Sanctions Clauses, Force Majeure, Illegality, Banking Restrictions, Currency Risks, Russia-Related Measures and Enforcement of Arbitral Awards
Economic sanctions have become one of the most significant sources of legal risk in international commercial transactions.
A contract may be perfectly lawful when signed and commercially viable when performance begins, yet become extraordinarily difficult—or legally impossible—to perform after a government imposes sanctions, freezes a counterparty’s assets, restricts access to particular banks, prohibits the export of controlled goods or prevents payments from being processed through the financial system.
The problem is particularly acute in long-term international contracts.
Energy supply agreements, commodity transactions, EPC contracts, aircraft and vessel leases, international financing arrangements, distribution agreements, mining projects and cross-border joint ventures may remain in force for many years. During that period, the political and regulatory environment can change dramatically.
The sanctions imposed following Russia’s invasion of Ukraine have demonstrated the scale of this risk.
As of August 2026, the European Union has adopted 21 sanctions packages against Russia, with measures affecting energy, financial institutions, trade, maritime transport, technology, services, crypto-assets and third-country entities involved in circumvention. The EU’s principal economic sanctions have also been extended until 31 July 2027.
The United States maintains a wide-ranging Russia-related sanctions architecture administered principally by the Office of Foreign Assets Control—OFAC—while the Bureau of Industry and Security—BIS—has imposed extensive export controls restricting the transfer of numerous goods, software and technologies to Russia and Belarus.
The United Kingdom has developed its own post-Brexit autonomous sanctions regime, including financial restrictions, licensing mechanisms and specific arrangements concerning legal and arbitration costs.
For international businesses, the practical consequence is straightforward:
a contractual obligation may remain valid while the payment or performance required to discharge that obligation becomes prohibited, delayed, commercially blocked or dependent upon a governmental licence.
When the parties disagree about who should bear that risk, international arbitration frequently becomes the forum in which the dispute is resolved.
1. Sanctions Risk Is Now a Core Contractual Risk
Sanctions were once treated by many commercial parties as a remote compliance issue primarily affecting defence transactions and dealings with a limited number of sanctioned states.
That approach is no longer realistic.
Modern sanctions regimes may restrict transactions involving:
designated individuals, companies owned or controlled by designated persons, banks, vessels, aircraft, commodities, energy projects, technology, financial services, insurance, professional services and parties located in third countries.
They may also affect transactions indirectly.
A Turkish company and a company in the Middle East, for example, may conclude a contract governed by English law with payment in US dollars and arbitration seated in London.
Neither party needs to be incorporated in the United States for the US financial system to become commercially relevant.
Similarly, an agreement between non-EU companies may encounter EU restrictions because payment is expected to pass through an EU financial institution, goods originate in the EU, an EU parent company is involved or performance requires services from an EU operator.
The correct sanctions analysis therefore begins not with the nationality of the parties alone, but with the entire transaction.
The contractual parties, beneficial owners, banks, currencies, insurers, carriers, goods, technology, ports, jurisdictions and ultimate end users may all create sanctions exposure.
2. Sanctions and Export Controls Are Not the Same Thing
Although frequently discussed together, economic sanctions and export controls should be legally distinguished.
Sanctions commonly regulate dealings with particular countries, persons, entities, sectors or assets.
An asset freeze may prohibit funds or economic resources from being made available to a designated person.
A transaction ban may prohibit dealings with a particular financial institution.
Sectoral restrictions may prohibit financing or services connected with specified activities.
Export controls, by contrast, are generally focused on the transfer of particular goods, software or technology.
The US Export Administration Regulations provide a particularly important example.
Following Russia’s invasion of Ukraine, BIS substantially expanded controls on items subject to the EAR that may be exported, re-exported or transferred to Russia and Belarus.
The distinction matters in arbitration.
Suppose a German manufacturer is contractually required to deliver sophisticated industrial machinery to a Russian purchaser.
If the purchaser itself becomes sanctioned, the dispute may concern sanctions.
If the machinery becomes prohibited for export because of a new technology control, the dispute may instead or additionally concern export-control legislation.
The commercial effect may be similar—non-delivery—but the applicable legal rules may be entirely different.
3. The First Question in Arbitration: Is Performance Actually Illegal?
One of the most important questions in a sanctions-related arbitration is deceptively simple:
Was performance actually prohibited by law?
This question must be distinguished from:
Did performance become commercially difficult?
A bank may refuse to process a payment because the transaction is illegal.
But a bank may also refuse because its internal compliance department considers the transaction too risky even though it is not technically prohibited.
These situations should not automatically receive the same legal treatment.
Suppose Party A must pay USD 20 million to Party B.
Party A’s bank refuses to process the payment because Party B has Russian shareholders.
That fact alone does not necessarily establish that payment was legally prohibited.
The tribunal may need to investigate:
whether Party B was actually designated, whether an ownership-and-control rule applied, whether the relevant sanctions regime covered Party A, whether the transaction was prohibited, whether a licence was available and whether another lawful payment channel could reasonably have been used.
The distinction between legal impossibility and banking inconvenience is therefore critical.
A party should not automatically be relieved from a USD 20 million payment obligation merely because its preferred bank declined the transfer.
4. Sanctions Clauses Have Become Essential
A properly drafted sanctions clause can dramatically reduce uncertainty.
The clause should define what constitutes a relevant sanctions event and should identify the sanctions regimes that the parties intend to take into account.
Generic wording such as:
“Neither party shall be required to do anything contrary to applicable sanctions”
may be insufficient for a sophisticated international transaction.
The real questions are more detailed.
What does “applicable” mean?
Does it include only sanctions legally binding on the relevant party?
Does it include US secondary-sanctions risk?
Does it cover the policies of financing banks?
Does it include future sanctions?
What if the counterparty is not listed but becomes owned or controlled by a designated person?
What if performance is lawful but a bank refuses to process payment?
What if the relevant prohibition can be overcome through a licence?
What if payment in USD becomes problematic but EUR payment remains lawful?
A sophisticated sanctions clause should answer these questions before the dispute arises.
5. Primary Sanctions and Secondary Sanctions
The distinction between primary and secondary sanctions is particularly significant in international business.
Primary sanctions generally bind persons within the jurisdiction of the sanctioning state or transactions having the required jurisdictional connection.
Secondary sanctions may seek to influence the conduct of persons outside the sanctioning jurisdiction by threatening restrictions or designation even where the underlying activity has a weaker direct jurisdictional connection.
This distinction creates difficult contractual questions.
One party may say:
“The transaction is not illegal under the law governing us.”
The other may respond:
“Performance creates an unacceptable risk that our bank, parent company or group may be sanctioned.”
A well-drafted contract should determine whether sanctions risk alone is sufficient to suspend performance, or whether actual legal prohibition is required.
Otherwise, an arbitral tribunal may have to determine the issue retrospectively through general contractual interpretation.
6. Russia-Related Sanctions Have Changed International Payment Risk
Russia-related measures illustrate the scale of modern sanctions restrictions particularly clearly.
The EU sanctions architecture currently extends well beyond straightforward asset freezes.
By 2026, measures had expanded to encompass extensive restrictions involving financial institutions, energy, maritime transport, technology, dual-use goods, crypto-assets and third-country institutions assisting circumvention. The EU states that its transaction bans currently extend to numerous Russian and other financial institutions, while use of Russia’s SPFS financial messaging system has also been restricted.
The 20th and 21st EU sanctions packages adopted in April and July 2026 expanded restrictions further, including additional transaction bans affecting banks and financial institutions and further measures concerning the Russian energy sector and third-country circumvention networks.
The practical implication is that counterparties should no longer analyse only whether the contractual party itself appears on a sanctions list.
The identity of the payment bank may independently determine whether performance is possible.
7. USD Payments and US Sanctions Risk
The choice of contractual currency can materially affect sanctions exposure.
US-dollar payments frequently involve the US financial system and US correspondent banks.
Accordingly, even where both commercial parties are non-US companies, USD payment arrangements may create a significant US sanctions-compliance issue.
This does not mean that every international dollar transaction automatically becomes prohibited whenever Russia is involved.
The precise transaction, counterparties, financial institutions and applicable OFAC restrictions must be analysed.
However, parties entering contracts with heightened sanctions exposure should recognise that the seemingly ordinary provision:
“Payment shall be made in United States Dollars”
may become one of the most important clauses in the agreement.
The payment currency should therefore be coordinated with the sanctions clause.
8. EUR Payments and EU Restrictions
EUR payments present a different but comparable concern.
Where the transaction passes through EU-regulated banks or payment-service providers, EU restrictive measures may become directly relevant.
The European Commission continues to issue specific guidance addressing payment services under the Russia sanctions framework. In March 2026, for example, the Commission published updated guidance concerning restrictions under Article 5b of Regulation 833/2014 in relation to certain payment and crypto-asset services.
Accordingly, changing from USD to EUR does not necessarily solve a sanctions problem.
It may simply move the transaction from one sanctions environment into another.
The legality of an alternative currency must therefore be confirmed before it is proposed as the contractual solution.
9. Must a Creditor Accept Payment in Another Currency?
This question became particularly important in the English Supreme Court decision in RTI Ltd v MUR Shipping BV [2024] UKSC 18.
The underlying contract required payment in US dollars.
Sanctions affecting the Russian parent company of the contractual counterparty created difficulties in processing those payments.
The paying party proposed payment in euros and offered to bear the additional conversion costs.
The question became whether the party relying upon force majeure was required, under a contractual reasonable-endeavours obligation, to accept this alternative method of performance.
The Supreme Court held that, absent sufficiently clear contractual wording, a reasonable-endeavours requirement did not oblige a party to accept non-contractual performance.
The Court emphasised the importance of contractual rights: where the agreement required payment in USD, the creditor was generally entitled to insist on the agreed currency rather than accepting EUR merely because the alternative might produce broadly the same economic result.
The case has major drafting implications.
If parties want a sanctions clause to require alternative currency, alternative bank accounts or other substitute payment arrangements, the contract should say so expressly.
10. MUR Shipping: The Importance of Precise Drafting
The broader lesson from MUR Shipping is that general expressions such as “reasonable endeavours” should not be assumed to rewrite the underlying commercial bargain.
The Supreme Court distinguished the general force majeure language in MUR from more targeted sanctions provisions requiring parties to cooperate and take necessary steps to resume payments.
A modern sanctions clause can therefore expressly provide that if payment in the agreed currency becomes prohibited or cannot reasonably be processed because of applicable sanctions, the parties must cooperate to identify:
an alternative lawful currency, an alternative payment bank, an alternative account, an escrow mechanism or another authorised method of performance.
Without such wording, a tribunal may conclude that the creditor remains entitled to insist upon the original contractual performance.
11. Force Majeure and Economic Sanctions
Force majeure is one of the most frequently invoked defences in sanctions disputes.
But sanctions do not automatically constitute force majeure.
The result depends primarily upon the contract.
A tribunal may need to determine whether the relevant sanctions event falls within the contractual definition.
Some clauses expressly refer to:
sanctions, embargoes, government restrictions, export prohibitions or changes in law.
Others use broad wording referring to events beyond the reasonable control of the affected party.
The claimant invoking force majeure will generally need to establish the causal relationship between the sanctions and non-performance.
It is insufficient merely to show that sanctions existed.
The party must normally demonstrate that the sanctions actually prevented or materially affected the contractual obligation within the wording of the clause.
12. Causation Is Often the Central Issue
Suppose a seller claims that EU sanctions prevented delivery of industrial equipment.
The tribunal may ask:
Was the equipment actually subject to the export prohibition?
Was the destination prohibited?
Was the buyer designated?
Could an export licence have been obtained?
Could performance have taken place through a lawful route?
Did the seller already lack the equipment for unrelated reasons?
Would the seller have defaulted even without sanctions?
The force majeure event must generally have the contractual causal effect.
A party should therefore maintain contemporaneous evidence demonstrating precisely how the relevant sanction prevented performance.
Generic compliance emails written after the dispute has begun may carry considerably less evidential weight than contemporaneous bank correspondence, licence applications, government guidance and rejected payment instructions.
13. The Duty to Mitigate or Exercise Reasonable Endeavours
Many force majeure clauses require the affected party to take reasonable steps to overcome the event.
In sanctions disputes this can create difficult questions.
Must the party seek a regulatory licence?
Must it approach another bank?
Must it offer another currency?
Must it restructure the delivery route?
Must it appoint a different insurer?
Must it use another shipping company?
There is no universal answer.
The wording of the contract is central.
The MUR Shipping decision demonstrates that a general reasonable-endeavours obligation does not necessarily require a party to accept a fundamentally different contractual performance.
Parties that want more extensive cooperation obligations should therefore state them expressly.
14. Licensing Can Be More Important Than Force Majeure
A sanctions prohibition does not necessarily mean that performance can never occur.
Many sanctions regimes permit governmental authorities to issue general or specific licences.
OFAC expressly provides procedures through which parties may seek specific authorisation for transactions that would otherwise be prohibited under applicable US sanctions.
UK sanctions legislation similarly operates through a substantial licensing framework.
This creates another arbitration question:
Was the affected party required to apply for a licence before invoking force majeure?
Again, the contract matters.
A sophisticated sanctions provision should state whether a party must:
apply for a licence, use reasonable endeavours to obtain one, cooperate with the other party’s application, provide supporting documentation and continue the application process for a specified period.
Without an express clause, disputes can arise over whether seeking regulatory permission formed part of the party’s reasonable mitigation obligations.
15. UniCredit v Celestial Aviation: When Sanctions Suspend Payment
The UK Supreme Court’s UniCredit Bank GmbH v Celestial Aviation Services Ltd [2026] UKSC 10, decided on 25 March 2026, provides a major recent example of sanctions directly affecting payment obligations.
The dispute concerned letters of credit connected with aircraft leases involving Russian airlines.
The Supreme Court concluded that the relevant UK Russia sanctions provision prohibited the bank from making payments under the letters of credit until the necessary licences had been obtained.
The Court therefore accepted that the payment obligation was effectively suspended during the period in which payment was legally prohibited. It also held that statutory interest did not accrue during that period under the circumstances of the case.
The decision illustrates a fundamental point:
a legally valid debt may continue to exist even though immediate payment of that debt is prohibited.
Sanctions therefore do not always extinguish the underlying contractual obligation.
They may temporarily prevent its lawful performance.
16. A Frozen Debt Is Not Necessarily an Extinguished Debt
This distinction is especially important in arbitration.
Suppose an arbitral tribunal determines that Party A owes Party B USD 50 million.
Party B subsequently becomes subject to an asset freeze.
That does not necessarily mean that the USD 50 million debt disappears.
Instead, payment may be legally blocked until:
the sanctions are lifted, a licence is obtained or another legally authorised payment mechanism becomes available.
Contractual parties should therefore distinguish between:
extinction of an obligation,
suspension of an obligation, and
restriction on the method of performing the obligation.
These produce dramatically different financial consequences.
Questions concerning interest can also become important.
The UniCredit litigation demonstrates that sanctions may affect whether interest continues to accrue during a period of legally prohibited payment, depending upon the applicable statutory and contractual framework.
17. Supervening Illegality
Force majeure is contractual.
Illegality is a broader legal doctrine.
A contract may be lawful when executed but later encounter a mandatory legal prohibition that makes the agreed performance unlawful.
The legal consequences depend on the governing law, the law of the place of performance and other mandatory rules relevant to the transaction.
An arbitral tribunal may therefore need to consider several different legal systems.
For example:
the contract may be governed by English law;
the seller may be German;
the buyer may be Turkish;
the goods may originate in the EU;
payment may be denominated in USD;
and delivery may be intended for Russia.
A single governing-law clause does not eliminate every other mandatory rule.
International arbitration distinguishes between the law governing the contract and mandatory laws capable of affecting performance regardless of the parties’ contractual choice.
18. Governing Law Does Not Neutralise Sanctions
A common contractual mistake is to assume that choosing a neutral governing law protects the transaction from sanctions.
It does not.
Suppose parties choose Swiss law.
If an EU manufacturer is legally prohibited from exporting the contracted equipment, choosing Swiss law does not authorise the export.
Similarly, choosing Turkish law does not make a prohibited USD payment through a sanctioned US financial institution lawful.
The governing law determines important contractual questions, but regulatory prohibitions may operate independently.
International contracts should therefore be analysed through at least three legal layers:
the law governing the contract, the mandatory regulatory laws affecting performance, and the law of the arbitral seat and eventual enforcement jurisdictions.
19. Bank De-Risking Is Different from Legal Prohibition
Commercial parties frequently discover that banks adopt policies stricter than the minimum legal requirements.
This phenomenon is commonly described as de-risking.
A bank may refuse a payment because:
the transaction involves Russia, beneficial ownership is unclear, payment instructions mention a high-risk jurisdiction, the bank’s correspondent institution may reject the transaction or the compliance department considers the transaction commercially undesirable.
The legal question is then difficult.
If no law prohibited payment, can the debtor rely upon the bank’s refusal?
Not necessarily.
Much depends on the payment and sanctions clauses.
A debtor may be expected to approach another lawful financial institution where that is commercially and legally reasonable.
For this reason, contracts involving elevated sanctions risk should address not merely legal prohibition but banking unavailability.
Otherwise, the difference between “cannot pay” and “my bank does not want to pay” may become a multimillion-dollar arbitration issue.
20. Alternative Payment Clauses
One practical solution is to establish a contractual payment waterfall.
For example, the agreement may specify that payment should first be attempted in the contractual currency through the nominated bank.
If that method becomes prohibited because of applicable sanctions, the parties may be required to attempt another agreed bank.
If the contractual currency itself becomes unavailable, an alternative currency may apply using a predetermined exchange-rate mechanism.
If direct payment remains impossible, amounts may potentially be placed into an escrow or blocked account where legally permissible.
The critical point is not that every contract should use the same mechanism.
It is that the mechanism should be decided before sanctions arise.
Otherwise, the parties may discover during the dispute that they disagree about whether EUR, RMB, TRY or another currency constitutes valid performance of a USD-denominated debt.
21. Export-Control Licences and Contractual Delivery Obligations
Export controls create similar problems.
A supplier may contract to deliver equipment that subsequently becomes subject to an export-licensing requirement.
The supplier may argue that delivery is legally impossible.
The purchaser may respond that the seller should have obtained the licence.
The tribunal may need to determine who assumed the regulatory risk.
Important contractual questions include:
Who must obtain the export licence?
Who provides end-user information?
What if the authority delays the licence?
What if the application is rejected?
Does the seller have to challenge the refusal?
How long is performance suspended?
When does either party acquire a termination right?
The answers should be contained in the contract rather than left entirely to general force majeure law.
22. Sanctions Compliance Is Also a Due-Diligence Obligation
Contract drafting alone is insufficient.
International transactions require ongoing sanctions due diligence.
A counterparty that is lawful on the signing date may later become designated.
Ownership may change.
A previously acceptable bank may become subject to a transaction ban.
A vessel may be designated.
Goods may be added to an export-control list.
A new beneficial owner may trigger an ownership-and-control rule.
Accordingly, sanctions representations should not necessarily be limited to the contract date.
Depending on the transaction, continuing covenants and notification obligations may be necessary.
This is particularly important in long-term energy, shipping, mining and financing arrangements.
23. Arbitration Agreements Usually Survive the Sanctions Dispute
A sanctions dispute does not ordinarily eliminate the arbitration agreement merely because the underlying contractual performance has become restricted.
The principle of separability means that an arbitration clause is generally treated as legally distinct from the substantive obligations of the underlying contract.
Accordingly, even where one party argues that the substantive transaction became unlawful, the arbitral tribunal may remain competent to determine:
whether sanctions applied, when they applied, whether they prevented performance, whether force majeure was established, whether termination was lawful and whether damages remain payable.
This is one reason arbitration is particularly valuable in sanctions disputes.
The tribunal can decide the contractual consequences of the regulatory prohibition without pretending that the prohibition itself does not exist.
24. Sanctions Can Affect the Arbitration Process Itself
Sanctions may nevertheless make arbitration administratively complicated.
A designated party may encounter difficulty:
paying institutional fees, paying arbitrators, instructing lawyers, obtaining expert services or transferring money for security for costs.
Arbitral institutions must themselves comply with the sanctions regimes legally applicable to them.
ICC expressly maintains compliance procedures concerning economic sanctions and restrictive measures affecting ICC-administered dispute-resolution proceedings, and its compliance note was updated on 1 June 2026.
This demonstrates that arbitral institutions do not operate outside the sanctions system.
The existence of an arbitration agreement gives parties access to adjudication, but practical administration may still require compliance checks and licensing.
25. Paying Arbitration Costs Where a Party Is Sanctioned
The United Kingdom provides a particularly clear example.
OFSI issued General Licence INT/2025/5787748, allowing certain payments to arbitration associations and arbitrators for arbitration fees and expenses under the Russia and Belarus sanctions regimes.
That licence remained relevant in 2026 and was amended on 16 July 2026 to update reporting requirements concerning payments involving designated persons.
Separate UK licensing arrangements also exist for legal services. The current Legal Services General Licence INT/2026/9512597, effective from 29 April 2026, permits qualifying payments by designated persons for legal advice and representation subject to its conditions.
These measures reflect an important policy principle:
sanctions should restrict prohibited economic activity without necessarily eliminating access to justice and legal representation.
26. Due Process Becomes an Enforcement Issue
Sanctions can nevertheless produce procedural problems.
Suppose a respondent cannot transfer funds to its lawyers.
Its preferred counsel withdraws.
The respondent cannot pay its share of the arbitration advance.
A hearing proceeds without full representation.
Later, enforcement is sought against the respondent.
The respondent may attempt to argue that sanctions prevented it from properly presenting its case.
This is legally significant because Article V(1)(b) of the New York Convention permits refusal of recognition or enforcement where the party against whom the award is invoked was not given proper notice or was otherwise unable to present its case.
Tribunals should therefore manage sanctions-related procedural difficulties carefully.
The objective is to prevent sanctions compliance from unnecessarily developing into a later due-process challenge.
27. Sanctions and the New York Convention
The 1958 New York Convention remains the cornerstone of international enforcement of commercial arbitral awards.
As of July 2026, it has 172 Contracting States, giving international arbitration an exceptionally wide enforcement network.
The Convention generally requires Contracting States to recognise and enforce qualifying foreign and non-domestic arbitral awards, subject to limited refusal grounds.
Sanctions do not create a separate, automatic New York Convention defence.
Instead, sanctions issues may intersect with existing Article V grounds.
The most important is frequently public policy under Article V(2)(b).
28. Public Policy and Sanctioned Awards
An enforcement court may face a difficult situation where an award is valid but immediate payment would violate mandatory sanctions applicable in the enforcement jurisdiction.
The court should distinguish between two questions.
First:
Should the arbitral award be recognised?
Second:
Can money or assets presently be transferred to satisfy it?
These questions are not necessarily identical.
Depending on the jurisdiction and sanctions regime, a court may be able to recognise an award while actual execution or transfer of proceeds remains restricted pending governmental authorisation.
A sanctions prohibition should therefore not automatically be assumed to destroy the legal validity of the arbitral award.
However, an enforcement court will not ordinarily order a transfer that would itself violate mandatory law.
29. Frozen Assets and Enforcement
Winning an arbitration against a sanctioned entity—or being a sanctioned claimant with an award—is only part of the problem.
The creditor must identify executable assets.
If the relevant assets are frozen, ordinary enforcement may be impossible without a licence.
An asset freeze generally restricts dealing with the property.
It does not automatically convert the frozen asset into property belonging to an award creditor.
Likewise, the fact that a claimant has obtained a USD 100 million award does not by itself authorise a bank to release USD 100 million of frozen funds.
The interaction between:
sanctions legislation, enforcement law, third-party rights, insolvency priorities and regulatory licensing
must therefore be analysed separately.
This is why sanctions should be considered at the pre-arbitration asset-strategy stage, not only after an award has been obtained.
30. Public Policy Should Not Become a General Rehearing of the Arbitration
The New York Convention is intended to support the recognition and enforcement of international arbitral awards and permits refusal only on specified grounds.
Accordingly, a respondent should not ordinarily be able to transform sanctions public policy into a complete rehearing of the contractual dispute.
If the tribunal has carefully considered the relevant sanctions regime, determined the contractual consequences and issued an award, the enforcement court’s role remains governed by the limited framework of Article V.
However, where enforcement itself would require conduct prohibited by the forum’s mandatory sanctions law, the court must deal with that problem.
The distinction between reviewing the merits of the award and ensuring lawful enforcement should therefore remain clear.
31. Russian Countermeasures and Parallel Proceedings
Russia-related disputes can become especially difficult because restrictive measures adopted by Western jurisdictions may interact with Russian countermeasures and domestic procedural mechanisms.
A party may find itself in a position where:
the contract requires arbitration outside Russia;
one jurisdiction restricts payment;
another jurisdiction restricts compliance with the foreign sanction;
and proceedings are simultaneously threatened in national courts.
This creates the possibility of parallel litigation, anti-suit measures, conflicting court orders and enforcement proceedings in several jurisdictions.
The arbitration strategy must therefore be coordinated internationally.
The question is no longer merely:
“Where is the seat of arbitration?”
It is also:
“Where are the counterparty’s assets, banks, parent companies and commercially significant operations?”
32. Choosing the Seat of Arbitration in a Sanctions-Sensitive Contract
The arbitral seat has always been important.
Sanctions have made the choice even more significant.
The seat determines the procedural law of the arbitration and the courts exercising supervisory jurisdiction.
When selecting a seat, parties should consider not only neutrality and arbitration legislation but also:
the applicable sanctions environment, availability of court assistance, approach to mandatory rules, ability of counsel and arbitrators to receive payment, licensing practice and likely enforceability of interim measures.
Traditional arbitration centres such as London, Paris, Geneva and Singapore remain significant, while Istanbul, Dubai and other centres may also be considered depending on the commercial relationship.
There is, however, no sanctions-proof arbitration seat.
A tribunal seated outside the EU may still have EU arbitrators.
A non-US institution may still receive USD payments.
A Turkish-seated arbitration may involve assets ultimately enforceable in London or Paris.
The entire dispute-resolution architecture should therefore be considered rather than the seat in isolation.
33. Turkey’s Position in Sanctions-Sensitive Transactions
Turkey occupies an increasingly important position in international trade between Europe, Russia, Central Asia, the Caucasus and the Middle East.
Turkish companies are not automatically made subject to every unilateral US, EU or UK sanction merely because they participate in an international transaction.
Nevertheless, those sanctions can become commercially and legally relevant through several connections, including foreign banks, payment currency, parent companies, insurers, shipping providers and the jurisdiction in which contractual performance occurs.
Turkey also maintains its own strategic-goods and export-control framework.
The Ministry of Trade identifies controls concerning dual-use and sensitive items, and Turkey participates in major international export-control arrangements. Turkish legislation provides licensing and control mechanisms for military, dual-use and other strategic goods.
Accordingly, a Turkish company involved in a Russia-connected international transaction should conduct two separate analyses:
What does Turkish law permit?
and
Which foreign sanctions or export controls may nevertheless affect performance, payment, financing, insurance or enforcement?
These questions are not interchangeable.
34. Turkish-Law Contracts Should Also Contain Sanctions Clauses
Sanctions clauses are sometimes associated primarily with English-law contracts.
There is no reason to limit them in that manner.
A Turkish-law international sale, energy, construction or distribution agreement may equally require detailed sanctions allocation.
The parties should determine whether sanctions will constitute:
a suspension event, force majeure event, termination event, payment-adjustment event or illegality event.
The clause should also define what happens where a foreign bank refuses payment even though performance remains lawful under Turkish law.
Without clear drafting, these matters may ultimately be determined under general principles of Turkish contract law, including impossibility of performance, temporary impossibility, default and force majeure doctrine.
For high-value international contracts, contractual specificity is preferable to uncertainty.
35. Sanctions Clauses Should Deal with Ownership and Control
Sanctions screening based only on the contracting party’s name is inadequate.
Many sanctions regimes extend restrictions to companies owned or controlled by designated persons even where the subsidiary’s own name does not appear on the principal sanctions list.
The contract should therefore address changes in ownership.
A useful continuing obligation may require a party to notify the other if:
it becomes designated, a significant shareholder becomes designated, ownership or control changes in a manner creating sanctions exposure or a key bank becomes subject to restrictions.
A breach of this disclosure obligation may itself constitute an event of default.
This allows the contractual mechanism to operate before a payment is unexpectedly frozen.
36. Representations Should Not Be Absolute Where the Risk Is Dynamic
Sanctions representations require careful drafting.
A representation stating that:
“Neither Party is subject to any sanctions anywhere in the world”
may be impractical or excessively broad.
A more sophisticated clause identifies the sanctions regimes relevant to the parties and transaction.
It may address:
designation status, ownership and control, prohibited end use, prohibited destinations, sanctions evasion and the use of proceeds.
The objective is to create a commercially meaningful representation rather than an impossible universal guarantee.
37. Termination Rights Should Be a Last Resort, Not the Only Solution
Many sanctions clauses move immediately from sanctions exposure to termination.
That may be commercially inefficient.
A temporary banking restriction can sometimes be resolved within weeks through licensing or an alternative bank.
Immediate termination of a ten-year supply agreement may create far greater losses than the original sanctions problem.
A more sophisticated clause may establish stages.
Performance may first be suspended.
The parties may then have a cooperation period.
Licence applications and alternative payment routes can be explored.
Only if the restriction continues beyond a defined long-stop period does termination become available.
The appropriate period will depend on the commercial transaction.
38. Damages After Sanctions-Based Termination
Termination does not automatically resolve the financial dispute.
Suppose one party terminates a long-term contract claiming sanctions made future performance impossible.
The counterparty argues that the sanctions did not actually apply.
If the tribunal agrees with the counterparty, the purported termination may itself constitute repudiatory breach.
Damages could then include substantial lost profits.
This is why a sanctions termination should be based upon a documented legal analysis.
Commercial anxiety alone may not justify abandoning a valuable contract.
39. Evidence in a Sanctions Arbitration
Sanctions disputes are unusually document-intensive.
The strongest evidence often includes contemporaneous material demonstrating what actually happened when performance became difficult.
The tribunal may need to examine sanctions lists, ownership information, correspondence from banks, rejected SWIFT messages, licence applications, governmental guidance, export-control classifications, customs documents, compliance memoranda, board decisions and communications concerning alternative performance.
Expert evidence may also become necessary.
Sanctions lawyers can explain the regulatory framework.
Banking experts may explain why a payment could or could not be processed.
Export-control specialists may determine whether goods fell within a controlled classification.
Damages experts may calculate losses resulting from delayed or cancelled performance.
Sanctions arbitration is therefore frequently an intersection of public regulatory law and complex commercial evidence.
40. Drafting the Arbitration Clause
The arbitration clause itself should also be designed with sanctions risk in mind.
A sophisticated agreement should specify:
the arbitral institution, seat, language, governing law and number of arbitrators.
But sanctions-sensitive agreements may require additional thought.
For example, parties may consider whether institutional fees can practically be paid in the selected currency and jurisdiction.
They may also consider emergency arbitration where blocked payments threaten immediate termination, or expedited procedures for urgent sanctions questions.
The 2026 ICC Arbitration Rules, which entered into force on 1 June 2026, now expressly include updated mechanisms including early determination, while ICC continues to administer proceedings within its sanctions-compliance framework.
Efficient procedural tools can be especially valuable where the entire commercial relationship depends on an urgent determination of whether performance is legally prohibited.
41. A Model Risk Allocation
For sanctions-sensitive international contracts, parties should generally consider a clause architecture addressing the following matters:
- the sanctions regimes regarded as relevant to the contract;
- representations concerning designation, ownership and prohibited end use;
- continuing notification obligations;
- the effect of new sanctions imposed after signing;
- the distinction between actual legal prohibition and ordinary banking refusal;
- obligations to seek licences and cooperate with regulators;
- alternative banks and payment accounts;
- alternative currencies and conversion methodology;
- force majeure and temporary suspension;
- export-licence responsibility;
- a sanctions long-stop period and termination mechanism;
- allocation of costs caused by sanctions compliance;
- consequences for interest during legally prohibited payment periods;
- treatment of blocked funds;
- arbitration and governing law; and
- cooperation during enforcement and licensing proceedings.
A carefully drafted clause cannot prevent geopolitical events.
It can, however, determine who bears their contractual consequences.
42. Practical Example: Russian Seller, Turkish Buyer and USD Payment
Consider a Turkish company purchasing industrial commodities from a Russian supplier.
The contract is governed by English law.
Payment is USD.
The agreement provides for ICC arbitration.
The Russian supplier itself is not designated when the contract is signed.
Several months later its principal bank becomes subject to financial restrictions.
The Turkish buyer’s bank refuses to process the USD transfer.
Several legal questions arise immediately.
Is payment legally prohibited or has the bank simply adopted a conservative compliance position?
Can the supplier nominate another non-sanctioned bank?
Is the buyer required to use that account?
Can EUR or TRY be substituted for USD?
Does the contract permit the supplier to invoke force majeure even though it is the recipient rather than the payer?
Does the buyer remain liable for interest?
Is an OFAC or other regulatory licence required?
If the contract is terminated, who bears the resulting market-price loss?
The tribunal cannot answer these questions by saying simply:
“There were sanctions against Russia.”
Each contractual and regulatory connection must be analysed separately.
43. Practical Example: European Manufacturer and Russian Purchaser
Assume instead that an EU manufacturer agreed in 2024 to deliver sophisticated equipment to a Russian purchaser in 2027.
The equipment later becomes subject to an EU export prohibition.
The seller refuses delivery.
The purchaser commences arbitration and seeks damages.
The seller invokes force majeure and supervening illegality.
The tribunal may have to determine:
whether the equipment is actually covered by the relevant restriction;
whether an exemption applies;
whether the seller was required to seek a licence;
whether a licence was realistically obtainable;
whether alternative technical specifications could lawfully have been supplied;
whether the sanctions clause allocates regulatory change to the buyer;
and whether termination occurred in accordance with the contractual procedure.
The existence of export controls therefore does not eliminate contractual analysis.
It makes contractual analysis more important.
44. The Central Difference Between Sanctions Compliance and Contractual Liability
One of the most important principles in this field can be expressed simply:
A party may be correct not to perform because sanctions prohibit performance, yet the contract must still determine the economic consequences of that non-performance.
Compliance law asks:
“May the party legally perform?”
Contract law asks:
“If it cannot perform, who bears the resulting loss?”
International arbitration sits at the intersection of those questions.
The arbitral tribunal does not grant permission to violate sanctions.
Instead, it determines the contractual consequences created by the regulatory environment.
45. Conclusion
Economic sanctions and export controls have fundamentally altered the risk structure of international contracts.
The legal problem is no longer limited to whether a counterparty appears on a sanctions list.
Modern international transactions require analysis of:
ownership and control, payment banks, currencies, correspondent banking, export-controlled goods, technology, insurance, transport, licensing, governing law, arbitral seat and enforcement jurisdictions.
Russia-related measures have made these issues particularly visible.
By August 2026, the European sanctions regime had reached its 21st package, with extensive measures affecting Russian banks, energy, transport, technology and third-country actors involved in sanctions circumvention.
US sanctions and export controls likewise continue to impose extensive restrictions affecting Russia-related commercial activity.
Yet the existence of sanctions does not automatically answer a contractual dispute.
International arbitral tribunals must still determine whether the particular transaction was prohibited, whether non-performance was caused by that prohibition, whether a licence could have been obtained, whether alternative performance was required, whether force majeure applied and which party contractually assumed the resulting economic risk.
Recent English Supreme Court jurisprudence demonstrates the importance of these distinctions.
In RTI Ltd v MUR Shipping BV [2024] UKSC 18, the Supreme Court confirmed that a general reasonable-endeavours obligation did not, without clear contractual language, force a party to accept non-contractual payment in another currency.
In UniCredit Bank GmbH v Celestial Aviation Services Ltd [2026] UKSC 10, the Supreme Court confirmed that sanctions could legally prohibit payment under letters of credit until the required licences were obtained and could affect the accrual of interest during the prohibited period.
These cases point toward the same contractual lesson:
sanctions risk should be drafted, not merely anticipated.
International agreements should expressly determine what happens if a bank becomes sanctioned, USD payment becomes impossible, export permission is withdrawn, a party becomes designated or regulatory approval becomes necessary.
The contract should determine whether the parties must seek licences, use alternative banks, accept alternative currencies, suspend performance or ultimately terminate the agreement.
The dispute-resolution clause must then operate alongside this risk allocation.
International arbitration remains particularly well suited to such disputes because it allows tribunals to analyse complex interactions between contractual obligations, mandatory sanctions laws and international commercial practice.
However, obtaining an arbitral award is not always the end of the matter.
The New York Convention provides an exceptionally broad international enforcement framework, but sanctions may continue to affect the practical ability to transfer funds, execute against frozen property or distribute enforcement proceeds.
Accordingly, sanctions strategy should begin before the contract is signed, continue throughout performance, remain part of the arbitration strategy and extend into the enforcement phase.
In a restricted global economy, the most important question is no longer simply whether a contract is binding.
It is whether the parties have designed a contractual and dispute-resolution architecture capable of remaining functional when law, banks, currencies and geopolitics make ordinary performance impossible.
This article reflects the general legal and regulatory landscape as of August 2026 and is intended for informational purposes only. Sanctions and export-control regimes change frequently and may differ materially depending on jurisdiction, parties, ownership structure, currency, goods and transaction route. Transaction-specific legal advice should be obtained before taking or refraining from any action in reliance on sanctions legislation.
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