It is tempting to think of sanctions primarily as instruments of foreign policy, or measures that belong in the realm of geopolitics rather than day-to-day commercial life. This view is misguided. For large corporates operating across multiple jurisdictions, sanctions have a direct and often disruptive operational impact. A vendor relationship that functions perfectly well one day can become untenable the next, not because of anything the parties have done but because of a regulatory development entirely outside their control.
The position is further complicated by the lack of harmonisation across sanctions regimes. Sanctions in the United State (US), European Union (EU) and United Kingdom (UK) differ in scope, drafting, and enforcement and parties operating across multiple markets must navigate all of them simultaneously, often with limited guidance on how those regimes interact.
Legal certainty: Primary and secondary sanctions
One of the clearest themes to emerge is the distinction between primary and secondary sanctions and the different challenges each presents for businesses and their advisers.
Primary sanctions, those that directly prohibit dealings between the sanctioning state’s own nationals or entities and a designated target, are complex but generally provide a greater degree of legal certainty. Secondary sanctions, which extend beyond the sanctioning state by penalising third-country parties for dealings with sanctioned entities, are considerably more unpredictable. For South African businesses with international trading relationships or financing arrangements, exposure to secondary sanctions may arise in ways that are not immediately apparent.
The challenge for lawyers is not simply to understand the current sanctions landscape but to reflect that understanding in contract drafting that is genuinely fit for purpose: The key is abandoning a boilerplate approach to dispute resolution clauses, force majeure clauses and illegality clauses, and being far more flexible and creative, particularly with secondary sanctions in mind.
A further layer of complexity arises from the absence, in South African law, of the automatic indemnity available under EU law for parties that comply with sanctions at the cost of non-performance. In the absence of that statutory protection, careful contractual drafting becomes even more important.
Access to justice and the arbitral forum
A recurring concern in sanctions-related arbitration is whether a sanctioned party can meaningfully access the arbitral process. The short answer, based on developments in key jurisdictions, is generally yes, but practical hurdles should not be underestimated.
In the UK, the Office of Financial Sanctions Implementation (OFSI) has issued general licences permitting sanctioned parties to make payments to arbitrators, arbitral institutions and legal advisers to participate in proceedings. English case law, including the Court of Appeal’s decision in Mints v PJSC National Bank Trust, has confirmed that granting a money judgment in favour of a sanctioned party does not, in itself, constitute a breach of sanctions. The broad principle reflected across multiple jurisdictions is that sanctioned parties should remain entitled to have their claims and defences adjudicated.
At the same time, Russia’s Lugovoy Law, which empowers Russian courts to assume jurisdiction over disputes involving sanctioned Russian entities even where a valid arbitration agreement points elsewhere, illustrates how sanctioned states may seek to address any perceived barriers to justice for their nationals. Managing the risk of parallel proceedings and preserving the integrity of arbitration agreements in this environment requires careful thought at the drafting stage, well before any dispute arises.
Choosing a forum and structuring enforcement
The instinctive response to sanctions-related complexity is often to seek a “neutral” arbitral seat. In a world of secondary sanctions, however, true neutrality is increasingly elusive. A party transacting in Europe, for example, may be required to comply with EU sanctions regardless of where the arbitration is seated.
Rather than pursuing illusory neutrality, parties should evaluate potential forums by reference to the integrity and sophistication of their dispute resolution institutions, the robustness of their legislative framework and their demonstrated commitment to the independence and impartiality of arbitral proceedings.
On that basis, South Africa presents a credible option. Arbitration is constitutionally recognised as a legitimate form of dispute resolution. The International Arbitration Act of 2017 provides a modern legislative framework aligned with the UNCITRAL Model Law and South African courts have consistently supported the enforcement of arbitration agreements and arbitral awards.
Enforcement, however, remains the area in which sanctions create the most significant practical challenges. An arbitral award is only as valuable as the ability to enforce it. A party that secures an award against a counterparty in a sanctioned jurisdiction may find enforcement effectively blocked or discover that taking enforcement steps would itself constitute a sanctions breach.
Planning for enforcement should therefore begin at the outset of the transaction. This requires consideration not only of the governing law and the law of the arbitral seat but also the laws of every jurisdiction in which the parties are domiciled and where enforcement may ultimately be sought.
Practical considerations for businesses
Several practical points emerged from the discussion that are directly relevant to businesses entering into international commercial arrangements:
- Dispute resolution clauses should be drafted with sanctions expressly in mind, including the possibility of an alternative mechanism where sanctions render the primary mechanism ineffective.
- Force majeure and illegality clauses should address sanctions specifically, rather than relying on broad or generic language.
- Contractual exclusions of liability for non-performance resulting from sanctions compliance should be considered, particularly in the absence of statutory protection.
- Enforcement planning should begin during contract negotiations, with careful consideration of every jurisdiction in which enforcement may ultimately be required.
- Local context matters. Arbitration clauses that work well in common-law jurisdictions where sanctions frameworks are not recognised or remain politically sensitive. Contracts should therefore be tailored to the relevant legal and commercial environment.
- Disputes lawyers should be involved in transactional negotiations from the outset rather than only after a dispute arises. Early identification of sanctions-related risks and potential enforcement challenges allows those risks to be addressed through careful drafting rather than managed after the fact.
Sanctions are neither a passing inconvenience nor a purely political phenomenon. They have a direct and material impact on commercial operations, legal risk management and the enforceability of arbitral awards. International arbitration remains an effective and preferred mechanism for resolving complex cross-border disputes. However, its effectiveness in a sanctions-affected environment depends largely on the quality of the contractual framework established before any dispute arises. For clients operating in international markets, the message is clear: think ahead, draft carefully and ensure that enforcement is considered from the outset, not as an afterthought.
