When things fall apart

Richard Power, a partner in Clyde & Co’s global arbitration group, examines the problems for dispute resolution posed by geopolitical instability.

Recent years have seen unprecedented political upheaval. Russia annexed Crimea and Ukraine is divided; regions of Sub-Saharan Africa are ungovernable or under rebel control; civil war rages in Libya, Syria and Iraq – now Libya has two governments and a “caliphate” straddles Iraq and Syria.

Many of these regions are rich in natural resources or host important infrastructure, and consequently attract foreign investors. In addition to physical protection, investors seek legal protection of their assets through contracts incorporating arbitration clauses, offering an independent and neutral dispute resolution mechanism. However, current geopolitical conditions give rise to unique problems which can undermine that legal protection.

Revolution and regime change

Investors face the prospect of contracts being terminated, or assets seized, if there is a change to those holding power in a host country. A state’s legal obligations will usually survive a change of government (even if occasioned by a coup), but today’s political scenarios are more complex:

• If one contracts with a self-proclaimed independent or self-governing region, can one bring a claim against that entity? Does a claim lie against the state from which the region has “seceded”, and does it matter whether the “main” state refuses to recognise that state? Does it depend upon how many other countries recognise the breakaway region?
• If one owns/invests in an asset in a foreign country and the state fails to protect that asset from damage/destruction by insurgents, does a claim lie against the state? What if they protected the assets of another nation’s investors? Would a claim lie if the insurgents subsequently take control of the state? What if the insurgents are funded and armed by, and act according to the orders of, another state – does a claim lie against that state?  While one may assume that bilateral investment treaty protection ameliorates these risks, Russia’s annexation of Crimea has raised significant questions as to attribution under Russian and Ukrainian BITs.

Practical problems

Lawlessness and unrest can have practical implications for the conduct of an arbitration:

• The seat of the arbitration determines the law and courts which support the arbitration, e.g. by compelling the attendance of witnesses or appointing an arbitrator where the Respondent refuses to participate. What if the Respondent is recalcitrant but the arbitral seat is a state which is in anarchy? Could an application be made to another state’s courts to assist with the arbitration? If so, which state’s courts?
• The seat also determines the nationality of the award, and its laws can prescribe rules for the validity of an award e.g. it must be signed in the jurisdiction. What if the seat is in a country to which the tribunal will not travel because of safety fears?
• Many institutional rules provide for a scenario where a party withholds documents, or a witness refuses to be cross-examined, but how should a tribunal deal with a key witness or crucial documents being available/willing to assist, but cannot be produced because they are in rebel-held territory e.g. ISIS-held Syria or Iraq? Should less weight be given to such evidence, or would that amount to procedural unfairness?

Sanctions

Countries involved in civil unrest, and certain companies and citizens of those countries, can often be subject to sanctions which prevent trading with and payments to/from the subjects of the sanctions. That can cause problems for an arbitration:

• If a party to an arbitration is subject to sanctions, can an arbitrator who is a citizen of a state which has imposed sanctions be paid his fee by that party? Can the arbitral institution receive its fee?
• If an award is made against the sanctioned party, can the award creditor enforce that award in a state which has imposed sanctions freezing that party’s assets?
• Can the subject of sanctions seek relief from its failure to perform a contract because doing so would breach the sanctions on it? Does it matter if the other party is willing to perform and not caught by sanctions?
• Can one party seek force majeure relief because trading with the other party would breach sanctions? Are sanctions a permanent bar to performance (frustrating the contract) or a temporary measure suspending performance?
• Can a tribunal proceed when a party refuses to participate because of impecuniosity caused by sanctions? Could an award be challenged for unfairness?

It is important to bear these points in mind when dealing with matters concerning countries which are the subject of unrest, or could become unstable. It would also be wise to review any existing contracts with these issues in mind, and to consider them at the outset of an arbitration when procedures are decided upon.