Sanctions making arbitration difficult

Daily Express

3 days ago

Published on: Thursday, July 31, 2025
Published on: Thu, Jul 31, 2025
By: Sherell Jeffrey Text Size: L/R: Steve, Dutsadee, Kevin, Ning and Fei. Kota Kinabalu: International arbitration is faced with challenges due to sanctions and corruption concerns, adding risks, costs and complexity to global trade dispute resolution. 'Arbitration is now a clash of international law, policy and economic law. It is more than just arbitration procedures that we need to know,' said Beihai Asia International Centre (Singapore) Founding President cum Executive Director Prof Steve Ngo. Steve, a recognised International Arbitrator, said this at the recent Borneo International Centre for Arbitration and Mediation (Bicam) Global alternative dispute resolutions (ADR) Horizons conference where he moderated Session 7's Navigating Impact of Sanctions and Corruption Allegation in Arbitration. What Is International Arbitration and why should we care? Before diving into the problems, it is important to understand what international arbitration is. Think of it as hiring a neutral referee when two companies from different countries have a business disagreement. Instead of going to court which can be slow, expensive and potentially biased toward the local company, businesses agree to let a neutral expert (called an arbitrator) hear both sides and make a binding decision. It is private, usually faster than court and the decision can be enforced in most countries around the world through international treaties. For decades, this system has been the backbone of international trade, giving companies confidence to do business across borders knowing they have a fair way to resolve disputes. But now, as the experts at the Bicam conference notes, that confidence is being shattered. Pisut & Partners' Dutsadee Dutsadeepanich, a major legal firm in Thailand, spoke about how international sanctions are crippling the arbitration system. 'Since the Russia-Ukraine conflict began in 2022, sanctions imposed by the United States, European Union and United Kingdom have created a maze of obstacles that make conducting fair arbitrations nearly impossible when certain parties are involved,' said Dutsadee who is also a member of Thailand's parliament. 'Arbitration is no longer straightforward for sanctioned parties,' she said, pointing out how even basic steps like paying arbitration fees become impossible when banks refuse to process transactions involving sanctioned companies. 'The problem is far more than just payment issues. This is a chilling effect where experienced arbitrators, the neutral referees' businesses rely on, simply refuse to take cases involving sanctioned parties. 'Why? They are worried about getting paid, damaging their reputations or even breaking laws in their home countries. 'For example, EU-based arbitrators may be prohibited from working on a case involving a Russian entity without special government permission,' she said, adding that this destroys one of arbitration's key advantages, which is the ability for parties to choose arbitrators they trust. The same problems face legal representation. 'Law firms from countries imposing sanctions often need government authorisation to represent sanctioned parties, while frozen bank accounts can make it impossible for sanctioned companies to pay their lawyers. The result? A fundamentally unfair playing field,' she said. Dutsadee cited examples of RCA (a Russian company) and Linde (a German company) fighting over a natural gas project. 'What should have been a single, clean arbitration turned into a messy battle across multiple countries and courts, exactly what the arbitration system was designed to prevent,' she said. Even worse, she noted, when arbitrations do proceed and decisions are made, there is no guarantee they can be enforced if sanctioned parties are involved. Courts may simply refuse to enforce decisions on public policy grounds. On corruption, Dutsadee said Thailand's challenge is that corruption issues often do not surface during the arbitration itself, but later when trying to enforce decisions. 'In Thailand, we have a lot of corruption related to arbitration, but at the stage of enforcement, especially when it involves contracts between private companies and government entities,' she said. Her prediction for the future? A shift toward arbitration centres in neutral countries like Singapore and Hong Kong as companies seek to avoid sanctions-related complications. Legal Solutions LLC (Singapore) Director Kevin Tan who works as both a lawyer and arbitrator, offered insights from Singapore, one of the world's top arbitration destinations. 'Singapore has built its reputation on being business-friendly while maintaining strict standards. We have zero-tolerance policy for corruption. As many of you would know, this includes tickets for concerts and the like,' Kevin said, pointing out how seriously the city-state takes these issues. He said corruption in arbitration comes in two flavours, namely corruption related to the original business deal (like bribing someone to get a contract) and corruption of the arbitration process itself (like bribing the arbitrator). 'Both can destroy an arbitration's validity,' he said. He cited a case study involving a Dutch investor and the government of Laos over gambling and casino investments. 'When corruption allegations surfaced, the arbitrators did not just ignore them, they conducted a thorough investigation using banking records, accounting reports, emails and witness testimony. 'The tribunal found that allegations of corruption were made out on balance of probabilities. 'When the losing party tried to challenge this decision in Singapore's courts, the judges refused and made a strong statement that arbitrators have a public duty to investigate corruption, regardless of what the parties might prefer. 'This sends a message that even in Singapore's pro-business environment, courts would not hesitate to intervene when corruption is involved,' he said. On sanctions, Kevin pointed out how Singapore follows United Nations sanctions while trying to be practical. He cited a recent case where Singapore courts granted a conditional delay when a company claimed US sanctions prevented it from paying an arbitration award. 'This shows that Singapore courts do not automatically enforce sanctions, but will consider them practically if compliance would make payment impossible for a party,' he said. He pointed out three worrying trends, namely companies are choosing different locations for their arbitrations when sanctions might be involved, arbitration centres are doing much more background checking and lawyers are having to become sanctions experts just to draft contracts. 'Law firms now need dedicated sanctions teams to protect their clients and their own reputations, a cost that ultimately gets passed on to businesses and consumers,' he said. Hui Zhong Law Firm Managing Partner Ning Fei from a China law firm, shared his perspective on how seriously corruption can be taken in arbitration. 'China operates what may be the world's strictest anti-corruption system for arbitration. The rules are so tough they make other countries look permissive by comparison,' he said. 'Chinese arbitration laws explicitly ban arbitrators from having private meetings with parties, receiving gifts or accepting any form of entertainment. 'In China, such practices are normally not allowed. It is quite strict,' Ning Fei said, referring to informal communications that are routine in other countries. But here is the kicker, China imposes criminal penalties on corrupt arbitrators. 'China is probably one of the few countries that impose criminal liability for arbitrators. If you take bribes from parties or have personal interest in a case, you may be sentenced from three to seven years in jail,' Ning Fei said. He cited examples of arbitrators being caught and banned from practice, including one who was followed by a suspicious party and photographed having dinner with the opposing side and another who was discovered making private phone calls to one party. 'Unlike other countries where arbitration centres take a hands-off approach, Chinese institutions actively monitor arbitrator behaviour through secretariat departments that can observe proceedings and participate in internal discussions. 'The secretary department knows well about arbitrators, who are good people, who may be biased. 'They have internal discussions and reviews. You can see regularly every couple of years, some people join the list, some people are released,' he said. He also pointed out that China has also had to deal with sham arbitrations, namely fake proceedings where parties collude to create enforceable court orders without genuine disputes. He cited examples of cases where companies essentially sued themselves or created artificial disputes just to get official-looking decisions they could enforce elsewhere. On sanctions, Ning Fei acknowledged the political complexity while noting that enforcement depends heavily on specific circumstances and which courts are involved. 'Interestingly, China's own retaliatory sanctions have not had much practical impact on business or arbitration enforcement,' he said. * Follow us on our official WhatsApp channel and Telegram for breaking news alerts and key updates! * Do you have access to the Daily Express e-paper and online exclusive news? Check out subscription plans available.
Stay up-to-date by following Daily Express's Telegram channel. Daily Express Malaysia