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International arbitration in 2024

Arbitration in times of crisis: conflict, sanctions, climate

By: Noah Rubins KC, Xin Liu, Olga Sendetska, Maxim Pyrkov

In 2024, we expect more disputes related to geopolitical crises, global warming, economic strife, and the regulatory and economic measures States take in response.

Companies will seek damages using investor-State claims, advance claims under political risk insurance policies and face climate change-related disputes. Sanctions and countersanctions are likely to add further complications, creating complex layers of parallel proceedings, requiring parties to consider risk and liability mitigation strategies.

Exit claims against Russia

During 2023, the regulatory framework for foreign investors in Russia continued to deteriorate. The government introduced further restrictions on the ability of investors from “unfriendly States” to exit Russia by selling local operations. Western companies have experienced difficulties in obtaining the necessary “exit permits” from the Russian government, forcing them to accept massive reductions in sale price and significant delays in payment. Worse, some foreign investors, such as Danone and Carlsberg, have seen their Russian assets seized outright.

We explained in our 2023 Trends Report that Russia’s conduct could give rise to claims in investor-State arbitration under bilateral investment treaties (BITs) between Russia and the “unfriendly States” whose nationals are the subject of Russia’s countersanctions. Increased activity from foreign investors in this area throughout 2023 suggests they have concluded the Russian business environment is unlikely to improve, and their assets in Russia could be lost altogether. A few investors have sent dispute notices in 2023, and it seems likely that the first claims arising out of Russian countersanctions will be filed in 2024.

The first rulings on jurisdiction in these disputes will be important. Many Russian BITs restrict the scope of arbitration to “the amount or mode of compensation for expropriation”. Previous decisions have left unsettled whether this limitation is to be construed narrowly or permissively.

Political risk insurance claims

Political risk insurance grows in importance in times of crisis. Investors purchase policies from private insurers or their home States under a foreign direct investment incentive scheme. Coverage can provide compensation for the loss of assets, income or property due to political events or government actions. These contracts can de-risk investments in countries where government interference is a concern.

Many foreign investors in Russia acquired such insurance. In 2024 these policyholders are expected to battle their insurers in arbitration, having submitted claims in 2022 and 2023 that are now in dispute. A focus of these disputes will be whether Russian countersanctions have caused a loss, considering licensing procedures that can (in theory) liberate assets in Russia, subject to the discretion of Russian authorities.

China presents a similar trend in political risk insurance. As well as specific challenges associated with investing in and out of China, the increasing complexity of the global investment climate is an influencing factor.

Political risk insurance provides investors with simplified access to recovery for losses in high-risk jurisdictions, alleviating the need to trace State assets or deal with enforcement procedures for awards against a State.

Noah Rubins KC
Freshfields Partner

Climate change-related disputes

Activist organizations and individuals have been using legal systems around the world to regulate through litigation for years. This trend continued in 2023 and is likely to persist in 2024.

Climate-related claims take a variety of forms, from damages claims against companies in carbon-intensive industries, to personal liability claims against directors, challenges to carbon-intensive projects in the pipeline, and claims against regulators or governments. The range of such claims has grown, including actions before the European Court of Human Rights, the International Criminal Court and UN bodies.

Such claims pressure States to introduce regulatory reforms on global warming. These changes may in turn affect foreign investors, giving rise to investor-State arbitration. A notable example is RWE v the Netherlands, an arbitration relating to the Dutch government’s decision to phase out coal. Although this claim was subsequently withdrawn following the German Federal Court of Justice’s ruling that the intra-EU ECT case was inadmissible, similar claims may follow as the regulatory framework evolves.

The diversity of such disputes is likely to develop further with potential conciliation and arbitration proceedings under treaties such as the United Nations Framework Convention on Climate Change (UNFCCC) and the Paris Agreement. Both contain dispute resolution provisions that provide for arbitration. Only a handful of States have opted into the dispute resolution system so far. But governments may feel pressure to join to show they are taking action on climate change, potentially leading to a new era of State-to-State climate change arbitration.

Sanctions-related disputes

The sanctions landscape is constantly evolving, with new sanctions and countersanctions emerging in response to new crises. These affect a wide range of commercial contracts where performance becomes difficult or impossible, due to the contractual partner’s sanctions designation, or because of an export ban on certain goods or services. However, parties affected by sanctions may not accept the restrictions and seek to enforce contractual provisions by all means.

Russian parties have been empowered by a 2020 modification in the Arbitrazh (State Commercial) Procedure Code granting exclusive jurisdiction to Russian courts over disputes involving a Russian party affected by sanctions, even if contractual dispute resolution clauses refer to foreign courts or arbitration. Russian parties frequently used these provisions in 2023 to avoid proceedings abroad and we expect this trend to intensify in 2024.

This litigation tactic creates exposure for foreign companies concerning assets in Russia and in “neutral” jurisdictions where courts could be convinced to give effect to Russian judgments issued in violation of contractual dispute resolution clauses. The risk appears particularly acute in China, which signed a treaty obliging it to enforce Russian judgments, subject only to limited exceptions.

In response, many Western companies will likely commence proceedings under the contractual dispute resolution clause and seek anti-suit injunctions from foreign courts to prevent the Russian party from litigating in Russia. This could strengthen their defense against attempts to enforce the Russian judgment outside Russia. But the pursuit of proceedings abroad can expose the foreign party to a Russian anti-suit injunction, backed by fines up to the amount in dispute in the contractual forum.

Western parties will face additional complexity, being forced to deal with parallel proceedings, the risk of liability in Russia, as well as unpredictable outcomes in parallel tracks. International businesses will need to carefully balance the risk of competing jurisdictions in defense of their assets and interests, and would benefit from an international strategy that maximizes their chances of success across jurisdictions.

China is another jurisdiction where foreign investment and trade are heavily affected by sanctions and export controls. In response, China has been building up its anti-sanctions regime, including allowing sanctioned Chinese parties to seek remedies in Chinese courts. To date, there has been no surge of sanctions-related disputes in China, but this may be in store for 2024 if geopolitical tensions continue.

Adaptation in the arbitration community

The imposition of sanctions profoundly impacts the logistics and legal considerations of arbitral proceedings. Lawyers, arbitrators and arbitration institutions must comply with applicable sanctions laws while ensuring justice is served. Leading arbitral institutions have responded by enhancing procedural flexibility, providing guidance on compliance, utilizing technology to avoid disruptions caused by travel restrictions, and maintaining a strong emphasis on neutrality, integrity and due process in the face of political and economic pressures.

In the meantime, arbitration users are increasingly seeking to “delocalize” their disputes to mitigate the effects of sanctions, which can complicate or even prevent the resolution of disputes when they involve sanctioned States, entities, or individuals. Such attempt is reflected in their choice of legal regimes, arbitral institutions and arbitrators. For example, there is increased popularity of common law Asian jurisdictions (i.e., Singapore and Hong Kong) and the arbitral institutions located there in Russia-related contracts.

The challenges that sanctions pose to international commerce and law will continue to test the adaptability, efficacy and neutrality of arbitration proceedings in a sanctions-laden global landscape in 2024.

Xin Liu
Freshfields Partner