A. Summary

Sanctions have become a recurring feature of international arbitration rather than an occasional complication. This is particularly visible in trade and shipping disputes, where counterparties, vessels, cargo, and payment chains can span several sanctions regimes at once. More broadly, sanctions can affect who is allowed to sit on a tribunal or act as counsel, how an institution administers a case and collects fees, whether a claim is even arbitrable, how evidence and witnesses can be handled, whether a favorable award can actually be enforced, and how commercial contracts should be drafted in the first place. Each touchpoint requires its own analysis, and treating sanctions as a single generic risk can produce weak positions on several of them at once.

B. Introduction

Sanctions can surface in arbitration in very different ways. A respondent may argue that continued performance became illegal once a counterparty or its ownership fell within a sanctions regime. A claimant may face difficulties funding the proceedings because its assets or banking channels are restricted. And a party that wins on the merits may still face a hard fight getting the award recognized and paid where it matters. These are distinct problems, governed by different rules, and they call for different strategies.

This overview covers five recurring touchpoints: case administration once sanctions exposure exists, arbitrability and jurisdiction, the tribunal’s assessment of sanctions-based merits defenses, evidentiary and logistical constraints at the hearing stage, and enforcement risk once an award is rendered.

C. Case administration changes once sanctions exposure exists

Before the merits are even reached, sanctions can affect the mechanics of a proceeding. Arbitral institutions increasingly ask parties with a potential sanctions nexus, whether through nationality, domicile, or ownership, to disclose beneficial ownership and shareholder information, and may flag that payment of fees and deposits could require regulatory clearance or the use of specific banking channels. Counsel appointments and even arbitrator appointments can raise similar questions where a nominee, a firm, or a funder has its own sanctions exposure.

The practical consequence is that sanctions questions need to be addressed at the outset of a case, not left for the merits phase. Security for costs, the funding of legal fees, the availability of preferred counsel, and the parties’ ability to make or receive payments during the proceedings can all be affected. Early engagement with the arbitral institution and, where relevant, the competent regulator, tends to avoid delays later.

D. Sanctions related to arbitrability and jurisdiction questions

A recurring objection is that a dispute involving a sanctioned party, or a transaction that touches a sanctions regime, should not be arbitrable at all, or that recognizing the arbitration agreement itself would run counter to public policy. Arbitral tribunals generally treat sanctions as a matter to be addressed within the merits and, where relevant, through applicable law, rather than as an automatic bar to jurisdiction. A recent Swiss Federal Supreme Court decision illustrates the high threshold for such arguments. In a dispute arising from a gas transportation agreement between a Ukrainian state-controlled company and a Russian company majority-owned by the Russian state, the respondent argued that the arbitration clause had become inoperative once Switzerland and Sweden were designated by Russia as “unfriendly states,” invoking the doctrine of clausula rebus sic stantibus. The Federal Supreme Court rejected the argument: the designation of the seat and governing-law jurisdictions as “unfriendly” did not, on its own, establish any concrete impediment to the respondent’s participation in the proceedings, particularly since the respondent had entered into the arbitration agreement in 2019 fully aware of the pre-existing sanctions landscape. Whether an arbitration agreement could ever become inoperative because a party later becomes subject to restrictive measures thus remains, in practice, a high bar to clear rather than a live open question.

A related and increasingly common issue is a challenge to the composition of the tribunal itself, where a party argues that an arbitrator's nationality, professional links, or the broader geopolitical and sanctions context creates an appearance of partiality. The same decision is instructive on this point as well. The respondent had challenged the tribunal’s composition on the basis that two of the three arbitrators held the nationality of states regarded by Russia as “unfriendly,” and alleged professional ties between the tribunal's chairman and opposing counsel. The Federal Supreme Court did not need to reach the merits of that challenge: because the objection had not been raised during the arbitration itself, it was held to be forfeited. The broader lesson holds regardless of how such a challenge might ultimately fare on the merits: sanctions-related or geopolitical concerns about tribunal composition need to be identified and raised at the earliest possible stage, not held in reserve for a later challenge to the award.

E. Sanctions-based merits defenses are tested for substance

Whether framed as force majeure, illegality, frustration, or a contractual compliance clause, a sanctions-based defense to non-performance tends to succeed or fail on the same underlying questions: was there an actual, specific legal impediment at the relevant time, rather than a general sense that sanctions risk was rising; did the party invoking it act promptly and transparently once the impediment arose; and did it take the steps reasonably available to it, such as seeking a license or exemption, rather than treating the impediment as a reason to stop engaging altogether.

Generic compliance language, whether framed as a sanctions clause, a representations-and-warranties provision, or a broad reference to applicable law, can create a false sense of security. It often does not specify who bears the burden of assessing risk, what triggers a right to suspend or terminate, what notice or evidence is required, and what a counterparty can demand in response. A clause invoked for the first time once a dispute is already underway, rather than through contemporaneous correspondence, tends to be harder to defend than one applied consistently from the moment the relevant facts emerged.

The same reasoning tends to apply regardless of the label attached to the defense. Once a genuine legal impediment exists, it can excuse performance for as long as it persists, provided the affected party does what is expected of it, whether based on the provision itself or on general standards of reasonableness, such as pursuing any available license or exemption. The burden generally remains on the party invoking the impediment to show that its own conduct, and the timing of its notice, matches when the obstacle actually arose, rather than when it became convenient to raise it.

F. Sanctions complicate evidence gathering and hearing logistics

Sanctions regimes also affect how a case is actually run once it is underway. Travel restrictions and visa processing delays can complicate in-person hearings for witnesses, experts, or party representatives based in or connected to a sanctioned jurisdiction, and remote participation protocols are often best agreed early rather than improvised close to the hearing. Paying experts, translators, or court reporters can raise similar banking and clearance issues to those affecting the parties themselves. Document production requests involving entities in a sanctioned jurisdiction can also be complicated by local blocking statutes or data transfer restrictions.

G. Winning an award is not the same as collecting on it

A favorable award against a party connected to a sanctioned jurisdiction can still be difficult to enforce in practice. Banks handling the payment may require regulatory clearance before releasing funds, and courts in some jurisdictions have shown a willingness to resist recognition of awards rendered by tribunals or under rules perceived as connected to an “unfriendly” state, sometimes invoking public policy grounds. Sanctions can also cut the other way: even where the award itself is capable of recognition, the applicable sanctions regime may prevent the resulting payment from actually being made if the award creditor turns out to be linked to a sanctioned entity. A recent Swiss Federal Supreme Court decision illustrates this distinction clearly. The award creditor, seeking definitive relief from an objection to debt enforcement proceedings in Switzerland based on an LCIA costs award, was found to be controlled – within the meaning of the Swiss Ukraine Ordinance – by a Russian company on the sanctions list, which held a significant minority stake and had placed individuals with apparent ties to it in key management positions. Rather than treating the underlying claim as extinguished, the Federal Supreme Court characterized the effect of the sanctions regime as a statutory suspension of enforceability for as long as the prohibition on making funds available to a sanctioned person persists, treating the relevant provision as an overriding mandatory rule of Swiss law. A parallel decision concerning related attachment proceedings between the same parties confirmed that refusing to enforce in favor of a potentially sanctioned creditor is not arbitrary. Recognition, enforceability, and the practical ability to transfer the proceeds of an award are, in other words, distinct questions – and the credentials of the award creditor deserve the same scrutiny as those of the debtor.

The practical lesson is that enforcement strategy deserves attention well before an award is rendered. Identifying where the counterparty holds assets, whether those jurisdictions are likely to cooperate, whether the award creditor's own ownership structure could itself trigger a payment prohibition, and what licenses or authorizations might be needed to actually receive payment can shape decisions on seat, applicable law, and even settlement posture long before the tribunal issues its decision.

Five practical takeaways follow: First, sanctions questions belong on the case management agenda from day one, not as an afterthought once the merits are briefed. Second, an arbitration agreement or a tribunal's jurisdiction is not automatically defeated by a party's sanctions exposure, but objections to jurisdiction or to tribunal composition need to be raised at the earliest possible moment in the arbitration itself, since Swiss case law treats late objections as forfeited regardless of their underlying merit. Third, a sanctions-based merits defense, whatever label it carries, tends to be assessed on the specificity of the impediment, the timing of the response, and the diligence shown, rather than on the general plausibility of the underlying concern. Fourth, hearing logistics and evidence gathering generally benefit from contingency planning wherever a sanctioned jurisdiction is in the picture. Fifth, enforcement risk cuts both ways: it is worth verifying not only whether the debtor can pay without breaching a sanctions regime, but also whether the award creditor's own structure could itself trigger a payment prohibition. Swiss courts have treated such a prohibition as suspending enforceability, not as a mere formalities.