwe, 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. 30 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. 31 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.

12. 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. 32 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. 33

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Economic sanctions in International Investment Arbitration 07.07.24, 19:54

13. In other instances, tribunals have admitted the exacerbated risk of non-recovery of
the sums due under the award if it were to be annulled in the context of sanctions,
justifying the lifting or continuing of a stay of enforcement. 34

VI. Recognition and enforcement obstacles

A. ICSID arbitrations

14. 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. 35 A common issue here is the
possibility to stay the enforcement of an award, with some US courts rejecting such
a proposition in the context of US sanctions against Venezuela, 36 and considering
a different State organ better suited to determine such issues. 37 Another court,
however, stayed its proceedings (although sanctions were only part of the reason
for this). 38

15. 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). 39 Because certain commercial uses
of the property were still possible, however, the argument was rejected. 40

16. 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. 41 Of course, establishing that the enforcement of an ICSID award
does indeed violate UN-based sanctions must be clearly determined.

B. Non-ICSID arbitrations

17. 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 State 42 or the non-
arbitrability of sanctions-based disputes. 43 See further Enforcement and
Recognition of non-ICSID awards.

18. Domestic courts considering granting or lifting a stay of enforcement also consider
the impact of sanctions on the parties, for instance by evaluating the delay or
prejudice caused. 44

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 Principles,
Private International Law Rules and International Arbitration Theories, Pepperdine Dispute

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Economic sanctions in International Investment Arbitration 07.07.24, 19:54

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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