ICC Dossiers

Chapter 7 Chapter 7: Economic Sanctions, Force Majeure and Hardship¹

by Dr Mercédeh Azeredo da Silveira

INTRODUCTION

Half way between diplomatic protest and military action, economic sanctions are tools used for the achievement of political goals. Their primary purpose is coercive: they are designed to lead their target to refrain from engaging in activities in breach of international laws or standards or to renounce further wrongdoing.² In past instances, economic sanctions have been imposed, for instance, to bring a target state accused of human rights violations to alter certain features of its domestic or foreign policy,³ to impair a target state’s military potential, bring hostilities to a halt and secure the restoration of peace,⁴ to prevent the development of weapons of mass destruction,⁵ to secure the withdrawal of a target state’s troops from an invaded territory,⁶ and to destabilize foreign regimes or induce a target state to reinstate a legitimate government.⁷ The purpose of economic sanctions is usually also symbolic, as the imposition of such measures constitutes an avenue to denounce the actions or policies of their target. Finally, some sanctions programmes have even been considered to serve a punitive purpose.

To achieve such goals, economic sanctions programmes are designed to deprive their targets of critical imports and/or export markets, and/or to curtail the flow of finance from which targets may benefit. To this end, two types of measures are regularly taken as part of economic sanctions programmes: first, measures—sometimes referred to as ‘trade sanctions’—that are used to limit the flow of services and commodities (goods, technologies and capital) towards or from a target; second, measures—sometimes referred to as ‘financial sanctions’—that provide for an interruption or reduction of financing, order the freezing of assets and/or prohibit the transfer of funds to the order or to the benefit of a target. Typically, economic sanctions programmes prohibit new trade and/or financial agreements and paralyse the performance of pre-existing ones. Contracts among private operators (individuals and corporate entities), which are used as instruments for the implementation of economic sanctions,⁸ are thus most directly impacted.

Sanctions may be imposed spontaneously by states acting individually (unilateral sanctions) or by states acting jointly under the auspices of a regional organisation such as the EU (autonomous Community sanctions), or they may be imposed as state or Community measures of implementation of resolutions adopted by the United Nations Security Council under Chapter VII of the United Nations Charter (UNC) (multilateral sanctions).

In addition to the prohibitions they lay down, economic sanctions programmes may establish investigation and enforcement procedures. They usually specify penalties that may be imposed in case of breach. Property involved in, and proceeds obtained through, a transaction may be seized and subjected to forfeiture proceedings, existing authorisations may be cancelled, export privileges may be denied, civil and/or criminal monetary penalties may be imposed, and individuals may even be sentenced to imprisonment.

Typically, the party prohibited by an economic sanction from performing a transaction withholds performance, even if the contract which generated its obligations was validly entered into prior to the imposition or the entry into effect of the sanction.⁹ In response, its contractual partner may launch judicial proceedings, seeking performance in kind and/or damages.

Today, the prevailing view is that, as a matter of principle, domestic courts and arbitral tribunals have the authority to give effect to measures, such as economic sanctions, which serve public interests, whether the measures under consideration have been imposed by the forum state (in the case of a dispute decided by a domestic court), by the state of the applicable law or by yet another state.¹⁰ In particular, disputes involving economic sanctions are deemed to be arbitrable:¹¹ the competence to rule on such disputes is not retained exclusively by domestic courts.¹² Two questions, however, remain to be addressed whenever a party claims, in court or arbitral proceedings, that it should be freed from pre-existing obligations on the ground that their performance is now prohibited by an economic sanctions programme: should the sanction be taken into account for the resolution of the dispute and, if so, how does the sanction affect the contract and the parties’ rights and obligations?

Section I. of this contribution focuses on the question of the characterisation of economic sanctions from a private law perspective. This question must be delved into to allow an identification, in Section II., of economic sanctions that may—perhaps must—be taken into account by a domestic court or an arbitral tribunal. Section III. is dedicated to the substantive effects of economic sanctions on pre-existing contracts between private operators.

I. CHARACTERISATION OF ECONOMIC SANCTIONS FROM A PRIVATE LAW PERSPECTIVE

To this day, the characterisation of economic sanctions from a private law perspective has been cause for debate. Is the prohibition against performing certain transactions, laid down in a sanctions programme, to be regarded as a legal rule that may have a claim to limit the parties’ contractual freedom along with other possible limitations posed by the applicable law, or is it to be regarded as a factual element, a datum, with which the parties are confronted in the performance of their agreement?

I.A. The Traditional Datum Approach

On various grounds—such as the fact that economic sanctions are behaviour rules rather than decision rules,¹³ the fact that economic sanctions typically prohibit all transactions falling within their scope irrespective of the law governing these transactions, and perhaps also the fact that economic sanctions do not form part of the law of contracts—it has traditionally been argued that from a private law perspective, an economic sanction imposed by a state other than the state of the applicable law must be regarded as a datum, that is, as an element of fact.¹⁴

For proponents of the traditional datum approach, it is the injunction’s efficacy, its power to compel a party to withhold performance, through threats of penalty and of enforcement measures, which justifies taking into account the prohibition in order to determine the fate of a disputed transaction.¹⁵ This position implies that irrespective of its origin and of its underlying purpose, a sanction that is foreign to the applicable law but deemed to be effective will be taken into account as a relevant fact and it will affect the parties’ rights and obligations to the extent that the applicable law ascribes consequences to its existence or to the situation it has created.¹⁶

Under the traditional datum approach, foreign sanctions are thus given effect strictly through the prism of the lex contractus, which remains the sole set of legal provisions governing the parties’ rights and obligations.¹⁷ Swiss courts,¹⁸ French courts,¹⁹ German courts²⁰ and English courts,²¹ among others, have relied on this approach to determine whether a contract concluded despite the existence of a foreign trade prohibition was to be considered illegal, immoral or contrary to public policy under the provisions of the lex contractus. In these cases, the relevant ‘facts’ were the existence of a foreign prohibition in force at the time of the conclusion of the contract and the parties’ disregard thereof. Arbitral tribunals have also relied on the datum approach,²² either to assess the validity of contracts or to determine whether a foreign prohibition imposed after the conclusion of a contract could be regarded, under the provisions of the lex contractus, as an event of force majeure or the like.²³

I.B. The Legal Norm Approach

Today, the datum approach is no longer an inevitable course to ensure that a sanction bear due consequences on the parties’ contractual relationship.

With the emergence of private international law, not only is a court ruling on a dispute governed by rules of private law no longer bound to disregard a substantively relevant provision merely because of its public law characterisation,²⁴ but it is even empowered to give effect to provisions (whether of a public or of a private law nature) that are external to the applicable law.²⁵ An ‘overriding mandatory rule’,²⁶ that is, a rule that purports to respond to essential needs and therefore proclaims itself applicable to all situations falling within its purview irrespective of the applicable law,²⁷ may be given effect as a legal norm even if it is external to the applicable law, provided that certain restrictive conditions be satisfied (these conditions are discussed below in section II.A.).

Regulation (EC) 593/2008 of the European Parliament and of the Council of 17 June 2008 on the Law Applicable to Contractual Obligations (Rome I Regulation)—the governing text for all EU member states with respect to the identification of the law applicable to contracts concluded after 17 December 2009 (Article 28)—defines overriding mandatory rules as:

provisions the respect for which is regarded as crucial by a country for safeguarding its public interests, such as its political, social or economic organisation, to such an extent that they are applicable to any situation falling within their scope, irrespective of the law otherwise applicable to the contract under this Regulation (Article 9(1)).

The Rome I Regulation further provides that:

[e]ffect may be given to the overriding mandatory provisions of the law of the country where the obligations arising out of the contract have to be or have been performed, in so far as those overriding mandatory provisions render the performance of the contract unlawful (Article 9(3)).

The Rome I Regulation’s predecessor, the Rome Convention on the Law Applicable to Contractual Obligations (80/934/EEC) of 19 June 1980 (Rome Convention),²⁸ also provided that:

[w]hen applying under this Convention the law of a country, effect may be given to the mandatory rules of the law of another country with which the situation has a close connection, if and in so far as, under the law of the latter country, those rules must be applied whatever the law applicable to the contract (Article 7(1)).²⁹

Economic sanctions fit into the category of overriding mandatory rules.³⁰ Indeed, as noted above, a distinctive feature of sanctions is that they strive to prohibit the performance of all transactions falling within their scope, irrespective of the law governing these transactions.³¹ Many trade sanctions prohibit, for instance, trade-related transactions between individuals located in, citizens of, and corporate entities incorporated under the laws of, the sanctioning state, on the one hand, and individuals and entities located in the target state, on the other hand, irrespective of the law applicable to these transactions. Accordingly, today, economic sanctions may be taken into account in the context of disputes between private operators, as legal norms, notwithstanding the fact that they serve public interests and even if they are external to the applicable law, provided they satisfy the conditions that must be met for an overriding mandatory rule to be given effect.³² In a 2010 decision, the French Cour de cassation held that Article 7(1) Rome Convention was to be relied upon to determine whether a unilateral Ghanean ‘embargo’ prohibiting imports of French beef into Ghana was to be taken into consideration for the resolution of a dispute pertaining to a contract (concluded in 2007) governed by French law, which provided for the transportation, from France to Ghana, of frozen beef.³³

If the conditions, discussed below, of provisions such as Article 7(1) Rome Convention or Article 9(3) Rome I Regulation are satisfied, the court ruling on the dispute has the authority—though in principle no duty³⁴—to give effect to a sanction that is foreign to the applicable law, irrespective of the content of this law, irrespective of contractual clauses that may collide with the sanction, and even irrespective of an agreement between the parties to exclude the application of the sanction.³⁵

The same applies in the case of disputes heard by an arbitral tribunal.³⁶ Indeed, although arbitrators are not bound a priori by any set of rules of private international law and therefore provisions such as Article 7(1) Rome Convention and Article 9(3) Rome I Regulation are not directly applicable to arbitration, they are applicable by analogy; at the very least, arbitrators should be guided by their underlying principles.³⁷ Accordingly, as early as in 1973, an arbitral tribunal took into account Lebanese import restrictions—which it characterised as overriding mandatory rules—in the context of a contract between a Japanese seller and a Lebanese importer, governed by general principles and usages of international trade and to be performed in Lebanon, Syria and Jordan.³⁸

In light of the above, proponents of the legal norm approach maintain that nothing justifies that sanctions be relegated to the sphere of data and assert that their legal nature ought to be acknowledged. Accordingly, they maintain that a sanction should be regarded as an impediment to the performance of contractual obligations only if the party required to withhold performance is legally bound to comply with it, that is, if the sanction has a valid claim under rules and/or principles of private international law to limit the parties’ contractual freedom, either as an element of the applicable law or as an overriding mandatory rule external thereto.³⁹

II. APPLICATION OF ECONOMIC SANCTIONS BY DOMESTIC COURTS AND ARBITRAL TRIBUNALS

In many case scenarios, the datum approach and the legal norm approach lead to the same outcome, in particular if the performance of the contract requires the obligor to take steps within the sanctioning state. In this case, possible enforcement measures or threats of penalty will usually weigh heavily against a decision to disregard the sanction, and whether the latter be characterised as an element of fact or as an element of law ultimately matters primarily for procedural purposes. However, as shown in the present section, one cannot exclude the possibility that the two approaches lead to different results in certain situations, notably in the case of unilateral sanctions and autonomous Community (or, more generally, autonomous regional) sanctions. Indeed, under the legal norm approach, mechanisms of private international law afford arbitrators and judges the ability to disregard sanctions programmes that do not meet certain narrowly defined conditions.

II.A. Unilateral and Autonomous Community Sanctions

It may be tempting to argue that whenever the lex contractus provides that exemption may be granted in situations of factual impediment (including situations in which performance has become excessively difficult or unreasonably onerous), a defaulting party may be exempted irrespective of the sanctioning state’s authority to proscribe the disputed transaction, if that state has the power to prevent the performance of this transaction. One may indeed be tempted to opine that a defaulting party should be denied exemption from liability for non-performance only if it failed to perform a contract that it could have performed, hence that it should be exempted if the sanctioning state would in any event have had the power to prevent its performance, irrespective of any other consideration including the sanction’s purpose.

Such an approach—which is in line with the datum approach—may, however, amount to an unsatisfactory shortcut if the measure under consideration is a unilateral or a Community autonomous sanction.⁴⁰ Indeed, relying primarily, if not solely, on the factual circumstances created by sanctions and disregarding the fact that these constitute deliberate instructions issued by one or several states, directed to the achievement of a political purpose, detrimental to one of the contractual partners, and that have at times been condemned by states if not by the international community at large, may lead to undesirable results.⁴¹

As shown below, by relying on the datum approach, a domestic court may run the risk of giving effect to a sanction that the forum state has refused to condone,⁴² perhaps to a sanction that the forum state has forthrightly condemned, perhaps even to a prohibition directed against the forum state. By relying on the datum approach, a deciding domestic court or arbitral tribunal may also run the risk of giving effect to extraterritorial sanctions (that is, sanctions that prohibit persons and entities located outside the sanctioning state from dealing with a target⁴³) against which blocking statutes have been adopted (possibly by the forum state itself in the case of a dispute litigated before a domestic court).⁴⁴ The deciding court may even run the risk of giving effect to sanctions programmes that violate international law.

In addition and as a matter of principle, if the contract or the lex contractus does not itself address the relevance of, or allocate the risk associated with, foreign prohibitions,⁴⁵ one may question whether a court should subject parties to a prohibition that is external to the applicable law merely on the ground that this prohibition proclaims itself applicable to their transaction, without first ascertaining the reasons justifying that it be taken into consideration and limit the parties’ contractual freedom.⁴⁶

Finally, one ought to pay heed to the fact that in cases (discussed in Section III. below) in which a sanctions programme contains prescriptions governing its impact on contractual relationships, the traditional datum approach may entail an unwarranted limitation or alteration of the consequences of this programme on private operators.⁴⁷

In light of the above, it is arguable that, at least as far as unilateral and Community (or other regional) autonomous sanctions are concerned, domestic courts and arbitral tribunals called to rule on contractual disputes should refrain from relying on the datum approach and rather examine whether the sanction under consideration has a valid claim, as a legal norm, to be given effect.⁴⁸

Given that economic sanctions fall into the category of overriding mandatory rules, domestic courts are bound, as state officers, to give effect to substantively relevant economic sanctions imposed by the forum state, even if the law of the forum is not the applicable law (see Article 7(2) Rome Convention and Article 9(2) Rome I Regulation).⁴⁹ By contrast, a domestic court may, by virtue of the public policy exception,⁵⁰ disregard a sanction (foreign to the law of the forum) imposed by the state of the applicable law if giving it effect would lead to an outcome which would be in conflict with the forum’s international public policy (see Article 16 Rome Convention and Article 21 Rome I Regulation⁵¹), that is, with fundamental principles and essential values that the forum state considers inviolable.⁵² Similarly, an arbitral tribunal may disregard a sanction imposed by the state of the applicable law if giving it effect would lead to an outcome which would be in conflict with principles of transnational public policy,⁵³ that is, with universally recognised principles of justice.⁵⁴

A domestic court may thus, for instance, disregard sanctions imposed by the state of the applicable law that are directed against the forum state⁵⁵ or sanctions against which the forum state has enacted a blocking statute. Both domestic courts and arbitral tribunals may also disregard sanctions imposed in breach of customary or conventional public international law binding on the sanctioning state,⁵⁶ for instance sanctions imposed in breach of the United Nations Charter (in particular the principle of non-intervention rooted in Article 2(1) UNC), of the General Agreement on Tariffs and Trade (GATT) (in particular its provisions aiming at the liberalisation of international trade, such as Article XI(1)),⁵⁷ of bilateral agreements, or of international human rights law.⁵⁸ Domestic courts and arbitral tribunals may also refuse to give effect to unilateral sanctions programmes that strive to be applied extraterritorially in breach of public international law.⁵⁹

As to economic sanctions that are external to the applicable law, as mentioned above, under the legal norm approach, the deciding court must examine whether the sanction has a valid claim, as an overriding mandatory rule, to be given effect. In this respect, Article 7(1) Rome Convention provides the following:

When applying under this Convention the law of a country, effect may be given to the mandatory rules of the law of another country with which the situation has a close connection, if and in so far as, under the law of the latter country, those rules must be applied whatever the law applicable to the contract. In considering whether to give effect to these mandatory rules, regard shall be had to their nature and purpose and to the consequences of their application or non-application.

Article 9(3) Rome I Regulation, in turn, reads as follows:

Effect may be given to the overriding mandatory provisions of the law of the country where the obligations arising out of the contract have to be or have been performed, in so far as those overriding mandatory provisions render the performance of the contract unlawful. In considering whether to give effect to those provisions, regard shall be had to their nature and purpose and to the consequences of their application or non-application.

Thus, to determine whether effect ought to be given to a sanction that is external to the applicable law, the deciding court must ensure that the following conditions are met: first, that the sanction serves interests so commanding that it should not be disregarded in a situation that falls within its scope; second, that a close connection exists between the disputed contract and the sanctioning state; and third, that the benefits of a decision to give effect to the sanction outweigh those of a decision to disregard it.

The first condition (sometimes referred to as the ‘application-worthiness’ condition⁶⁰) requires courts to weigh the ethical essence and importance of the policy underlying a foreign prohibition.⁶¹ They will thus determine whether they should contribute to the achievement of the purpose of the prohibition, even though the latter is foreign to the applicable law. Domestic courts generally rely on domestic and/or EU standards.⁶² Arbitral tribunals, on the other hand, must examine whether the sanction’s purpose is considered by the international community to be legitimate (even if the achievement of this purpose is not essential to the international community⁶³) and whether there is an agreement at the international level, be it implicit, that this purpose mandates that the sanction be given effect.⁶⁴ In this respect, it should be noted that the international community may recognise the legitimacy of a sanction imposed by a single state, considering that other states may have refrained from imposing the same sanction for contingent reasons while being in agreement with its underlying purpose.⁶⁵ One must bear in mind that a binding resolution of the Security Council is the outcome of an affirmative vote of nine members (out of the 15 members), including the concurring votes of the five permanent members (Article 27(3) UNC),⁶⁶ each of which has its own interests to safeguard. Furthermore, multilateral sanctions have, in some instances, followed unilateral measures, the legitimacy of which was thus subsequently validated.⁶⁷ Arbitrators should therefore not assume that because a sanction is unilateral, it does not serve a legitimate purpose. In each case, they must consider the context in which the sanction was imposed and determine whether its purpose mandates that it be given effect.⁶⁸

By way of example, unilateral and autonomous Community sanctions imposed following, and in accord with, a non-binding resolution of the UN Security Council⁶⁹ ought to be regarded as serving a legitimate purpose.⁷⁰ The deciding court may also recognise the legitimacy of, and therefore ‘take into account economic sanctions of foreign governments which promote mutually accepted policies or prevent a mutually recognized evil’,⁷¹ and sanctions programmes that are intended to protect the sanctioning state’s vital interests or national security and that are not in conflict with the interests of the forum state.⁷² This being said, it should be emphasised that courts should always ponder on the purpose of unilateral and autonomous regional sanctions rather than be influenced by pure considerations of reciprocity or international comity.

In this respect, the following may be noted. Today’s broad conventional and treaty obligations protecting freedom of trade circumscribe the latitude of states to impose limits on the exchange of goods and services for reasons other than national and international peace and security. While it is true that, as noted above, in the absence of a conventional or treaty obligation of one state towards another to maintain trade relations, the use of trade sanctions is not to be considered intrinsically in breach of public international law, these conventional and treaty prescriptions may be regarded as guidelines in the assessment of the application-worthiness of a given sanctions programme, even where the sanctioning state is not bound by any such convention or treaty. Thus, for instance, considering provisions of the GATT (in particular Article XXI) and NAFTA (in particular Article 2102(1)) regarding the imposition of restrictive measures, a ban on arms exports to a state which is suspected of engaging in the development of weapons of mass destruction will likely be considered to serve a legitimate purpose, even if the sanctioning state has not sustained any direct injury and its interests have not been directly threatened.⁷³

By contrast, it is hardly conceivable that a domestic court would consider legitimate a sanction that is directed against the forum state⁷⁴ or a sanction against which the latter has enacted blocking statutes.⁷⁵ Furthermore, sanctions based, for instance, on racial, religious or gender discrimination should never be considered legitimate and should therefore not be given effect.⁷⁶ An extraterritorial sanction imposed by a state other than the state of the applicable law may also have to be disregarded⁷⁷ if its scope is unjustifiable under principles of public international law⁷⁸ or, in the case of a dispute litigated before a domestic court, if the forum state has enacted a blocking statute⁷⁹ or its interests are adversely affected by the sanction.⁸⁰ The existence of a blocking statute must also be weighed against a finding of legitimacy by arbitral tribunals, given that, as noted above, arbitral tribunals ought to give effect to measures whose legitimacy has been acknowledged by the international community, rather than assist one state in the pursuance of an extraterritorial policy that others have opposed.

Regarding the second condition, namely that a close connection exist between the disputed contract and the sanctioning state, pursuant to Article 9(3) Rome I Regulation, domestic courts in EU member states may only give effect to sanctions imposed by the state where contractual obligations under the disputed contract have to be or have been performed.⁸¹ Thus, in a decision rendered on 25 February 2015, the Cour d’appel of Paris refused to take into account US (extraterritorial) sanctions against Iran in the context of a dispute related to a contract governed by French law between a French company and an Iranian company.⁸²

Arbitral tribunals, which are not bound by this limitation,⁸³ may consider the close connection requirement satisfied, for instance, if the disputed contract (or part of it) is to be performed within the territory of the sanctioning state,⁸⁴ if it involves prohibited imports into and/or exports from that territory, or if one of the parties must take some measures within that state to carry out its performance. The close connection requirement may also be deemed to be satisfied if the disputed contract involves prohibited transactions by nationals (or permanent residents) of the sanctioning state, or if the prohibited transactions threaten the sanctioning state’s national security.

With respect to the third condition, namely that the benefits of a decision to give effect to the sanction outweigh those of a decision to disregard it, the deciding court may consider several variables. It ought to examine whether the sanctioning state has the power to enforce the sanction through material measures and thus prevent the performance of the contract⁸⁵ and whether penalties could be imposed by the sanctioning state against a party that would perform the contract in breach of the sanction.⁸⁶ The deciding court may also have to consider the foreseeable financial repercussions of a decision to give effect to a sanction.⁸⁷ In addition, an arbitral tribunal must weigh the risk that an award taking into account or disregarding a sanction be set aside or that enforcement of the award be refused.⁸⁸ Finally, in its assessment of the consequences of a decision to disregard or give effect to a sanction that has an extraterritorial scope, the deciding court should pay heed to decisions issued and legislation enacted to thwart the operation of the sanction or ‘neutralise’ its effects. Indeed, the deciding court should consider blocking statutes threatening persons and entities under the enacting state’s jurisdiction with penalties⁸⁹ and prohibiting courts from recognising or enforcing judicial and administrative decisions giving effect to the sanction.⁹⁰ It should also examine possible clawback provisions granting persons and entities under the enacting state’s jurisdiction the right to recover damages (including legal costs) caused by the application of the sanction or by actions based thereon or resulting therefrom.⁹¹

II.B. Multilateral Sanctions—Sanctions Adopted under Chapter VII of the UN Charter

The situation of UN sanctions is different.

UN Security Council mandatory resolutions on sanctions emanate from an international organisation acting on behalf of all its member states. They are adopted under Chapter VII of the UN Charter,⁹² in pursuance of the Charter’s goals, in situations in which the Security Council has determined the existence of a breach of the peace, an act of aggression, or a threat to the peace (Article 39 UNC).⁹³ UN Security Council mandatory resolutions not only are deemed to serve a purpose that the international community considers to be worthy of protection, but in fact form part of transnational public policy,⁹⁴ and are accordingly binding on domestic courts and arbitral tribunals.⁹⁵ In other words, the latter must give effect to any relevant domestic and Community measure implementing UN Security Council mandatory resolutions without calling into question the legitimacy of their purpose⁹⁶ (even if, in the case of a dispute brought before a domestic court, the forum state has not yet enacted domestic implementation measures).

Accordingly, arbitral tribunals and domestic courts are bound, rather than just authorised, to give effect to any domestic or Community measure which implements a UN Security Council sanction and is relevant to the case at hand (that is, a measure in the scope of which the disputed contract falls), even if this measure is external to the applicable law⁹⁷ and foreign to the law of the forum state (in the case of a dispute brought before a domestic court).⁹⁸ The prohibition laid down in this piece of legislation must have on the targeted transaction the impact intended by the Security Council. Therefore, the characterisation of such a measure, as an element of fact (datum) or as an element of law, is not as relevant in the case of multilateral sanctions as it is in the case of unilateral and autonomous Community sanctions:⁹⁹ measures implementing UN Security Council mandatory resolutions ought never to be disregarded on the purported ground that they do not serve a legitimate purpose, that they do not present a close connection to a given transaction that they prohibit, or that the benefits of a decision to disregard them outweighs those of a decision to give them effect.¹⁰⁰

Most importantly, in the unlikely event that a UN Security Council mandatory resolution has not been transposed into Community or domestic law, either as a result of an omission or of a political choice of the state concerned, it is satisfactory to take into consideration the prohibition laid down in the resolution itself as a relevant datum for the settlement of the dispute.¹⁰¹ A UN Security Council mandatory resolution—which typically requires member states to take all necessary measures to give effect to its operative paragraphs notwithstanding pre-existing contracts and prior licences—itself does not create rights and obligations for private operators.¹⁰² It does, however, affect their contractual relationships, even if it has not been translated into state or Community legislation, to the extent that individuals and corporate entities may legitimately consider themselves bound not to overlook the content of such resolutions. Therefore, where a resolution has not been transposed into Community or domestic law, taking into account as data the prohibitions laid down in the resolution itself allows the deciding court to make up for a state’s failure to meet its international implementation obligation.¹⁰³ Accordingly, in Etat irakien v SA Dumez GTM, the French Cour de cassation stated that ‘si les résolutions du Conseil de Sécurité des Nations Unies s’imposent aux Etats membres, elles n’ont, en France, pas d’effet direct tant que les prescriptions qu’elles édictent n’ont pas, en droit interne, été rendues obligatoires ou transposées’, but added that ‘à défaut, elles peuvent être prises en considération par le juge en tant que fait juridique.’¹⁰⁴

In sum, the datum approach appears to be satisfactory in the case of multilateral sanctions as well as in the case of UN Security Council resolutions that have not been translated into domestic or Community legislation.

III. EFFECTS OF ECONOMIC SANCTIONS ON THE RIGHTS AND OBLIGATIONS OF PRIVATE OPERATORS UNDER INTERNATIONAL LAW INSTRUMENTS

Whereas section II. above focussed on the question of whether a given economic sanctions programme ought to be taken into account by a domestic court or an arbitral tribunal for the resolution of a contractual dispute, the present section addresses the substantive effects of a sanctions programme on pre-existing obligations, during the sanction’s term and after it is lifted. In essence, this section explores the tension between the principle of sanctity of contracts, on the one hand, and the need to adapt the parties’ obligations in situations of subsequent alteration of circumstances such as the types of alteration that result from the imposition of economic sanctions, on the other hand.

In this context, the terms and breadth of a sanctions programme invoked by the defaulting party to justify its non-performance or delayed performance must be carefully examined to identify which transactions are actually prohibited. Does the sanction invoked by a defaulting seller only prohibit shipments from the sanctioning state (directly and indirectly) to the target state? Does it also prohibit nationals of the sanctioning state from making goods available to nationals of the target state, even within the sanctioning state? Does it prohibit any action ultimately intended to allow imports or exports, direct or indirect, from or to the target state?

If a sanction prohibits shipments from the sanctioning state (directly and indirectly) to the target state, it may well constitute an impediment to a seller’s obligation to deliver the goods at the port of shipment (for instance under a CIF contract¹⁰⁵) or in the country of destination.¹⁰⁶ By contrast, such a sanction is no impediment to the seller’s obligation to deliver the goods by making them available on its own premises¹⁰⁷ (for instance under an EXW contract¹⁰⁸). A sanction prohibiting persons and entities within the sanctioning state from making goods available to nationals of the target state or prohibiting any transaction aimed at the export of goods to the target state may, on the other hand, constitute an impediment to a seller’s obligation to make goods available to the buyer inside the sanctioning state. A buyer may, in turn, invoke as an impediment to performance an import prohibition preventing it from taking delivery of the goods at the port of destination.¹⁰⁹ By contrast, a sanction prohibiting imports to a location other than the one where the buyer must take delivery is no impediment to the performance of its obligations, unless the contract clearly stipulates that the buyer must transport the goods to the location which is now under prohibition.¹¹⁰

If the performance of a party’s obligations is indeed prohibited under a given sanctions programme, it must be determined whether the prohibition amounts to an exonerating impediment. In this context, section III.A. and section III.B. below address two different types of situations.

Section III.A. focuses on situations in which the deciding court has resolved to take the sanction into account for the resolution of the dispute. The deciding court may have followed the datum approach (discussed in section I.A. above) and come to the conclusion that the sanction (or the situation created by it) constitutes a relevant factual element to be taken into account for the resolution of the dispute. The deciding court may, alternatively, have followed the legal norm approach (discussed in section I.B. above) and reached the conclusion that the relevant sanctions statute is to be given effect either as part of the law applicable to the disputed contract or as a foreign overriding mandatory rule (see section II.A. above). Section III.A. examines how the sanction affects the rights and obligations of the parties during the sanction’s term (section III.A.1.) and after it has been lifted (section III.A.2.). Both situations in which the sanction plainly prohibits performance by the obligor (section III.A.1.a.) and situations in which performance by this party is subject to a regime of authorisation (section III.A.1.b.) are analysed.

Section III.B. deals with situations in which the ruling court, having followed the legal norm approach, has come to the conclusion that even though the contract falls within the scope of a sanction prohibiting its performance, this prohibition, as such, is not to be taken into account for the resolution of the dispute. That is, on grounds of a private international law nature (discussed above in section II.A.), the deciding court has determined that the sanction is not to be given effect, be it as an element of the applicable law or as an overriding mandatory rule, and that the prohibition, in itself, can therefore not justify the obligor’s failure to perform its obligations. In this context, the question arises whether any kind of relief is nevertheless available to the obligor, considering not the prohibition itself (the deciding court having resolved that the statute must be disregarded) but rather solely the factual risk of penalty that the obligor would run if it were to perform the transaction. Should this party be compelled to perform its obligations despite the risk of penalty, on the ground that performance is not illegal in the eyes of the ruling court? Should the obligor be compelled to choose between being liable to the obligee for breach of the contract and being penalised by the sanctioning state for breach of the sanction? Or does the risk of penalty constitute a valid ground for some kind of relief, considering that the environment in which the contract must be performed differs from the one in which, at the time of the conclusion of the contract, the parties assessed their risks, costs, and benefits? Section III.B. below is devoted to the examination of these questions.

III.A. Economic Sanction as a Ground for Exemption from Liability for Non-Performance

Only a few sanctions programmes address (sometimes implicitly or indirectly) the question whether the prohibition against performing pre-existing obligations amounts to an exonerating impediment. Some sanctions stipulate that targeted persons and entities or persons and entities of the target state are precluded from seeking compensation for non-performance of contracts affected by these sanctions.¹¹¹ They thus make such claims inadmissible (irrecevables)¹¹² before both domestic courts and arbitral tribunals. Other sanctions programmes provide that no claims filed in connection with contracts or transactions the performance of which was affected by these sanctions shall be satisfied.¹¹³ Under such sanctions programmes, no judicial authority—be it domestic or arbitral—may hold liable a party that has withheld performance of its contractual obligations.

Most sanctions programmes are, however, silent as to the rights and obligations of the parties to contracts whose performance is prohibited. Typically, the UN Security Council calls upon states to act in accordance with its resolutions ‘notwithstanding the existence of any rights or obligations conferred or imposed by any international agreement or any contract entered into or any licence or permit granted prior to the date of adoption of [the] resolution [in question]’.¹¹⁴ Accordingly, domestic rules implementing UN resolutions most often prohibit the performance of such agreements and contracts or of actions they involve, without addressing the fate of these agreements or that of the parties’ rights and obligations. The same is true of unilateral sanctions. A unilateral sanction is typically silent, for instance, on the question of whether a pre-existing contract falling within its scope ‘re-lives’ after the sanction is lifted, whether a party that withholds performance of its contractual obligations in order to comply with the sanction is exempted from liability for non-performance, and whether any remedy is available to the other party. As a result, relying solely on the terms of a sanction prohibiting a party from performing its contractual obligations often does not allow the deciding court to rule on the parties’ claims. The deciding court must turn to the contract if it contains a clause dealing with occurrences that may prevent a party from performing its obligations.¹¹⁵ In the absence of such a contractual clause, it must look into the applicable law.

III.A.1. Exemption from Liability for Non-performance While the Sanction Is in Force

a. Economic sanction plainly prohibiting the performance of a transaction

Under general principles of law, international law instruments and domestic laws, primary economic sanctions (commonly simply referred to as economic sanctions)—namely sanctions that prohibit persons and entities under the prescriptive jurisdiction of the sanctioning state from performing certain transactions—are deemed to constitute some form of exonerating obstacle, even if they do not make performance technically impossible.¹¹⁶

In an International Chamber of Commerce arbitral award rendered in 1974 regarding a dispute between a French buyer and a Romanian seller, the arbitral tribunal stated that the annulment of export authorisations constituted an event of force majeure, both under general principles of law and under the disputed contract.¹¹⁷

Several awards were also rendered in the context of disputes governed by the United Nations Convention on Contracts for the International Sale of Goods (CISG), whose Article 79(1) reads as follows:

A party is not liable for a failure to perform any of his obligations if he proves that the failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it, or its consequences.

In a 1996 Bulgarian Chamber of Commerce and Industry award, a prohibition on exports imposed by the Ukrainian Government was found to constitute an impediment, under Article 79(1) CISG, to the delivery of coal by the seller.¹¹⁸ In a Hungarian Chamber of Commerce and Industry award, rendered that same year, the arbitral tribunal also held that UN sanctions in force against Yugoslavia constituted, under Article 79(1) CISG, an impediment to the payment, by a Hungarian buyer, of the portion of the price that was due after the sanction had come into effect.¹¹⁹

As to decisions issued under domestic law, in 1992, a final award was made under the Rules of the Milan Chamber of National and International Arbitration, in which the sole arbitrator found that a contract between an Italian main contractor and an Italian subcontractor, governed by Italian law, was ‘affected by the impossibility to perform, ensuing from [EU and Italian] embargo legislation’ in force against Iraq.¹²⁰ One may also refer to judgments of US courts regarding disputes involving trade restrictions. Relying on para 2-615(a) of the Uniform Commercial Code (UCC)—which provides that discharge can result from ‘compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid’—US courts have granted discharge on grounds of ‘commercial impracticability’ in cases of governmental prohibitions,¹²¹ as well as in cases of informal governmental pressure¹²² and informal governmental restrictions.¹²³ Under French law, a party that withholds performance of its obligations in order to comply with a sanctions programme may invoke Article 1148 of the French Civil Code, which provides that ‘[d]amages are not due when, because of a force majeure or a fortuitous event, the obligor-debtor either was prevented from giving or doing what he was obligated to give or did what he was forbidden to do’.¹²⁴

As noted above, for proponents of the traditional datum approach (discussed in section I.A.), it is the situation created by a primary sanction (hence its compelling power over private operators) that is deemed to constitute a factual impediment. For proponents of the legal approach (discussed in section I.B.), a primary economic sanction may only give rise to an impediment of a legal nature. Accordingly, the prohibition laid down in a sanctions programme may be deemed an impediment to performance only if the conclusion was first reached that the sanction must be given effect in the context of the dispute at hand, either as a legal prescription that is part of the applicable law or as an overriding mandatory rule external thereto.

It is questionable whether measures known as secondary and tertiary sanctions may be deemed to constitute exonerating impediments to performance. Secondary and tertiary sanctions are measures used by some states to increase the efficiency of their primary sanctions programmes through the exertion of pressure (for instance, by way of threats of penalties, trade restrictions or denial of loans or credit from financial institutions of the sanctioning state) on foreign persons and entities which are not under the jurisdiction of the sanctioning state, to induce them to sever their ties with target states.¹²⁵ These measures do not amount to legal impediments to performance given the absence of prescriptive jurisdiction of the sanctioning state,¹²⁶ which can only threaten with penalties persons and entities that would maintain commercial and/or financial ties with the targets of a primary sanctions programme.¹²⁷ It has also been argued that, in principle, secondary and tertiary sanctions cannot justify an exemption from liability on grounds of factual impediment to performance, considering, inter alia, that the risk of future adverse measures taken by a sanctioning state often only makes the performance of the contract indirectly more onerous through a possible subsequent deprivation of certain advantages related to other transactions (for example, the denial of export licences or export financing),¹²⁸ and that secondary and tertiary sanctions are generally not insurmountable.¹²⁹

In the case of primary economic sanctions which, as mentioned above, may amount to impediments to performance, exemption from liability for non-performance is subject to a number of conditions.

Under international law instruments and uniform projects such as the CISG and the 2016 UNIDROIT Principles of International Commercial Contracts (UNIDROIT Principles), a compilation ‘set[ting] forth general rules for international commercial contracts’,¹³⁰ a party prevented by an impediment from performing its obligations may be granted exemption from liability for damages and its duty to perform in kind may be considered unenforceable, provided that the impediment was beyond the defaulting party’s control and this party could neither reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract nor reasonably be expected to avoid or overcome the impediment.¹³¹ Article 79(1) CISG indeed provides that:

[a] party is not liable for a failure to perform any of his obligations if he proves that the failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it, or its consequences.

Article 79(5) CISG further specifies that

[n]othing in this article prevents either party from exercising any right other than to claim damages under this Convention.¹³²

Article 7.1.7(1) UNIDROIT Principles, in turn, provides that:

[n]on-performance by a party is excused if that party proves that the non-performance was due to an impediment beyond its control and that it could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences.

Article 7.1.7(5) UNIDROIT Principles then clearly adds that

[n]othing in this article prevents a party from exercising a right to terminate the contract or to withhold performance or request interest on money due.

With respect to the condition that the impediment be beyond the defaulting party’s sphere of control, state interventions in general (such as the imposition of quotas, import and export restrictions, blockades, boycotts, exchange controls and closing of traffic routes) are in principle deemed to lie beyond the control of private operators, in the same way as wars, civil strife, riots, terrorist acts, industrial disasters and man-made catastrophes (such as prolonged breakdowns of transport or electricity), natural catastrophes or disasters (such as earthquakes, storms, fire, floods and epidemics), and tortious acts of third parties (such as robberies, explosions and the destruction of machines).¹³³

Prohibitions on transfer of funds and import and export prohibitions, in particular, constitute impediments beyond the control of private parties.¹³⁴ Such was the arbitral tribunal’s finding in a 1985 Final Award on Force Majeure in a case opposing National Oil Company (NOC) to Libyan Sun Oil Company (Sun Oil). The tribunal held that US government orders issued in 1981 and 1982 declaring that US passports were no longer valid for travel to Libya, banning imports of Libyan oil into the US and subjecting exports of goods and technical information to the delivery of licences, ‘were acts of Government and thus clearly beyond the control of the Parties’.¹³⁵ Similarly, in a dispute, governed by the CISG, opposing a US seller of chicken leg quarters to a Romanian buyer, the ruling arbitrator held that ‘[t]he Romanian government’s decision to stop all chicken imports on virtually no notice to the industry was certainly beyond Seller’s control’.¹³⁶ Thus, an economic sanction prohibiting the sale or purchase of goods or services to or from a given target may constitute an impediment beyond the seller’s or the buyer’s control to deliver the goods or to accept delivery and/or pay for the goods, respectively.

The situation is different if a party to the disputed contract withholds performance not on the ground that it is itself prohibited by an economic sanction, but because of its supplier’s default resulting from a sanction prohibiting the supplier from performing its obligations. Such a situation may arise, for instance, if the seller’s supplier is prohibited from exporting goods to the seller or if the buyer’s financial institution is ordered to freeze the buyer’s assets or is prohibited from making funds available to the buyer or from transferring funds upon this party’s order or to the seller’s benefit. Regarding such situations, the following must be noted.

As a general rule, the seller bears the ‘acquisition risk’ (or ‘procurement risk’).¹³⁷ The acquisition of the goods is considered within its sphere of risks and responsibilities. Accordingly, if it has sold goods that are only generically defined in the contract,¹³⁸ it cannot invoke its supplier’s non-performance as a ground for exemption,¹³⁹ even if the supplier’s non-performance results from a sanction. The seller must acquire the goods from another available source, even a more expensive one,¹⁴⁰ and may only be excused for the unavoidable delay that this may cause. Similarly, the buyer is deemed to guarantee its financial capacity.¹⁴¹ It is therefore liable for the price even if it is denied access to the sum due by a newly imposed sanctions programme (or any impediment beyond its control) and must therefore seek funds elsewhere.

The impediment can only be deemed beyond the seller’s or the buyer’s sphere of risks and responsibilities if it is insurmountable.¹⁴² This is the case, for instance, if the contract provides expressly or implicitly that the seller must deliver goods from the very supplier that is now affected by the sanction, if the seller promised to deliver the goods ‘provided that’ he receive the necessary deliveries from his supplier (in which case the seller’s obligation is in fact conditional), if the sanction has led to the goods’ unavailability on the international market¹⁴³ or if, although the goods are still available on the international market, their price has risen so steeply as a result of the sanction that the acquisition of substitute goods may not reasonably be expected from the seller.¹⁴⁴ In turn, the buyer may be deemed to be facing an impediment beyond its control if, for instance, all of its assets have been frozen pursuant to a UN Security Council mandatory resolution.¹⁴⁵

As noted above, the second condition for an exemption from liability for non-performance is that the defaulting party could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract. Whether this condition is satisfied must be determined on a case-by-case basis¹⁴⁶ considering, in particular, the relevant trade area or industry.

One may indeed more easily expect a company involved in the nuclear or military sector, than a manufacturer of agricultural equipment or educational material, to have taken into account the risk of future sanctions.¹⁴⁷ In all instances in which, at the time of the conclusion of the contract, the United Nations Security Council had already passed a resolution for the imposition of sanctions, the impediment must be deemed to have been reasonably foreseeable even if domestic (and EU) implementation measures were adopted only after the conclusion of the contract.¹⁴⁸ Similarly, an impediment resulting from the imposition of economic sanctions must be considered to have been reasonably foreseeable if, by the time of the conclusion of the contract, the target state had been threatened with sanctions or the UN Security Council had on its agenda to address a situation in reaction to which sanctions could be imposed.

The third condition mentioned above, namely that the impediment be reasonably unavoidable and insurmountable, implies that it must have become impossible for the defaulting party to lawfully perform the transaction.¹⁴⁹ Exemption must be denied if the defaulting party could have performed its obligations without breaching or evading the sanction,¹⁵⁰ be it at greater cost and with more extensive efforts than anticipated at the time of the conclusion of the contract.¹⁵¹

If, for instance, a sanction grants a period of time for the performance of pre-existing contracts (before the sanction comes into effect), the defaulting party will not be granted exemption if it could have performed its obligations during that time-period.¹⁵² Exemption will also be denied if the defaulting party could have avoided the consequences of a sanction by delivering the goods at a location other than the agreed one (without, of course, defeating the sanction’s purpose), or if the goods could have been channelled through a different route from the one envisaged in the contract so as to avoid a prohibited transit through a certain state,¹⁵³ even if this were to entail additional costs.¹⁵⁴ This being said, a defaulting party cannot reasonably have been expected to channel the goods through an alternative route if the itinerary specified in the contract was critical,¹⁵⁵ in particular if the goods would have perished or if they would not have reached their destination by a compulsory date had they been shipped via an alternative route.¹⁵⁶

Also, if a trade sanction prohibits a seller from using a specific carrier for the transportation of the goods to the buyer, the seller may be expected to overcome the impediment by using an alternative means of transportation to carry out its delivery obligation.¹⁵⁷

Finally, the obligor may be expected to tender a ‘commercially reasonable substitute’ (that is, a substitute that departs only from ‘non-exclusive’ or ‘non-essential’ specifications laid down in the contract¹⁵⁸ and one that can ‘satisfy the purpose of the contract just as well’¹⁵⁹) in order to overcome the consequences of a sanction prohibiting, for instance, exports of goods originating in or manufactured through technology developed in the sanctioning state, or containing materials, parts or components originating in that state.¹⁶⁰

In this respect, the above-mentioned 1985 Final Award on Force Majeure rendered in a case opposing NOC to Sun Oil¹⁶¹ is relevant. In 1980, the parties had entered into an Exploration and Production Sharing Agreement (EPSA), whereby Sun Oil was to undertake, finance and carry out an oil exploration programme in Libya. In March 1982, however, the Reagan administration banned imports of Libyan oil into the US and subjected exports of goods and technical data to the delivery of licences. On 21 April 1982, Sun Oil informed NOC that pursuant to this new regulation, it had to obtain an export licence in order to continue its operations in Libya and that this constituted an event of force majeure until it obtained such licence. On 23 June 1982, Sun Oil advised NOC that the licence had been denied and that it continued to invoke the force majeure excuse. The tribunal interpreted the contractual clause on force majeure (Article 22 EPSA) in light of Article 360 of the Libyan Civil Code (the applicable law) to conclude that:

under the meaning of Art. 22, non-performance by a party or delay in performing contractual obligations is excused when an unforeseen circumstance beyond the control of the parties occurs, which circumstance constitutes an obstacle such that an obligor, normally diligent, having the same obligations and placed in the same situation, could not have overcome it.¹⁶²

The tribunal found that it was not an essential condition under the EPSA that Sun Oil use its own technological resources to perform the contract, and that Sun Oil did have the possibility to fulfil its undertakings by resorting to resources other than its own (other parties engaged in similar exploration operations had been able to overcome the supervening obstacle). The tribunal concluded that the 1982 US Export Regulations did not constitute, for Sun Oil, an event of force majeure excusing the discontinuance of exploration.¹⁶³

If all of the conditions enunciated above are met, the universally recognized principle of sanctity of contracts or pacta sunt servanda¹⁶⁴—according to which a contract validly entered into is binding upon the parties and must be observed—may be circumvented and the defaulting party may be exempted from liability for non-performance.

b. Economic sanction subjecting performance to a regime of authorisation

Certain sanctions programmes do not prohibit performance altogether but rather subject the performance of certain transactions to a regime of authorisation (or of ‘specific licence’).

In most instances, the party that needs an authorisation to perform its obligations undertakes to seek such authorisation¹⁶⁵ and to take all the required steps in view thereof, but does not guarantee that it will be successful.¹⁶⁶ Accordingly, its duty is a duty of ‘best efforts’ (or of ‘diligence’) and its obligation to perform is conditional upon the delivery of the necessary authorisation. Therefore, to be discharged from its obligations, this party needs to apply for the required authorisation in due time and in compliance with the applicable procedure, unless it is clear that, under the relevant sanctions programme, no authorisation will be granted (in which case, it need not even apply for an authorisation).¹⁶⁷ If, despite this party’s best efforts, authorisation is denied, it is not bound to perform and there is therefore no reason to seek an exemption from liability for non-performance.¹⁶⁸

The situation is different if it may be inferred from the contract that the obligor has committed itself to obtaining the required authorisations, and must accordingly be deemed to have assumed a ‘duty of result’ (also sometimes referred to as an ‘absolute duty’ or as a ‘duty to achieve a specific result’).¹⁶⁹

In this case, if the sanction was already in force or had at least already been adopted at the time of the conclusion of the contract, the party that committed itself to obtaining all required authorisations may reasonably be deemed to have implicitly assumed the risk that the authorisation be denied.¹⁷⁰ Consequently, if the authorisation is eventually denied, it cannot successfully invoke the existence of an exonerating impediment or event of force majeure. ‘Where the obligor has contractually assumed a particular risk and therefore a "greater obligation", there may be—strictly speaking—no impediment in the first place’.¹⁷¹ The risk of authorisation denial ‘is actually within the sphere of control of the relevant party, since, before accepting the obligation to clear the goods for export or import, the seller or buyer should ascertain that the regulations in the relevant country do not prevent them from obtaining the required permits under the circumstances’.¹⁷²

In light of the above, in order to avoid a finding that a party assumed an absolute duty to obtain an authorisation despite denial being reasonably foreseeable, and the ensuing finding that it assumed the risk of authorisation denial, this party would be well-advised to make a contractual reservation to the effect that it does not guarantee its ability to perform if authorisation is denied.¹⁷³

The situation is different with respect to licences or authorisations that are made necessary by a subsequent economic sanctions programme (or any subsequent change of legislation or policy), that is, by a sanctions programme imposed after the conclusion of the contract and which was reasonably unforeseeable at the time of the conclusion of the contract.

In this case, the defaulting party cannot be deemed to have assumed the risk that the authorisation be denied, even if it assumed, for instance, the risk of import or export clearance, unless there is clear evidence that it assumed the risk of legislation or policy changes (or assumed unconditionally the risk of authorisation denial).¹⁷⁴ Indeed, the obligor cannot be considered to have assumed the risk that an authorisation be refused following unforeseeable legislation or policy changes.¹⁷⁵ Thus, even if the parties have incorporated into their contract a term (for instance, an Incoterm) to the effect that a party must obtain the required licences or authorisations ‘at its own risk’, this party does not automatically assume the risk of reasonably unforeseeable changes in law, regulations or practices making new licences or authorisations necessary. ‘The same principle applies when an export license is first granted but then indirectly annulled by a general export ban’.¹⁷⁶

In such circumstances, the defaulting party may be granted exemption from liability for non-performance if it is able to prove that under the relevant sanctions programme, no authorisation would possibly be granted or if authorisation was denied although duly applied for.¹⁷⁷

III.A.2. Adaptation of the Contract in Situations of Hardship Once the Sanction Has Been Lifted

International law instruments and uniform projects such as the CISG and the UNIDROIT Principles suggest that the existence of the contract is not affected by the occurrence of an impediment justifying an exemption from liability for non-performance. In accordance with the principle of favor contractus, Article 79(3) CISG stipulates that ‘[t]he exemption provided by this article has effect for the period during which the impediment exists’. Thus, in principle, performance must be resumed by the defaulting party, and its contractual partner must accept performance and carry out its own counter-performance when the consequences of the impediment no longer prevent performance.¹⁷⁸ Article 7.1.7(2) UNIDROIT Principles seems to offer greater flexibility, as it provides that ‘[w]hen the impediment is only temporary, the excuse shall have effect for such period as is reasonable having regard to the effect of the impediment on the performance of the contract’.

Like wars and strikes, economic sanctions are temporary by nature. Some sanctions are imposed for a predetermined period of time (with possible extensions), as in the case of UN sanctions against Eritrea and Ethiopia,¹⁷⁹ Sierra Leone,¹⁸⁰ Afghanistan/the Taliban,¹⁸¹ Liberia,¹⁸² the Democratic Republic of the Congo¹⁸³ and Ivory Coast.¹⁸⁴ Even in the more frequent case in which sanctions are imposed for an unspecified period of time,¹⁸⁵ they are not intended to remain permanently in effect, but rather to be lifted once they have successfully achieved their purpose, most often of a coercive nature.¹⁸⁶

When performance of a contractual obligation is prevented by an economic sanction, the impediment is thus known from the outset to be temporary. It is only if timely performance is of the essence and if the sanction prevents performance from taking place on the agreed date¹⁸⁷ that a sanction may arguably be deemed a definitive impediment and the defaulting party may accordingly be considered to be permanently exempted from liability.¹⁸⁸

If timely performance is not of the essence, the temporary nature of economic sanctions cannot be overlooked, which is why it is often said that performance must be resumed once the sanction or ban is lifted.¹⁸⁹ Accordingly, in the 1996 Hungarian Chamber of Commerce and Industry award referred to above, the arbitral tribunal held that United Nations sanctions against Yugoslavia constituted a temporary impediment under Article 79 CISG to the payment, by the Hungarian buyer, of the portion of the price due after the sanctions had come into effect.¹⁹⁰ UN sanctions had become effective in Hungary on 3 June 1992 (by virtue of Government Order 91/1992) and were effectively suspended on 22 November 1995 at 12 am (UN Security Council Resolution 1022 (1995)). The tribunal held that from 23 November 1995, the buyer was in default of the payment of the said portion of the purchase price and interest ran until the sum was paid.¹⁹¹

In an ICC award rendered in 2002, the sole arbitrator handed down a similar decision in a case opposing an Italian company to a Yugoslavian company.¹⁹² The Italian company argued that the UN sanctions against the Socialist Federal Republic of Yugoslavia made the performance of its obligations impossible and justified termination of the contract. On the ground that the sanctions had been lifted by the time the dispute was brought to arbitration, the arbitrator rejected the Italian company’s argument, found that the parties were no longer prevented from performing their obligations, and ordered the payment of sums due by the Italian company to the Yugoslavian company.¹⁹³

This being said, it must be conceded that most sanctions remain in effect for years, some even for decades. Furthermore, a sanction’s term typically depends on the sanctioning state’s discretionary decision to lift the sanction once its coercive purpose has been achieved. Parties may therefore find themselves in a difficult situation if they are bound to perform obligations contracted for in entirely different circumstances, years or decades before. This is why one may question whether the rule that instructs parties to resume performance under the initially agreed terms need not be adapted when the impediment is a sanction.

In this respect, one can hardly dispute the emergence of a general principle (to be interpreted narrowly¹⁹⁴) according to which a party should not be held to its contractual obligations if circumstances have changed so radically and unforeseeably that the contract’s implications, at the time of performance, are entirely different from what was anticipated at the time of the conclusion of the contract.¹⁹⁵

Many civil law jurisdictions have endorsed the principle and consequences of changed circumstances (also referred to as the clausula rebus sic stantibus), either statutorily¹⁹⁶ or in case-law,¹⁹⁷ empowering the disadvantaged party to request renegotiation or seek a court-ordered adaptation of the contract, sometimes even its termination. As noted by Brunner, ‘the more modern civil codes in many Arab countries have also imported European civil law notions of "rebus sic stantibus"’.¹⁹⁸ In the US common law system, discharge may be granted to a party that faces ‘commercial impracticability’, that is, to a party that can perform its obligation(s) though only with extreme and unreasonable difficulty, expense, injury or loss, as a result of unexpected supervening events the non-occurrence of which was a basic assumption of the contract.¹⁹⁹ In some cases, the party that faces commercial impracticability may seek an adaptation of the contract.²⁰⁰ Under US law, discharge may also be granted in cases of ‘frustration of purpose’, that is, if a party’s principal purpose is substantially frustrated after the conclusion of the contract, due to an event the non-occurrence of which was a basic assumption on which the contract was made.²⁰¹ Under English law, although no relief is available in situations of impracticability, the doctrine of frustration recognises, in addition to physical and legal impossibility, frustration of purpose as a ground for automatic discharge, bringing the contract to an end (termination ex nunc).²⁰²

International law instruments and uniform projects also deal with situations of ‘hardship’, that is, situations in which a dramatic change in circumstances leads to a fundamental disruption of the contractual balance by making performance radically more onerous or radically less profitable for one of the parties. Article 62 of the 1969 Vienna Convention on the Law of Treaties, applicable to treaties between sovereign states, addresses instances of ‘fundamental changes of circumstances’ (following Article 61 which deals with situations of ‘supervening impossibility of performance’). Articles 6.2.1 through 6.2.3 UNIDROIT Principles also offer remedies to a party disadvantaged by a fundamental alteration of the contractual equilibrium²⁰³ (alongside Article 7.1.7, which deals, as explained above, with force majeure). Finally, the ICC Model Clauses include both a force majeure clause (2003) and a hardship clause (2003).

Impossibility of performance is usually not required for a finding of hardship.²⁰⁴ What is critical is that the distortion of the contractual equilibrium could not reasonably have been taken into account by the disadvantaged party at the time of the conclusion of the contract; that is, the distortion did not constitute a normal risk associated with the kind of contract under consideration²⁰⁵ or a risk that this party agreed to assume.

The rationale of provisions on hardship is that good faith prevents the obligee from seeking performance under the original terms if the circumstances differ fundamentally from those that were in place when these terms were agreed upon, considering that the obligor (which may well still be capable of performing the contract) might not have consented to the contract had the surrounding conditions been—or had this party foreseen that they would become—radically different.²⁰⁶.

The UNIDROIT Principles grant the disadvantaged party the right to request renegotiation (Article 6.2.3(1) and (2)²⁰⁷) in derogation of the general principle of pacta sunt servanda (Article 6.2.1²⁰⁸) and, if an attempt to renegotiate fails, the right to seek a court-ordered adaptation or the termination of the contract (Article 6.2.3(3) and (4)²⁰⁹). Thus, in a dispute between Cubic Defense Systems, Inc. (a US corporation) and the Iranian Air Force with respect to two contracts for the sale and installation of military equipment, the deciding arbitral tribunal, relying on the UNIDROIT Principles, found that the Islamic Revolution justified a unilateral request for an adaptation or the termination of the contracts.²¹⁰ The contracts had been only partially performed when the Revolution broke out. The parties entered into a series of negotiations but were unable to reach an agreement. The arbitral tribunal held that considering the events preceding and following the 1979 Revolution and the consequences on the political relationship between Iran and the US, each party was entitled to unilaterally request, if not the termination of the contracts, at least an adaptation of their terms, in particular the postponement of the performance dates by a reasonable period of time.²¹¹ Referring explicitly to Article 6.2.3(4) of the 1994 edition of the UNIDROIT Principles,²¹² the arbitral tribunal based its conclusions on the following considerations, among others:

[F]rom the covenant of good faith and fair dealing which is implied in each contract follows that in a case in which the circumstances to a contract undergo… fundamental changes in an unforeseeable way, a party is precluded from invoking the binding effect of the contract. The idea that a change in circumstances may affect the binding force of a contract is known under the maxim clausula rebus sic stantibus: the contract remains binding provided that things remain unchanged. It is understood, however, that due to the fundamental principle of pacta sunt servanda not any change of circumstances can be sufficient. Due to its exceptional character, its application is only justified if the change in circumstances was fundamental and unforeseeable.²¹³

As to the CISG, while it does not explicitly authorise a party to request renegotiation or to seek a court-ordered adaptation of the contract in situations of hardship, a historical interpretation of the Convention suggests that this may be interpreted as an internal gap, to be filled by inferring a solution from general principles on which the CISG is based (Article 7(2) CISG).²¹⁴ The right to request a renegotiation of the contract may be derived from a combination of five general principles underlying the CISG, namely the principle of good faith, the principle of reasonableness, the general duty to cooperate, the principle of favor contractus and, finally, the parties’ duty to mitigate losses.²¹⁵ In other words, an adaptation of the contract may need to be considered in situations in which performance has not necessarily become impossible or unreasonably difficult, but in which an unforeseeable change in circumstances leads to a fundamental disruption of the contractual balance, making performance for one party either radically more onerous or radically less profitable.²¹⁶ The right to seek a court-ordered adaptation of the contract following an unsuccessful attempt to renegotiate its terms may be inferred from Article 50 CISG applied by analogy.²¹⁷

It is therefore arguable, at least under general principles of law, the UNIDROIT Principles and the CISG, that if circumstances surrounding performance, once the sanction is lifted, have drastically changed, renegotiation may be requested on grounds of hardship. If renegotiation fails, the disadvantaged party may seek a court-ordered adaptation of the contract. In amending the contract, the court should strive to adapt it to the new set of circumstances, without neglecting the original explicit or implicit risk allocation by the parties.²¹⁸ A change of circumstances that does not exceed the ultimate limit of sacrifice is part of the risk implicitly assumed by the relevant party.

Alternatively, the party whose performance has become radically more onerous may seek a new (definitive) exemption, this time on grounds of economic impediment to performance.²¹⁹ All the conditions for an exemption from liability for non-performance must, however, be satisfied to justify an exemption on economic grounds. In particular, the cost increase must be such that the obligor could not reasonably be expected to have taken it into account at the time of the conclusion of the contract—a condition that will often not be satisfied in the case of market fluctuations.²²⁰ It must also be such that the obligor cannot reasonably be expected to overcome it.

Finally, it may be observed that if the provisions of a sanction themselves address the fate of contracts falling within its scope, including after the sanction is no longer in force, these provisions may have to be taken into account irrespective of the solutions provided in the lex contractus. Relying on the terms of certain economic sanctions, some courts have indeed felt bound to declare terminated contracts affected by these sanctions. In particular, tribunals have declared terminated contracts affected by the UN sanctions against Iraq. They relied primarily on Community legislation implementing Security Council Resolutions 661 (1990) and 687 (1991). In paragraph 29 of the latter resolution, the Security Council had decided that:

all States, including Iraq, shall take the necessary measures to ensure that no claim shall lie at the instance of the Government of Iraq, or of any person or body in Iraq, or of any person claiming through or for the benefit of any such person or body, in connection with any contract or other transaction where its performance was affected by reason of the measures taken by the Security Council in resolution 661 (1990) and related resolutions.²²¹

To implement this provision, the Council of the European Communities adopted Council Regulation (EEC) 3541/92 of 7 December 1992 prohibiting the satisfying of Iraqi claims with regard to contracts and transactions, the performance of which was affected by United Nations Security Council Resolution 661 (1990) and related resolutions. Considering claims filed by non-Iraqi parties, courts held that in order to comply with the above sanctions legislation and not to impair the sanctions’ purpose,²²² they were bound to declare contracts affected by the sanctions against Iraq terminated rather than merely suspended for the duration of the sanctions.²²³

III.B. For Proponents of the Legal Norm Approach, the Risk of Penalty for Breach of a Sanction as Ground for an Adaptation of the Contract

As explained above, a prohibition against performing a certain transaction, laid down in an economic sanctions programme which the deciding court has resolved to take into account for the resolution of a dispute, may constitute an exonerating obstacle—an event of ‘force majeure’ under the UNIDROIT Principles or an ‘impediment’ in CISG parlance—to the performance of contractual obligations.

According to proponents of the legal norm approach (discussed above in section I.B.), there is, a contrario, no exonerating obstacle if the sanction invoked by the defaulting party is declared inapplicable to the contract or if it is disregarded on the ground that the conditions (of a private international law nature) to give it effect as an overriding mandatory rule are not satisfied. Indeed, proponents of the legal norm approach contend that if the ruling court has decided not to give effect to the sanction itself, that is, if there is no legal impediment to performance, exemption may not be granted merely on the ground that performing the contract would involve a risk of penalty,²²⁴ even if the penalty that could be imposed would exceed the boundaries of a ‘reasonable sacrifice’.²²⁵ They opine that given that the risk of penalty is one of the factors considered to determine whether a sanction that is external to the applicable law should be given effect as an overriding mandatory rule (see the discussion in section II.A. above), then the very same risk of penalty cannot, on its own, justify the obligor’s exemption if the sanction is disregarded despite this risk (and if the existence of a legal impediment is therefore denied). Similarly, if an economic sanction imposed by the state of the applicable law is disregarded on the ground that giving it effect would lead to an outcome which would be in conflict with principles of international public policy of the forum (or principles of transnational public policy, if the dispute is heard by an arbitral tribunal) and the deciding tribunal has therefore reached the conclusion that there is no exonerating legal impediment to performance, measures adopted by the sanctioning state to increase the efficiency of the sanction—hence to favour the achievement of its underlying purpose—cannot justify an exemption of the defaulting party.

Overall, according to proponents of the legal norm approach, a decision not to take a sanction into account despite the risk of penalty strongly suggests that the downsides of giving effect to the sanction outweigh the inconvenience of a penalty for the obligor. Logically, therefore, a tribunal that has decided not to give effect to a sanction despite the risk of penalty cannot hold that this risk alone bears the same consequences on the performance of the contract as those that would have resulted from the sanction itself being taken into consideration,²²⁶ knowing, in particular, that by granting a party exemption, the deciding court will contribute to the achievement of the sanctioning state’s purpose.

Thus, for proponents of the legal norm approach, notwithstanding the risk of penalty, exemption from liability for non-performance is not justifiable if, for instance, the sanction is disregarded on the ground that it is directed against the forum state, on the ground that it was imposed in violation of public international law, or yet on the ground that the connection between the sanctioning state and the disputed contract is not sufficiently close.

This being said, knowing that the threat of penalty for breach of a sanction imposed after the conclusion of the contract²²⁷ implies an alteration of the risks involved in the performance thereof,²²⁸ proponents of the legal norm approach concede that it may be unreasonable to disregard altogether such threat.²²⁹

The question indeed arises whether any kind of relief is available despite the prohibition itself being disregarded by the deciding court. Should the obligor be compelled to perform its obligations despite the risk of penalty, on the ground that performance is not illegal in the eyes of the ruling court? Should the obligor be compelled to choose between acting in breach of the contract or acting in breach of the sanction?

The same questions may be posed if the obligor is the object of a secondary or a tertiary sanctions programme. As noted earlier, these are measures used by some states to increase the efficiency of their primary sanctions programmes through the exertion of pressure on foreign persons and entities, to induce them to sever their ties with a target state. While these persons and entities, which are not under the jurisdiction of the sanctioning state, are not prohibited from trading with the target state, they are under threats of penalties (such as the denial of future exports from the sanctioning state or of loans or credit from financial institutions of that state, or the blocking of property interests subject to the sanctioning state’s jurisdiction) if they maintain direct or indirect ties, in particular commercial ties, with a target state.

As noted above, parties that have validly entered into a contract remain in principle bound to perform their obligations according to the terms of the contract, even in case of evolution of the surrounding circumstances. This is the ‘basic and universally accepted principle’²³⁰ of pacta sunt servanda (or sanctity of contract) which ‘places the burden of such a change of circumstances upon the party on which it falls’.²³¹ ‘That rule, however, may prove too harsh in cases where completely unexpected and unforeseeable events prevent performance of one’s contractual obligations’.²³² This is why the principle of pacta sunt servanda may suffer limited exceptions. As explained in section III.A.1. above, there is one such exception, under international law instruments, if, as a result of a reasonably unforeseeable, unavoidable, and insurmountable impediment beyond the obligor’s control, performance has become impossible or so excessively difficult that it may no longer reasonably be expected from that party; the latter may therefore be exempted from liability for non-performance. In addition, as explained in section III.A.2. above, international sets of principles and rules authorise a party deemed to be facing ‘hardship’—i.e. a party for which performance has become either dramatically more onerous or dramatically less profitable than anticipated at the time of the conclusion of the contract—to seek renegotiation of a contract, possibly even its adaptation or termination by way of court order.

The risk of penalty that the obligor incurs if it performs a contract in breach of a sanction may precisely give rise to one such situation of hardship.²³³ Irrespective of a finding of inapplicability of the sanction by the deciding court, penalties may be imposed by the sanctioning state. Accordingly, the balance of risks, costs, and benefits assessed by the parties at the time of the conclusion of the contract is often altered by the subsequent imposition of a sanction.²³⁴

According to Article 6.2.2 UNIDROIT Principles, ‘[t]here is hardship where the occurrence of events fundamentally alters the equilibrium of the contract either because the cost of a party’s performance has increased or because the value of the performance a party receives has diminished, and (a) the events occur or become known to the disadvantaged party after the conclusion of the contract; (b) the events could not reasonably have been taken into account by the disadvantaged party at the time of the conclusion of the contract; (c) the events are beyond the control of the disadvantaged party; and (d) the risk of the events was not assumed by the disadvantaged party’, whether expressly or implicitly. The cause of the alteration may be factual or legal.²³⁵ It is, however, required that the event be ‘beyond the control of the disadvantaged party’ (lit. c), which is the case—at least as far as contracts among private operators are concerned—of ‘acts of rulers and governments’.²³⁶ Furthermore, as per lit. b, only an event that is ‘so outside the bounds of probability that reasonable parties would not provide for it’ may lead to hardship.²³⁷ The risk of penalty for breach of a primary economic sanction may be deemed to have been reasonably unforeseeable only if the imposition of the sanction itself was reasonably unforeseeable at the time of the conclusion of the contract. As noted above, the reasonable unforeseeability condition is less likely to be satisfied if the parties are involved in a sensitive trade area, such as the nuclear or military sector. Finally, knowing that a party may be deemed to be facing hardship only if performance has become excessively onerous, not merely more onerous than anticipated,²³⁸ the party that runs the risk of incurring penalties for breach of a sanctions programme may only be considered to be facing hardship if these penalties exceed a ‘reasonable limit of sacrifice’.²³⁹

In this respect, while it is undeniable that legal certainty and the parties’ need for predictability would be served by the identification of a general benchmark below which an increase in onerousness could not, in principle, allow hardship, whether the ‘excessive onerousness’ requirement is met can only be determined on a case-by-case basis.²⁴⁰ Various critical parameters, specific to each case, must be considered, such as the cost increase in percentage,²⁴¹ the value of the counter-performance to be received by the obligor, the obligor’s financial situation,²⁴² the number of other contracts concluded by this party that are affected by the same sanction, the nature of the contract, in particular whether it is a long-term instalment contract, and the often decisive specifics of any possible explicit or implicit risk allocation by the parties.²⁴³

Provided that the obligor did not explicitly or implicitly assume the risk of the imposition of an economic sanction, that the hardship threshold is met, and that an adaptation of the contract is conceivable to restore the contractual equilibrium, the obligor may request renegotiation. Should the parties fail to reach an agreement on amended terms within a reasonable time frame,²⁴⁴ the obligor may seek a court-ordered adaptation of the contract (possibly the termination thereof).

It is reasonable to expect that a court will more readily conclude that a seller threatened with penalties for breach of an export prohibition is facing hardship than a buyer threatened with penalties for breach of an import prohibition. In the latter case, indeed, a court could find that although penalties would make the buyer’s performance more onerous, this party is less prone to face hardship if the value of the goods purchased has risen as a result of the imposition of the sanction.²⁴⁵

CONCLUDING REMARKS

This contribution, which has dealt with the effects of economic sanctions on contractual relationships between private operators, suggests that a pre-existing contract may be affected by an economic sanction even if the sanction was imposed by a state other than the state of the applicable law and, in the case of a dispute litigated before a domestic court, even if the sanctioning state is not the state of the forum. This study also suggests that the outcome of the dispute may vary depending on the sanction’s characterisation, from a private law perspective, as a factual element—a datum—whose effects on pre-existing contracts is to be examined solely through the prism of contract law, or as a legal norm whose effects on pre-existing contracts must be addressed pursuant to both rules of conflict of laws and rules of substantive law.

Multilateral sanctions imposed by way of mandatory resolutions of the United Nations Security Council are compulsory for all member states, and even non-member states may be invited to comply with them. These sanctions, which belong to the realm of transnational public policy, are binding on domestic judicial authorities around the globe as well as on arbitral tribunals. A party prohibited from performing pre-existing obligations, by a domestic or Community piece of legislation implementing a UN Security Council mandatory resolution, will invariably be deemed to be facing an impediment justifying its exemption from liability for non-performance, whether the sanction be regarded as a factual element (a datum) or as a legal element.

If the traditional datum approach is followed, the imposition of unilateral economic sanctions and Community autonomous sanctions are also often regarded as events of force majeure that may justify that a party’s non-performance be excused. Such a general statement cannot, however, be made if unilateral and Community autonomous economic sanctions are regarded as legal norms. Indeed, as such, a sanction may be (or may have to be) disregarded on grounds of a private international law nature, in which case the prohibition laid down in the sanction cannot be deemed to constitute an exonerating impediment to performance. This being said, the risk of penalty involved in a prohibited transaction, which signals an alteration of the circumstances in which the contract must be performed, may nonetheless justify an adaptation of the contractual terms on grounds of hardship.

The above analysis thus shows that whether economic sanctions be regarded as data or as legal norms, the mere fact that private operators face certain risks in the performance of their agreement once a sanction has been imposed calls for some form of relief.

Furthermore, because of the uncertain and often lengthy term of economic sanctions, parties that were exempted from liability for non-performance while a sanction was in force may be prevented from resuming performance under the contractually agreed terms even after the sanction has been lifted. Indeed, despite the temporary nature of economic sanctions, resuming performance under the initially agreed terms may not be possible if, as a result of changes in market conditions, performance has become radically more onerous or dramatically less profitable for one of the parties. The tension between the principle of sanctity of contracts, on the one hand, and the need to adapt the parties’ obligations in situations of subsequent alteration of circumstances, on the other hand, may thus persist after the sanction has been lifted: a sanction, intrinsically temporary, may lead to a permanent disruption of the contract.

While the effects of economic sanctions on the fate of contracts falling within their scope often depend directly upon solutions provided in each contract and in the law governing it, it is safe to conclude that the longer a sanction remains in force, the more efficient it is, if not in achieving its ultimate political goal, certainly in preventing the performance of contracts under the initially agreed terms, perhaps even altogether.

1
This contribution is partly based upon material discussed in my chapter ‘Economic Sanctions and Contractual Disputes Between Private Operators’ in Larissa van den Herick (ed), Research Handbook on UN Sanctions and International Law (Edward Elgar Publishing 2017) 330, and contains sections already published therein

2
See, among others, C Lloyd Brown-John, Multilateral Sanctions in International Law—A Comparative Analysis (Praeger Publishers, Inc 1975) 17; Geneviève Burdeau, ‘Le gel d’avoirs étrangers’ (1997) 1 Journal du Droit International 5, 10, n 7; Sandra Szurek, ‘Le recours aux sanctions’ in Habib Gherari and Sandra Szurek (eds), Sanctions unilatérales, mondialisation du commerce et ordre juridique international—A propos des lois Helms-Burton et d’Amato-Kennedy (Montchrestien 1998) 19, 24; Robin Renwick, Economic Sanctions (Center for International Affairs, Harvard University 1981) 89.

3
Sanctions against South Africa, for instance, which were in force between 1977 and 1994, were intended, inter alia, to bring about the elimination of the policy of apartheid and racial discrimination, as well as the establishment of equal rights for all South African citizens (see UNSC Res 418 (1977), preambular para 1; UNSC Res 473 (1980), preambular para 7, paras 4 and 7; UNSC Res 569 (1985), preambular para 5; UNSC Res 591 (1986), preambular para 7; UNSC Res 765 (1992), para 7). In 1978, the US Congress imposed a general ban on all imports from, and exports to, Uganda, in reaction to Idi Amin’s genocidal regime (Pub L No 95-435, Sec 5(c)–(d), 92 Stat 1051 (1978)). UN sanctions against the Federal Republic of Yugoslavia, imposed in 1998 following the build-up of tension between Serbian authorities and the Kosovar Albanian community, were intended, inter alia, to induce the Federal Republic of Yugoslavia to cease all action by security forces affecting the civilian population, to withdraw security units used for civilian repression (UNSC Res 1160 (1998), para 16b; UNSC Res 1199 (1998), para 4a), to enable the safe return of refugees and displaced persons, and to allow the free access of humanitarian organizations and supplies to Kosovo (UNSC Res 1199 (1998), para 4c). In 2004 and 2005, the UN Security Council passed mandatory sanctions resolutions directed against non-governmental and governmental actors in the Darfur region of Sudan, to address the unfolding humanitarian crisis, and in particular to disarm the Janjaweed militias and prevent further human rights violations and other atrocities (see, for example, UNSC Res 1556 (2004), para 6). Over the years, multilateral and unilateral sanctions have also been imposed against Libya, Iraq, Cuba, North Korea, Iran, Sudan and Afghanistan on account of their support of terrorist activities (see, for example, UNSC Res 748 (1992) against Libya, paras 2 and 3, and UNSC Res 1054 (1996) against Sudan, para 1b).

4
The establishment of peace and stability in general was one of the objectives explicitly articulated in UN mandatory resolutions imposing sanctions against former Yugoslavia in 1991 (UNSC Res 713 (1991), para 6), against Somalia in 1992 (UNSC Res 733 (1992), para 5), against Liberia in 1992 (UNSC Res 788 (1992), para 8), and against the Federal Republic of Yugoslavia in 1998 (UNSC Res 1160 (1998), para 8), among others. UN sanctions have been imposed in an effort to disarm and demobilize rebel groups or government-sponsored militias in several instances (see, e.g., UN sanctions against Sierra Leone (UNSC Res 1171 (1998), para 7), against the Democratic Republic of the Congo (UNSC Res 1493 (2003), para 22), against Liberia (UNSC Res 1521 (2003), para 5) and against Sudan (UNSC Res 1556 (2004), para 6)). For example, in September 1993, during the civil war in Angola, UN sanctions were imposed which prohibited the supply of arms and petroleum products to the National Union for the Total Independence of Angola (UNITA), the rebel group acting against the country’s recognized government (UNSC Res 864 (1993), para 17; UNSC Res 1127 (1997), paras 2 and 3; UNSC Res 1173 (1998), para 3; UNSC Res 1295 (2000), preambular para 5). In 2000, the Security Council imposed sanctions against Eritrea and Ethiopia, so as to induce both countries to cease hostilities and engage in a peace process (UNSC Res 1298 (2000), para 17). In March 2001, the UN Security Council imposed arms, diamond and timber sanctions, among others, against Liberia, to prevent the Liberian government from providing support to the Revolutionary United Front, a Sierra Leonean rebel group (UNSC Res 1343 (2001), preambular para 9; UNSC Res 1408 (2002), preambular para 11; UNSC Res 1478 (2003), preambular para 13).

5
See, for example, UNSC Res 687 (1991) against Iraq and UNSC Res 1718 (2006) against the Democratic People’s Republic of Korea (North Korea). Multilateral, Community, and unilateral sanctions against Iran are prominent examples of sanctions intended to prevent the development of a weapons programme.

6
This was the purpose of measures affecting, inter alia, strategic goods and grain exports to the USSR, decided by President Carter on 4 January 1980 after the invasion of Afghanistan by the USSR. Coercing Iraq into renouncing occupation was also one of the initial goals of UN Security Council sanctions against Iraq, following its invasion of Kuwait in 1990 (see UNSC Res 661 (1990), para 2).

7
During the Cold War, the US imposed unilateral sanctions against some Latin American countries in an effort to destabilize governments that it viewed as tilting towards the Soviet Union (see Gary Clyde Hufbauer, Jeffrey J Schott, Kimberly Ann Elliott and Barbara Oegg, Economic Sanctions Reconsidered (3rd edn, Peterson Institute for International Economics 2009) 13 and 52). The very first UN Security Council mandatory non-military sanctions, in force from 1966 until 1979, were imposed against the white minority regime in Southern Rhodesia following the Unilateral Declaration of Independence in 1965. These sanctions were intended to bring the illegal minority regime to an end (UNSC Res 232 (1966), preambular para 2; UNSC Res 253 (1968), preambular para 3; UNSC Res. 277 (1970), in general; UNSC Res 288 (1970), para 2; UNSC Res 326 (1973), para 4; UNSC Res 423 (1978), in general) and to enable the self-determination and independence of all of the Southern Rhodesian people (UNSC Res 232 (1966), para 4; UNSC Res 253 (1968), preambular paras 7 and 8, para 2; UNSC Res. 277 (1970), para 4; UNSC Res 288 (1970), preambular para 4, para 2; UNSC Res 318 (1972), paras 1 and 2; UNSC Res 326 (1973), preambular para 3; UNSC Res 328 (1973), preambular para 7, para 3; UNSC Res 386 (1976), preambular para 4; UNSC Res 403 (1977), preambular para 3; UNSC Res 424 (1978), preambular para 4; UNSC Res 445 (1979), preambular para 8; UNSC Res 448 (1979), preambular para 7; UNSC Res 460 (1979), para 1; UNSC Res 463 (1980), para 1). Several unilateral and multilateral sanctions programmes, intended to facilitate the reinstatement of a legitimate government, followed. After the rise of Fidel Castro to power and Cuban expropriation without compensation of American property and the imposition of discriminatory taxes on American products, US sanctions were imposed against Cuba in 1962. One of the stated goals of these sanctions was to compel the adoption of democratic reforms (see, among other acts, Presidential Decree 3447 of 3 February 1962; the Cuban Asset Control Regulations of 1992 (31 CFR 515); and the Cuban Liberty and Democratic Solidarity (LIBERTAD) Act of 1996 (Pub L No 104-114, 110 Stat 785 (1996), codified at 22 USC paras 6021–6091)). The reinstatement of the democratically elected government of Haitian President Jean-Bertrand Aristide was also the purpose of the 1993 UN sanctions against Haiti (UNSC Res 841 (1993), para 16; UNSC Res 917 (1994), preambular para 8; UNSC Res 940 (1994), preambular para 8). Similarly, the 1997 UN sanctions against Sierra Leone were intended to induce the military junta, which had come to power by means of a coup d’état, to relinquish power and allow the restoration of the democratically elected government and a return to constitutional order (UNSC Res 1132 (1997), paras 1 and 19; UNSC Res 1171 (1998), para 7).

8
See Abdoullah Cissé, ‘Les effets des sanctions économiques de l’Organisation des Nations Unies sur les contrats’ in Laura Picchio Forlati and Linos-Alexandre Sicilianos (eds), Economic Sanctions in International Law (Martinus Nijhoff 2004) 683, 684, n 2; Jacques Périlleux, ‘L’embargo et le droit des obligations’ in L’embargo—Actes de la journée d’études du 1er décembre 1995 organisée par l’Association Européenne pour le Droit Bancaire et Financier—Belgium (Bruylant 1996) 169, 171.

9
An obstacle to the performance of a pre-existing contract may indeed arise if the sanction stipulates (or its wording or purpose suggests) that it applies to all pre-existing contracts that have not yet been fully performed or to pre-existing contracts concluded after a specified date. In such cases, the prohibitions laid down in the sanction may apply with immediate effect or after the expiration of a ‘grace period’. A prohibited contract concluded while a sanctions programme is in force will usually be deemed null and void under the applicable domestic law, on grounds of illegality or the like. For an overview and a comparative law analysis of this question, see Aurore Marchand, L’embargo en droit du commerce international (Larcier 2012) 247 and following. See also Elliott Geisinger, Philippe Bärtsch, Julie Raneda and Solomon Ebere, ‘Les conséquences des sanctions économiques sur les obligations contractuelles et sur l’arbitrage commercial international’ (2012) Revue de droit des affaires internationales/International Business Law Journal 405, 410 and following.

10
See Mercédeh Azeredo da Silveira, Trade Sanctions and International Sales—An Inquiry into International Arbitration and Commercial Litigation (Kluwer Law International 2014) chapter 4.

11
See, for example, Belship Navigation, Inc v Sealift, Inc, in which the US District Court for the Southern District of New York granted Belship’s motion to compel arbitration of a dispute involving the Cuban Assets Control Regulations (1995 US DIST LEXIS 10541, 1996 AMC 209 (SDNY 1995)). See also Azeredo da Silveira, Trade Sanctions and International Sales (n 10) § 4.02[A][1]; Jean-Baptiste Racine, ‘L’arbitrage commercial international et les mesures d’embargo—A propos de l’arrêt de la Cour d’appel du Québec du 31 mars 2003’ (2004) Journal du Droit International 89, 95, n 8; Matthias Scherer, ‘Swiss Embargos and their Impact on Contracts Governed by Swiss Law Illustrated by the Swiss Sanctions against Iran’ (5 April 2011) Kluwer Arbitration Blog available at <http://kluwerarbitrationblog.com/2011/04/05/swiss-embargos-and-their-impact-on-contracts-governed-by-swiss-law-illustrated-by-the-swiss-sanctions-against-iran/>. In particular, the fact that an agreement may be null and void, under a given sanctions programme, does not imply that the arbitration clause is null and the dispute inarbitrable. The arbitration clause is considered ‘severable’ from the rest of the contract (it is a contract of its own), and it is therefore generally admitted that the nullity of the contract does not entail the nullity of the arbitration clause. On the doctrine of severability (or autonomy) of the arbitration agreement, see, inter alia, Gary B Born, International Commercial Arbitration (2nd edn, Wolters Kluwer 2014) Vol I, 349 and following; Emmanuel Gaillard and John Savage (eds), Fouchard, Gaillard, Goldman on International Commercial Arbitration (Kluwer Law International 1999) 198, n 389 and following; Gabrielle Kaufmann-Kohler and Antonio Rigozzi, Arbitrage international—Droit et pratique à la lumière de la LDIP (2nd edn, Weblaw 2010) 75, n 148; Christophe Seraglini, Lois de police et justice arbitrale internationale (Dalloz 2001) 443, n 939. Furthermore, the fact that some sanctions programmes provide that persons and entities of the target state are precluded from seeking compensation for non-performance of contracts affected by these sanctions (see, for example, para 29 of UNSC Res 687 (1991) against Iraq, implemented by Council Regulation (EEC) 3541/92 of 7 December 1992; para 8 of UNSC Res 757 (1992) against Yugoslavia, implemented by Council Regulation (EC) 1733/94 of 11 July 1994; para 8 of UNSC Res 883 (1993) against Libya, implemented by Council Regulation (EC) 3275 of 29 November 1993; and para 11 of UNSC Res 917 (1994) against Haiti, implemented by Council Regulation (EC) 1264/94 of 30 May 1994) has an impact on the admissibility (recevabilité) of such claims, not on their arbitrability (see the decision of the Cour supérieure de Montréal in Air France v Libyan Airlines, quoted in the decision of the Cour d’appel du Québec, 31 March 2003, Rev arb 2003 1365, 1371, n 25; unpublished ICC Award in Case 7698 of 24 May 2006, cited in Marchand (n 9) 118, n 102).

12
On the notion of arbitrability, see Kaufmann-Kohler and Rigozzi (n 11) 101–102, nn 190–193a.

13
Economic sanctions indeed prohibit certain transactions usually without addressing their impact on the parties’ rights and obligations.

14
See Marchand (n 9) 169–171, nn 167–169 and 224, nn 243 and following. Van Hecke explains, in this respect, that ‘[s]ince the foreign law [is] not the law governing the contract, it [is] not applicable as law but [is] merely a fact to be taken into account in assessing the morality of the conduct of the parties’ (Georges van Hecke, ‘The Effect of Economic Coercion on Private Relationships’ in Les moyens de pression économiques et le droit international—Actes du colloque de la SBDI, 26–27 octobre 1984 (1984–1985) Revue belge de droit international 113, 116).

15
See, for example, Vincent Heuzé, ‘Communication’ in Gherari and Szurek (n 2) 103, 109; Marchand (n 9) 228, n 250 and 230, nn 251–252; Estelle Fohrer-Dedeurwaerder, La prise en considération des normes étrangères (LGDJ 2008) 88 and following; Patrick Kinsch, Le fait du prince étranger (LGDJ 1994) 157, n 133 and 198 and following, nn 166 and following, in particular his conclusions at 229–231, n 186.

16
See Mercédeh Azeredo da Silveira, ‘Economic Sanctions and Contractual Disputes Between Private Operators’ in Larissa van den Herick (ed), Research Handbook on UN Sanctions and International Law (Edward Elgar Publishing 2017) 330, 335.

17
This may, of course, influence the parties in their selection of the applicable law.

18
In a 1968 decision, the Commercial Court of the canton of Zurich declared contrary to bonos mores and consequently null and void under the Swiss Code of Obligations (SCO), a contract the purpose of which was to smuggle goods in breach of an Italian law (RSJ 1968 354 and following).

19
See Spitzer v Amunategui, in which a French court held the following: ‘[S]i les juges français n’ont pas à réprimer devant les tribunaux français les atteintes portées en pays étranger, à l’ordre public national propre à ce pays, du moins doivent-ils considérer comme illicites et dépourvues d’effet de ce chef, les opérations de contrebande qui, faites en fraude des lois étrangères portent … atteinte à la conscience publique et à l’ordre public international’ (4 January 1956, (1956) Revue Critique de Droit International de la Haye 679, 680). The Second Chamber of the Cour d’Alger had taken a similar stance in a judgment rendered on 20 February 1925 in Garau v Lambert (1926) Journal du Droit International 701, 702.

20
In 1960, the German Supreme Court declared immoral and void under the German Civil Code a contract governed by German law, between two German companies, for the delivery of 100 tons of borax to be produced in Germany from raw material imported from the US but which the parties knew to be ultimately destined for Rostock, East Germany, at a time when export licences were granted by the US on condition that no borax be shipped to any socialist country (21 December 1960, BGHZ 1961 169 and following, NJW 1961 822 and following). A similar decision was rendered on 24 May 1962 (NJW 1962 1436 and following). In 1972, the German Supreme Court declared null and void, pursuant to German law, an insurance contract concerning the transportation of cultural goods of national interest from Nigeria to Germany, on the ground that exports of such goods were strictly prohibited under Nigerian law (22 June 1972, BGHZ 1972 82, NJW 1972 1575).

21
See Foster v Driscoll and Others [1929] 1 KB 470, [1928] All ER 130, in which the King’s Bench declared contrary to public policy and consequently void an agreement to load a ship with a cargo of whisky to be carried across the Atlantic and sold, if possible, in the US, and if not, in Canada or on the high seas at a location sufficiently close to the territory of the US, to facilitate its smuggling into the US in violation of the laws of that country. See also Regazzoni v K.C. Sethia [1958] AC 301, [1957] 3 All ER 286, in which the House of Lords declared unenforceable on the basis of international comity a contract governed by English law for the sale of jute bags to be shipped from India to Genoa, which both parties contemplated would subsequently be resold to a South African buying agency, notwithstanding an order of the Indian government prohibiting the taking out of British India of any goods destined directly or indirectly for the Union of South Africa.

22
See Gaillard and Savage (n 11) 849, n 1518; Hans van Houtte, ‘Trade Sanctions and Arbitration’ (1997) International Business Lawyer 166, 167; Hans van Houtte, ‘Les effets des sanctions économiques sur les contrats transnationaux’ in L’embargo—Actes de la journée d’études du 1er décembre 1995 organisée par l’Association Européenne pour le Droit Bancaire et Financier—Belgium (Bruylant 1996) 191, 194 and 196; Klaus Peter Berger, ‘Acts of State and Arbitration: Exchange Control Regulations’ in Karl-Heinz Bockstiegel (ed), Acts of State and Arbitration (C Heymann 1997) 99, 116–117.

23.
See In the Matter of the Arbitration Between Triad International Marketing, SA, et al v Northrop Corporation, American Arbitration Association arbitration taking place in California, award reported in Northrop Corp v Triad Int’l Marketing SA, 593 F Supp 928 (CD Cal 1984), rev’d, 811 F 2d 1265 (9th Cir 1987), cert denied, 108 S Ct 261 (1987). In this case, the arbitral tribunal had to rule on the duty of Northrop Corporation (Northrop), a Californian seller of fighter aircraft and related equipment, to pay commissions to Triad International Marketing, SA (Triad), a Saudi Arabian sales representative, based on a ‘Marketing Agreement’ governed by California law, following the issuance of a Saudi Arabian decree prohibiting the payment of commissions in connection with armament contracts and requiring that existing obligations for the payment of commissions be suspended. The arbitral tribunal concluded that only a factual impossibility would justify non-performance, pointing out that decisions interpreting para 1511 of the California Civil Code did not look to the law of the foreign jurisdiction to determine whether performance was unlawful but instead examined the legal action the foreign jurisdiction had taken, to determine whether, in fact, it prevented performance of the contract. Noting that despite the issuance of the said decree, Northrop could still pay Triad the commissions the Marketing Agreement called for, and Triad could still give advice, translate documents, make local arrangements and perform the other services the Agreement required, the arbitral tribunal refused to excuse Northrop’s failure to perform. The US District Court of the Central District of California vacated the award, but the US Court of Appeals for the 9th Circuit reversed and thus reinstated the arbitral award, noting that ‘“[i]mpossibility based on foreign law does not fall within the same class as that occasioned by domestic law, and it has generally been held no excuse for breach of contract.” … Such impossibility is not treated as impossibility of law, but as impossibility of fact.’ (811 F 2d 1265, 1270, footnote 7).

24.
In the 1975 Resolution on the Application of Foreign Public Law, the International Law Institute stated: ‘The public law character attributed to a provision of foreign law which is designated by the rule of conflict of laws shall not prevent the application of that provision, subject however to the fundamental reservation of public policy’ (para AI1) ((1975) Annuaire de l’Institut de droit international 550 and following, (1976) Revue Critique de Droit International de la Haye 423 and following (official text in French)). The purpose of this Resolution was to clarify once and for all that the understanding that mechanisms of conflict of laws pertain exclusively to the identification of rules of private law is outdated (see Giuseppe Sperduti, ‘Les lois d’application nécessaire en tant que lois d’ordre public’ (1977) Revue Critique de Droit International de la Haye 257, 263–264).

25.
See Azeredo da Silveira, Economic Sanctions and Contractual Disputes Between Private Operators (n 16) 337.

26.
Overriding mandatory rules are often also referred to as lois de police or as lois d’application immédiate.

27.
On the definition of overriding mandatory rules, see Phocion Francescakis, ‘Quelques précisions sur les “lois d’application immédiate” et leurs rapports avec les règles de conflit de lois’ (1966) Revue Critique de Droit International de la Haye 1; Andrew Barraclough and Jeff Waincymer, ‘Mandatory Rules of Law in International Commercial Arbitration’ (2005) Melbourne Journal of International Law 205, 206; George A Bermann, ‘Mandatory Rules of Law in International Arbitration’ (2007) American Review of International Arbitration 1, 1; Marc Blessing, ‘Impact of the Extraterritorial Application of Mandatory Rules of Law on International Contracts’ in N. Vogt (ed), Swiss Commercial Law Series (Helbing & Lichtenhahn 1999) Vol 9, 1, 5; Thomas G Guedj, ‘The Theory of the Lois de Police, a Functional Trend in Continental Private International Law—A Comparative Analysis with Modern American Theories’ (1991) American Journal of Comparative Law 661, 662 and 664–665; David Jackson, ‘Mandatory Rules and Rules of “Public Order”’ in p. North (ed), Contract Conflicts—The EEC Convention on the Law Applicable to Contractual Obligations: A Comparative Study (North-Holland 1982) 59, 66; Kaufmann-Kohler and Rigozzi (n 11) 423, n 658; Pierre Mayer, ‘Les lois de police étrangères’ (1981) Journal du Droit International 277, 284; Nathalie Voser, ‘Mandatory Rules of Law as a Limitation on the Law Applicable in International Commercial Arbitration’ (1996) American Review of International Arbitration 319, 321.

28.
The Rome Convention still provides the relevant rules of conflict of laws with respect to contracts concluded up to 17 December 2009.

29
Article 7(1) Rome Convention was applicable in all Contracting States except those that had reserved the right not to apply this provision, in accordance with Article 22(1). The Rome I Regulation contains no provision equivalent to Article 22(1) Rome Convention, and all member states are thus bound by Article 9(3) of the Regulation.

30.
See Azeredo da Silveira, Trade Sanctions and International Sales (n 10) § 3.02[B]; Francois Knoepfler, Philippe Schweizer and Simon Othenin-Girard, Droit international privé suisse (3rd ed., Staempfli Editions SA 2005) 190–191, n 378; Bernard Dutoit, Commentaire de la loi fédérale du 18 decembre 1987 (4th ed., Helbing & Lichtenhahn 2005 and Supplement 2011) 77, n 1 ad Article 19; Catherine Kessedjian, ‘Mandatory Rules of Law in International Arbitration: What Are Mandatory Rules?’ (2007) American Review of International Arbitration 147, 148; Bernard Audit, ‘How Do Mandatory Rules of Law Function in International Civil Litigation?’ in George A Bermann and Loukas A Mistelis (eds), Mandatory Rules in International Arbitration (JurisNet 2011) 53, 54; Barraclough and Waincymer (n 27) 207; Berger (n 22) 100; Andrea K Bjorklund, ‘Investment Arbitration’ in Bermann and Mistelis (n 30) 233, 239; Blessing, ‘Impact of the Extraterritorial Application of Mandatory Rules of Law on International Contracts’ (n 27) 13; Andrea Bonomi, ‘Overriding Mandatory Provisions in the Rome I Regulation on the Law Applicable to Contracts’ (2008) Yearbook of Private International Law 285, 291; Bernard Grelon and Charles-Etienne Gudin, ‘Contrats et crise du Golfe’ (1991) Journal du Droit International 633, 651; Trevor C Hartley, ‘Mandatory Rules in International Contracts: The Common Law Approach’ in Recueil des cours, Academie de droit international de La Haye (Martinus Nijhoff 1997) 341, 346; Daniel Hochstrasser, ‘Choice of Law and “Foreign” Mandatory Rules in International Arbitration’ (1994) 1 Journal of International Arbitration 57, 68; Bernd von Hoffmann, ‘Internationally Mandatory Rules of Law before Arbitral Tribunals’ in Bockstiegel (n 22) 3, 4; Kaufmann-Kohler and Rigozzi (n 11) 424, n 660; Laurence Landy-Osman, ‘L’embargo des Nations Unies contre l’Irak et l’exécution des contrats internationaux’ (1991) Droit et pratique du commerce international 597, 607–608, nn 24–25; Munir Maniruzzaman, ‘International Arbitrator and Mandatory Public Law Rules in the Context of State Contracts: An Overview’ (1990) 3 Journal of International Arbitration 53, 57–58; Marchand (n 9) 150–151, n 145; Pierre Mayer, ‘Le rôle du droit public en droit international privé français’ in F. Klein (ed), Basel Symposium on the Role of Public Law in Private International Law 20–21 March 1986 (Helbing & Lichtenhahn 1991) 63, 81; Loukas A Mistelis, ‘Mandatory Rules in International Arbitration: Too Much Too early or Too Little Too Late?’ in Bermann and Mistelis (n 30) 291, 292; Racine (n 11) 102, n 19; Voser (n 27) 349.

31.
Economic sanctions prohibit the performance of specific actions (for instance, imports from a target state or exports thereto) by designated persons and entities (for instance, those located within the territory of the sanctioning state or nationals thereof, wherever located), without necessarily making an explicit reference to the contracts (for instance, sales contracts) they may affect. It remains, however, clear from their object that economic sanctions strive to apply to all contractual relationships involving the performance of a prohibited action (perhaps even of any action that would defeat the sanction’s purpose), irrespective of the law applicable to these contractual relationships, whether selected by the parties or identified through mechanisms of conflict of laws.

32.
See Azeredo da Silveira, Trade Sanctions and International Sales (n 10) § 3.02[B]; Azeredo da Silveira, ‘Economic Sanctions and Contractual Disputes Between Private Operators’ (n 16) 339.

33.
Moller Maersk Company v Viol Company and Fauveder Company, Cour de cassation, n 08-21511, 16 March 2010, Bulletin 2010 IV n 54.

34.
Article 7(1) Rome Convention and Article 9(3) Rome I Regulation are indeed permissive (see Guedj (n 27) 675; Daniel Gutmann, Droit international privé (6the edn, Dalloz 2009) 61, n 53 and 228, n 240; Mayer, ‘Les lois de police étrangères’ (n 27) 306–307 and 326; Allan Philip, ‘Mandatory Rules, Public Law (Political Rules) and Choice of Law in the EEC Convention on the Law Applicable to Contractual Obligations’ in North (n 27) 81, 87, n 19; Richard Plender and Michael Wilderspin, The European Contracts Convention—The Rome Convention on the Law Applicable to Contractual Obligations (Sweet & Maxwell 2001) 333, n 12-001 and 343, n 12-018). Domestic courts and arbitral tribunals are, however, bound to give effect to overriding mandatory rules that incorporate a recognized principle of transnational public policy, as is the case of sanctions implementing UN Security Council mandatory resolutions (multilateral sanctions)—see section II.B. below.

35.
Azeredo da Silveira, Trade Sanctions and International Sales (n 10) § 4.01[C].

36.
ibid. § 4.02[C]. See, however, George A Bermann, ‘Mandatory Rules of Law in International Arbitration’ in Franco Ferrari and Stefan Kroll (eds), Conflict of Laws in International Arbitration (Sellier European Law Publishers 2011) 325, 327 and 338.

37.
See, inter alia, Kaufmann-Kohler and Rigozzi (n 11) 425, n 661; Knoepfler, Schweizer and Othenin-Girard (n 30) 201, n 397c; Voser (n 27) 329–330. Considering the core purpose of these provisions, arbitrators cannot be deprived of the authority to take into account overriding mandatory rules enacted by a state other than the state of the applicable law (see François Knoepfler, ‘L’article 19 LDIP est-il adapté à l’arbitrage international?’ in Christian Dominicé, Robert Patry and Claude Reymond (eds), Etudes de droit international en l’honneur de Pierre Lalive (Helbing & Lichtenhahn 1993) 531, 531–541; Laurence Shore, ‘Applying Mandatory Rules of Law in International Commercial Arbitration’ in Bermann and Mistelis (n 30) 131, 134–135 and 145).

38.
ICC Award n 1859 of 1973 (excerpts in Yves Derains, ‘Le statut des usages du commerce international devant les juridictions arbitrales’ (1973) Rev arb 122, 134, and in Yves Derains, ‘L’ordre public et le droit applicable au fond du litige dans l’arbitrage international’ (1986) Rev arb 375, 408, n 54).

39.
See Azeredo da Silveira, Trade Sanctions and International Sales (n 10) § 3.02 and § 7.01[A]; Azeredo da Silveira, ‘Economic Sanctions and Contractual Disputes Between Private Operators’ (n 16) 340.

40.
EU sanctions are imposed (either autonomously or to implement Security Council mandatory resolutions) pursuant to Article 29 of the Treaty on European Union and Article 215 (and possibly Article 75) of the Treaty on the Functioning of the European Union. EU sanctions are self-executing within member states and may be invoked by individuals and corporate entities in judicial proceedings (see Vera Gowlland-Debbas, ‘Implementing Sanctions Resolutions in Domestic Law’ in Vera Gowlland-Debbas (ed), National Implementation of United Nations Sanctions—A Comparative Study (Martinus Nijhoff 2004) 33, 38; Rusen Ergeç, ‘L’embargo et les droits nationaux’ in L’embargo—Actes de la journée d’études du 1er décembre 1995 organisée par l’Association Européenne pour le Droit Bancaire et Financier—Belgium (Bruylant 1996) 125, 131, n 18; Grelon and Gudin (n 30) 640; Marchand (n 9) 79, n 58).

41.
Azeredo da Silveira, ‘Economic Sanctions and Contractual Disputes Between Private Operators’ (n 16) 341-342. For an in-depth analysis of the rationale and weaknesses of the datum approach, see Azeredo da Silveira, Trade Sanctions and International Sales (n 10) § 3.01[B].

42.
For instance, ‘[i]n the Borax case [discussed above in n 20] the court respected the American embargo prescriptions although the German Government, which had previously co-operated with the United States within the Consultative Group and the COCOM, did not adopt the particular embargo in question. The judicial appreciation of foreign State interests led to the undesirable discrepancy that the court denounced as immoral the parties’ conduct in a transaction which was approved by the executive authorities of the same forum State’ (Frank Benedict Vischer, ‘General Course of Private International Law’ in Recueil des cours, Académie de droit international de La Haye (Martinus Nijhoff 1992) 9, 175).

43
For instance, a sanction has an ‘extraterritorial scope’ if it seeks compliance from nationals abroad or from subsidiaries of domestic entities incorporated in states other than the sanctioning state, or if it prohibits foreign individuals and entities that have imported goods from the sanctioning state or made use of technologies developed inside the territory of the sanctioning state from exporting to the target state these goods or technologies. For a definition of the concept of ‘extraterritorial laws’, see Paul Demaret, ‘Les affirmations de compétence extraterritoriale des Etats-Unis’ in L’application extraterritoriale du droit économique—Troisième journée d’actualité internationale du CEDIN (23 April 1986) (Montchrestien 1987) 41, 41; Jean-Michel Jacquet, ‘La norme juridique extraterritoriale dans le commerce international’ (1985) Journal du Droit International 327, 347, n 34; Patrick Juillard, ‘L’application extraterritoriale de la loi économique’ in L’application extraterritoriale du droit économique—Troisième journée d’actualité internationale du CEDIN (23 April 1986) 13, 20; Brigitte Stern, ‘L’extraterritorialité revisitée—Où il est question des affaires Alvarez-Machain, Pâte de bois et de quelques autres’ (1992) Annuaire français de droit international 239, 244. An example of an extraterritorial sanctions programme was the so-called ‘pipeline controls’ decided by US President Reagan in December 1981 and reinforced in June 1982, following the institution of martial law in Poland on 13 December 1981. In order to obstruct the Soviet construction of the Yamal natural gas pipeline to Europe, President Reagan prohibited, inter alia, the following: exports of foreign-origin goods (oil and gas equipment) and technologies (even of entirely foreign origin) by foreign subsidiaries of US companies; exports and re-exports, to the Soviet Union, by foreign purchasers not owned or controlled by US entities, of products containing US-origin parts and of US-origin oil- and gas-related machinery, even if the said machinery was already located abroad by the time the sanctions were imposed; and exports by foreign companies of foreign-produced commodities utilizing US technical data, if these foreign companies had agreed not to re-export US technology to the USSR, had agreed to comply with US legislation or were bound by a licence agreement to a person under US jurisdiction (47 Fed Reg 27250 (1982); see also Bernard Audit, ‘Extra-territorialité et commerce international—L’affaire du gazoduc sibérien’ (1983) Revue Critique de Droit International de la Haye 401, 403–404, n 3). Regarding the pipeline controls, which gave rise to an international controversy, see, for instance, Barry E Carter, International Economic Sanctions—Improving the Haphazard US Legal Regime (CUP 1988) 83; Kathleen Hixson, ‘Extraterritorial Jurisdiction under the Third Restatement of Foreign Relations Law of the United States’ (1988–1989) Fordham International Law Journal 127, 143 and following; J Brett Busby, ‘Jurisdiction to Limit Third-Country Interaction with Sanctioned States: The Iran and Libya Sanctions and Helms-Burton Acts’ (1998) Columbia Journal of Transnational Law 621 and following; Daniel Marcus, ‘Soviet Pipeline Sanctions: The President’s Authority to Impose Extraterritorial Controls’ (1983) Law & Policy in International Business 1163 and following.

44
Blocking statutes are counter-measures adopted by states for the purpose of preventing an extraterritorial sanction from producing effects within these states’ territories. For examples of blocking statutes, see n 79 below.

45
A contract may, for instance, contain a clause such as the 2003 ICC Force Majeure Model Clause, under which the following, inter alia, constitute exonerating impediments: ‘act of authority whether lawful or unlawful, compliance with any law or governmental order, rule, regulation or direction’ (third paragraph, d). The applicable law may also provide, for instance, that any foreign or domestic governmental regulation or order may justify the obligor’s discharge. Article 501(4) SCO, for instance, provides that ‘[i]f the duty to perform of a principal obligor who is domiciled abroad is barred or restricted by foreign legislation, as, for example, provisions relating to clearing systems or prohibitions on currency transfers, a guarantor domiciled in Switzerland may also invoke this legislation unless he has waived such defense’ (translation of the Swiss-American Chamber of Commerce).

Paragraph 2-615(a) of the United States Uniform Commercial Code, in turn, stipulates that discharge may be granted in case of non-performance of actions that are prohibited by a regulation or an order (that is, actions that fall within the scope of application of a regulation or an order), whether domestic or foreign. Under this provision, discharge can result from ‘compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid’. By providing that any foreign or domestic governmental regulation or order may justify the defaulting party’s discharge, the applicable law simply allocates the risks associated with any subsequent prohibition: the defaulting party is discharged not on the ground that it is legally bound to comply with any and all such measures, but because its contractual partner assumes the risk that a subsequent regulation prohibit the performance of the transaction.

46
The absence of an assessment of the purpose of sanctions that are external to the applicable law explains why the existence of a territorial link with the sanctioning state or concerns of comity or public policy are usually raised by courts relying on the traditional datum approach.

47
See, in general, Knoepfler, Schweizer and Othenin-Girard (n 30) 199, n 393; Voser (n 27) 323.

48
Azeredo da Silveira, ‘Economic Sanctions and Contractual Disputes Between Private Operators’ (n 16) 343-344.

49
Van Houtte, ‘Les effets des sanctions économiques sur les contrats transnationaux’ (n 22) 194, n 4; Marchand (n 9) 144, n 136; Landy-Osman (n 30) 608, n 25. Thus, whenever the disputed contract provides for the performance of an action that is prohibited by an economic sanction imposed by the forum state, domestic courts of that state must give effect to the sanction, unless the legislation of that state itself authorises its courts to examine the sanction’s legality, constitutionality, and/or conformity with international law. By contrast, as arbitral tribunals are neither officers nor organs of any state, they have no duty to ensure compliance with the laws of a particular state or to act as a guardian of its public policy (see Christoph Brunner, Force Majeure and Hardship under General Contract Principles—Exemption for Non-Performance in International Arbitration (Wolters Kluwer 2009) 265; Andreas Bucher and Pierre-Yves Tschanz, International Arbitration in Switzerland (Helbing & Lichtenhahn 1988) 104; Pierre Mayer, ‘Mandatory Rules of Law in International Arbitration’ (1986) Arbitration International 274, 277; Voser (n 27) 338). Given the absence of forum in arbitration, all laws (and all overriding mandatory rules) including those enacted by the state of the seat of the arbitration, are foreign laws for the arbitrators (see, inter alia, ICC Award 6294 rendered in 1991, (1991) Journal du Droit 1050, 1051; Gaillard and Savage (n 11) 848, n 1517; Maniruzzaman (n 30) 56, 63; Lambert Matray, ‘Embargo and Prohibition of Performance’ in Bockstiegel (n 22) 69, 88).

50
The exception of public policy enunciates a general principle of law, according to which courts may disregard a specific provision of the governing law if its application would lead to an unacceptable outcome in the instance at hand (see, for instance, C v C-E, 4 July 2000, Swiss Federal Tribunal, 126 III 327; Andreas Bucher, ‘L’ordre public et le but social des lois en droit international privé’ in Recueil des cours, Académie de droit international de La Haye (Martinus Nijhoff 1993) 9, 76, n 39; Henri Batiffol and Paul Lagarde, Traité de droit international privé (8th edn, LGDJ 1993) Vol I, 575–576, n 358; Plender and Wilderspin (n 34) 363, n 12-055).

51
According to Article 16 Rome Convention and Article 21 Rome I Regulation, the application of a provision of the law of any country specified by the Convention or Regulation may be refused only if such application is manifestly incompatible with the public policy (ordre public) of the forum.

52
Regarding the concept of public policy (ordre public), see inter alia Bucher (n 50) 25; Joost Blom, ‘Public Policy in Private International Law and its Evolution in Time’ (2003) Netherlands International Law Review 373, 385; Phocion Francescakis, ‘Y a-t-il du nouveau en matière d’ordre public?’ in Travaux du Comité français de droit international privé, 1966–1969 (Dalloz 1970) 149, 154–155.

53
Although provisions such as Article 16 Rome Convention and Article 21 Rome I Regulation are not directly applicable to arbitration, it is today unquestionable that arbitrators must ensure the safeguarding of universal principles of justice (see Batiffol and Lagarde (n 50) 588, n 365; Kaufmann-Kohler and Rigozzi (n 11) 423, n 657; Matray (n 49) 71–72).

54
See, among others, Berthold Goldman, ‘Les conflits de lois dans l’arbitrage international de droit privé’ in Recueil des cours, Académie de droit international de La Haye (Martinus Nijhoff 1963) 347, 432, n 44; Kaufmann-Kohler and Rigozzi (n 11) 422–423, n 657; Pierre Lalive, ‘Ordre public transnational (ou réellement international) et arbitrage international’ (1986) Rev arb 329, 364; Serge Lazareff, ‘Mandatory Extraterritorial Application of National Law’ (1995) Arbitration International 137, 139; Sperduti (n 24) 269.

55
Van Houtte, ‘Les effets des sanctions économiques sur les contrats transnationaux’ (n 22) 194–195.

56
Trade and financial sanctions are not altogether prohibited by international laws and standards and are therefore not considered intrinsically unlawful measures. Rather, they are regarded by most as measures of retorsion, that is, measures which, albeit unfriendly, remain within the ambit of each state’s sovereign and discretionary competence. Regarding trade restrictions, see, inter alia, Louis Dubouis, ‘L’embargo dans la pratique contemporaine’ (1967) Annuaire français de droit international 99, 108 and references cited therein at 108–110; Denis Alland, Justice privée et ordre juridique international—Etude théorique des contre-mesures en droit international public (A Pedone 1994) 152–155, n 106; Dominique Carreau, ‘Les moyens de pression économique au regard du FMI, du GATT et de l’OCDE’ (1984-1985) Revue belge de droit international 20, 20; Charles Leben, ‘Les contre-mesures inter-étatiques et les réactions a l’illicite dans la société internationale’ (1982) Annuaire français de droit international 9, 14, n 7. Regarding asset freezes, see, inter alia, Charlotte Beaucillon, ‘Crise ukrainienne et mesures restrictives de l’Union européenne: quelle contribution aux sanctions internationales à l’égard de la Russie?’ (2014) Journal du Droit International 787, 803, n 41. However, customary and conventional international obligations (such as conventional provisions that guarantee freedom of trade) may limit a state’s latitude to impose economic sanctions. Sanctions that are in breach of such customary or conventional obligations will be considered in conflict with principles of transnational public policy. Indeed, as noted by Racine, ‘le droit international public, en ce qu’il exprime des valeurs reflétées dans la légalité internationale, est une composante de l’ordre public transnational’ (Racine (n 11) 104, n 24).

57
The GATT governs trade relations among over 150 member states of the World Trade Organization and lays down a ‘general elimination of quantitative restrictions’ (Article XI). It liberalises trade and allows restrictive measures only in certain specific circumstances. Article XXI(b) allows restrictive measures that are ‘necessary [according to the enacting state] for the protection of its essential security interests (i) relating to fissionable materials or the materials from which they are derived; (ii) relating to the traffic in arms, ammunition and implements of war and to such traffic in other goods and materials as is carried on directly or indirectly for the purpose of supplying a military establishment; (iii) taken in time of war or other emergency in international relations’. In addition, Article XXI(c) allows restrictive measures taken ‘in pursuance of [the enacting state’s] obligations under the United Nations Charter for the maintenance of international peace and security’. The North American Free Trade Agreement (NAFTA) contains a clause (Article 2102(1)) very similar to Article XXI GATT.

58
See, among others, Marchand (n 9) 186–187, n 191 and 214, n 229; Jean-Hubert Moitry, ‘L’arbitre international et l’obligation de boycottage imposée par un Etat’ (1991) Journal du Droit International 349, 363 and 365; Emmanuel Gaillard, ‘Trente ans de Lex Mercatoria—Pour une application sélective de la méthode des principes généraux du droit’ (1995) Journal du Droit International 5, 21, n 27. The Swiss Federal Tribunal lays down, among other principles of transnational public policy, ‘la prohibition des mesures discriminatoires ou spoliatrices’ (13 November 1998, (1999) ASA Bulletin 529, 533, c. 1.b.aa).

59
See Hans van Houtte, ‘The Impact of Trade Prohibitions on Transnational Contracts’ (1988) Revue de droit des affaires internationales/International Business Law Journal 141, 150. Public international law dictates that a state’s prescriptive jurisdiction must be based on criteria that are neither superficial nor arbitrary. A country’s prescriptive jurisdiction may be based on criteria such as the following: a ‘territoriality’ criterion (a state has jurisdiction over situations that occur on its territory); a ‘nationality’ criterion (a state has jurisdiction over its nationals); a ‘protection’ criterion (a state has jurisdiction over situations that threaten its own national security, integrity or vital economic interests). Some states also rely on an ‘effects criterion’ (a state has prescriptive jurisdiction over foreign persons and entities located outside its territory if their behaviour produces effects inside that territory). If the sanction strives to be applied extraterritorially, based on a criterion that is either superficial or arbitrary, it may have to be disregarded even if it is part of the applicable law. Furthermore, even if the scope of an extraterritorial sanction is considered by the deciding court to be in accordance with public international law, it may have to be disregarded if giving it effect extraterritorially would clearly not contribute to the achievement of the sanction’s stated foreign policy or national security goal.

60
See Blessing, ‘Impact of the Extraterritorial Application of Mandatory Rules of Law on International Contracts’ (n 27).

61
See van Hecke (n 14) 118.

62
EU domestic courts may wish to rely on the European Union’s ‘Basic Principles on the Use of Restrictive Measures (Sanctions)’ (Council document 10198/1/04). According to these Principles, sanctions may serve to maintain and restore international peace and security in accordance with the principles of the UNC and of the EU’s common foreign and security policy, to fight terrorism and the proliferation of weapons of mass destruction, and to uphold respect for human rights, democracy, the rule of law and good governance.

63
As rightly noted by Seraglini, ‘la fin poursuivie peut non seulement être contingente, mais … elle n’a par ailleurs pas besoin d’être partagée par une majorité d’Etats pour voir sa légitimité reconnue. En d’autres termes, si la légitimité s’impose s’agissant d’intérêts contingents “généralement protégés par la communauté internationale” …, elle peut également être reconnue à des intérêts contingents qui ne bénéficient pas de la même généralité mais qui peuvent être considérés comme “généralement acceptés par la communauté internationale”’ (Seraglini (n 11) 377–378, n 784).

64
On the applicable standard in international arbitration, see Azeredo da Silveira, Trade Sanctions and International Sales (n 10) 141–142, nn 226–227; Voser (n 27) 351; Berger (n 22) 113; Kaufmann-Kohler and Rigozzi (n 11) 426, n 663.

65
See Seraglini (n 11) 377–378, n 784.

66
These are China, France, Russia, the United Kingdom and the United States (Article 23(1) UNC). The international community may well also be of the opinion that unilateral sanctions are sufficient measures against the target state.

67
For instance, after Iraq’s invasion of Kuwait, France, the US and the UK were first to impose sanctions against these countries and only subsequently did the UN Security Council pass Resolution 661 on 6 August 1990.

68
See Karl M Meessen, ‘Extraterritorial Jurisdiction in Export Control Law’ in Karl M Meessen (ed), International Law of Export Control—Jurisdictional Issues (Graham & Trotman/Martinus Nijhoff 1992) 3, 10–11; Seraglini (n 11) 385, n 801.

69
For example, on 20 November 1965, the Security Council passed Resolution 217, calling upon all states ‘to refrain from any action which would assist and encourage the illegal regime and, in particular, to desist from providing it with arms, equipment and military material, and to do their utmost in order to break all economic relations with Southern Rhodesia, including an embargo on oil and petroleum products’ (para 8).

70
Domestic courts of member states of regional organizations may also be expected to consider that sanctions imposed further to a recommendation issued by these organizations serve a legitimate purpose. See, for instance, the 1991 and 1992 Resolutions passed by the Organization of American States (OAS)—following the overthrow of President Aristide by the Haitian military under the command of General Cedras—recommending its member states to impose trade sanctions against Haiti on all but humanitarian goods (OAS Res 1/91, OEA/SerJ/Vl MRE/RES1/91 (1991); OAS Res 2/91, OEA/SerF/V1 MRE/RES2/91 (1991); OAS Res 3/92, OEA/SerF/Vl MRE/RES3/92 (1992)).

71
Van Houtte, ‘The Impact of Trade Prohibitions on Transnational Contracts’ (n 59) 149. See also Van Houtte, ‘Les effets des sanctions économiques sur les contrats transnationaux’ (n 22) 197–198; Marchand (n 9) 211–212, n 225.

72
Marchand (n 9) 212, n 226.

73
For a discussion of the distinction to be drawn between sanctions serving a coercive purpose (possibly combined with a symbolic and/or punitive purpose) and sanctions that serve an exclusively punitive purpose, see Azeredo da Silveira, Trade Sanctions and International Sales (n 10) 157 and following, nn 252 and following.

74
Marchand (n 9) 211, n 224.

75
See Bernardo Cortese, ‘International Economic Sanctions as a Component of Public Policy for Conflict-of-Laws Purposes’ in Picchio Forlati and Sicilianos (n 8) 717, 745.

76
See Andreas Bucher, in Andreas Bucher (ed), Commentaire romand—Loi sur le droit international privé Convention de Lugano (Helbing Lichtenhahn 2011) 273–274, n 43 ad Article 19 LDIP; Marchand (n 9) 210–211, n 224; Seragini (n 11) 385, n 800.

77
Article 9(3) Rome I Regulation provides a clear-cut solution in situations in which the sanction strives to apply extraterritorially. Under this provision, effect may only be given to overriding mandatory provisions of the law of the state where the obligations arising out of the contract have to be or have been performed. In other words, Article 9(3) Rome I Regulation explicitly requires the existence of a territorial nexus between the sanctioning state and the disputed contract. See the decision of the Cour d’appel of Paris, dated 25 February 2015, discussed below.

78
See Compagnie Européenne des Pétroles SA v Sensor Nederland BV, Arrondissementsrechtbank, The Hague, 17 September 1982 (1983) ILM 66 and following, (1983) Revue Critique de Droit International de la Haye 473 and following. See also Bucher, Commentaire romand—Loi sur le droit international privé (n 76) 274, n 48 ad Article 19 LDIP. A state may be deemed to have a legitimate interest in enacting extraterritorial legislation only if there is a reasonable connection between this state and situations affected by this legislation. See, in this respect, n 59 above.

79
Several countries as well as the EU have adopted blocking statutes to prevent US extraterritorial sanctions from producing effects within their territories. For instance, in reaction to the pipeline sanctions described above in n 43, the UK government issued an Order under the Protection of Trading Interests Act as well as directions addressed to four UK companies (three of which were subsidiaries of US companies) prohibiting compliance with US measures intended to obstruct the construction of the Siberian gas pipeline (see the Protection of Trading Interests (US Re-export Control) Order 1982 (Statutory Instrument 1982 n 885), British Yearbook of International Law 1982 452–453). The European Community also responded to these US measures (see, for instance, the European Communities’ Comments on the US Regulations Concerning Trade with the USSR of 11 August 1982, Europe-Documents n 1216, 12 August 1982, reprinted in ILM 1982 891 and following). As to US extraterritorial sanctions against Cuba, Canada (see the Order of 9 October 1992 (Foreign Exraterritorial Measures (United States)), Statutory Orders and Regulations 92-584, Canada Gazette Part II 4048) and the UK (see the Statutory Instrument of 14 October 1992, Order n 2449 (Protection of Trading Interests (US Cuban Assets Control Regulations))), among others, reacted to the breadth of the Cuban Democracy Act and issued blocking orders prohibiting US-owned or -controlled Canadian and UK companies, respectively, from complying with this Act. In 1996, the European Union also adopted a regulation in response to US extraterritorial and secondary sanctions laid down in the Cuban Democracy Act, the Cuban Assets Control Regulations, the Helms-Burton Act, and the Iran and Libya Sanctions Act (ILSA) (see Council Regulation (EC) 2271/96 of 22 November 1996 Protecting Against the Effects of the Extra-Territorial Application of Legislation Adopted by a Third Country, and Actions Based Thereon or Resulting Therefrom (OJ L309 of 29 November 1996, ILM 1997 125)).

80
See Bernard Audit, Droit international privé (Economica 2010) 118, n 123.

81
This limitation—which did not exist under the Rome Convention—is unfortunate if one considers that a sanctioning state may, for instance, have a legitimate interest in prohibiting exports to a target state, even if the delivery of exported goods takes place outside the sanctioning state. In Audit’s opinion, ‘le véritable critère devrait être de savoir si les intérêts généraux de cet Etat sont ou non engagés’ (Audit, Droit international privé (n 80) 740, n 840).

82
Cour d’appel of Paris (pôle 5, ch 4), Decision 12/23757, 25 February 2015. In the words of the Cour d’appel: ‘Considérant qu’en application de l’article 9 du Règlement “Rome I” il ne peut être donné effet à une loi de police étrangère que s’il s’agit d’une loi de police du lieu d’exécution du contrat et si cette loi de police rend illégale l’exécution du contrat; qu’en l’espèce, sans avoir à se prononcer sur la qualification de loi de police des dispositions du Code des Réglementations Fédérales, “CFR”, instituant un embargo sur les exportations à destination de l’Iran, la Cour ne peut donner d’effet à la loi américaine, qui n’est ni une loi de police française, ni une loi de police iranienne’.

83
An application by analogy of Article 9(3) Rome I Regulation should indeed not limit the authority of arbitral tribunals to give effect to overriding mandatory rules enacted by states other than those where contractual obligations have been or have to be performed. As noted earlier, arbitral tribunals are not directly bound by provisions such as Article 7(1) Rome Convention and Article 9(3) Rome I Regulation. Rather, they must be guided by principles inferred therefrom. It is therefore suggested that prior to giving effect to a sanction external to the applicable law, arbitral tribunals should simply verify the existence of a close connection between the sanction and the disputed contract.

84
See ICC Award 1859 of 1973 (excerpts in Derains, ‘Le statut des usages du commerce international devant les juridictions arbitrales’ (n 38) 134, and in Derains, ‘L’ordre public et le droit applicable au fond du litige dans l’arbitrage international’ (n 38) 408, n 54), discussed above, in which Lebanese import restrictions were taken into account in the resolution of a dispute pertaining to a contract between a Japanese seller and a Lebanese importer, governed by general principles and trade usages and to be performed in Lebanon (where the goods were to be delivered).

85
Ole Lando, ‘The Conflict of Laws of Contracts—General Principles’ in Recueil des cours, Académie de droit international de La Haye (Martinus Nijhoff 1984) 225, 405.

86
Cortese (n 75) 729.

87.
In the well-known Fruehauf decision of 22 May 1965, the Cour d’appel of Paris pointed to ‘the catastrophic results which would have been produced, on the eve of delivery date, and which would be felt even today, if the contract had been breached’, and refused to apply a US trade sanction against the People’s Republic of China, to a sales contract between two French companies providing for the supply of vans destined to be ultimately delivered to the People’s Republic of China (Fruehauf Corporation v Massardy, Cour d’appel, Paris, 22 May 1965, Gaz Pal 1965 86 and following, ILM 1966 476).

88.
See Azeredo da Silveira, Trade Sanctions and International Sales (n 10) § 4.02[C][3] and 163–164, n 264.

89.
See, for instance, Article 9 of Council Regulation (EC) 2271/96 of 22 November 1996.

90.
See, for instance, Article 4 of Council Regulation (EC) 2271/96 of 22 November 1996.

91.
See, for instance, Article 6 of Council Regulation (EC) 2271/96 of 22 November 1996.

92.
According to Article 24(1) and (2) UNC, ‘[i]n order to ensure prompt and effective action by the United Nations, its Members confer on the Security Council primary responsibility for the maintenance of international peace and security, and agree that in carrying out its duties under this responsibility the Security Council acts on their behalf. In discharging these duties the Security Council shall act in accordance with the Purposes and Principles of the United Nations. The specific powers granted to the Security Council for the discharge of these duties are laid down in Chapters VI, VII, VIII, and XII’.

93.
Pursuant to Article 39 UNC, the Security Council ‘shall [then] make recommendations, or decide what measures shall be taken in accordance with Articles 41 and 42, to maintain or restore international peace and security’. As per Article 41 UNC, measures not involving the use of armed force include ‘complete or partial interruption of economic relations’.

94
See, inter alia, Racine (n 11) 101, n 18 and 104, n 23; Nabil Ferjani and Véronique Huet, ‘L’impact de la décision onusienne d’embargo sur l’exécution des contrats internationaux’ (2010) Journal du Droit International 737, 755; Gaillard and Savage (n 11) 853, n 1522; Landy-Osman (n 30) 609, n 28; Marchand (n 9) 68, n 42 and 104–105, n 88.

95.
Marchand (n 9) 97–98, n 80, 106, n 90, and 104–105, n 88. In the same vein, domestic ‘counter-legislation’ enacted by the target state to thwart the effects of a multilateral sanction must be disregarded. See, for instance, the 1990 Law for the Protection of Iraqi Property, Interests, and Rights in and outside Iraq (or ‘Law no 57’ available in Yearbook of Islamic and Middle Eastern Law 1994 519–520) enacted by Iraq to thwart the effects of UN Security Council Resolution 661 passed after the invasion of Kuwait by Iraq (Grelon and Gudin (n 30) 661; Jean Matringe, ‘Problèmes et techniques de mise en oeuvre des sanctions économiques de l’Organisation des Nations Unies en droit interne’ in Picchio Forlati and Sicilianos (n 8) 637, 668).

96.
Azeredo da Silveira, Trade Sanctions and International Sales (n 10) 63, n 101 and 147–148, n 240. For situations in which several implementation measures purport to apply to the disputed contract (that is, several states claim to have jurisdiction over the same parties and transactions), see Azeredo da Silveira, Trade Sanctions and International Sales (n 10) 149–150, nn 241–242.

97.
In the case of UN sanctions against the Democratic People’s Republic of Korea, for instance, one may imagine a scenario in which the disputed contract was entered into by a French entity and a North Korean entity and was governed by Swiss law. Unless otherwise specified, Swiss sanctions (including measures of implementation of UN Security Council mandatory resolutions) only apply territorially, that is, they apply to individuals and corporate entities located in Switzerland and/or engaged in commercial activities in Switzerland (Mathias-Charles Krafft, Daniel Thürer and Julie-Antoinette Stadelhofer, ‘Switzerland’ in Gowlland-Debbas (n 40) 523, 548). Swiss sanctions against North Korea (implementing UN Security Council mandatory resolutions) therefore likely do not prohibit the performance of the disputed contract between the French entity and the North Korean entity. EU and/or French sanctions (implementing UN Security Council mandatory resolutions), on the other hand, may prohibit the transaction and may therefore have to be given effect despite being external to the applicable law.

98.
A failure to give effect to a domestic or an EU measure implementing a UN Security Council binding resolution would fall within the category of instances in which, according to Mistelis, ‘failure to [apply an overriding mandatory rule is] inconsistent with international public policy, e.g. where an element of illegality or immorality is asserted’ (Mistelis, ‘Mandatory Rules in International Arbitration’ (n 30) 299).

99.
According to Bismuth, ‘si les résolutions du Conseil de sécurité ne bénéficient pas nécessairement d’un effet direct devant les juges internes ou les arbitres, ceux-ci peuvent en tenir compte en tant que fait juridique … (par exemple au titre de la force majeure) ou comme un élément d’un “ordre public réellement international”’ (Régis Bismuth, ‘Odyssée dans le conundrum des réactions décentralisées à l’illicite’ (2014) Journal du Droit International 719, 729, n 14).

100
See Azeredo da Silveira, Trade Sanctions and International Sales (n 10) § 3.02[C]; Azeredo da Silveira, ‘Economic Sanctions and Contractual Disputes Between Private Operators’ (n 16) 353.

101
See Azeredo da Silveira, Trade Sanctions and International Sales (n 10) § 3.02[C]; Azeredo da Silveira, ‘Economic Sanctions and Contractual Disputes Between Private Operators’ (n 16) 353.

102
UN Security Council mandatory resolutions are directed to, and binding on, states only, and must therefore be translated into domestic or EU legislation to be effective. See Etat irakien v SA Dumez GTM, Cour de cassation, n 02-17344, 25 April 2006, JCPG 2006 II 10179, p 2058; Affaire pénale Barcot et Trojić, Trieste Tribunal, 24 December 1993, (1998) Journal du Droit 441, 441–442; Bradley v The Commonwealth of Australia and the Postmaster-General, High Court of Australia, 10 September 1973 (1974) Journal du Droit International 865, 867; Burdeau (n 2) 43, n 67; Cissé (n 8) 685, n 6 and 701, n 38; Ergeç (n 40) 130–131, nn 15–17; Grelon and Gudin (n 30) 639; Gilbert Guillaume, ‘L’introduction et l’exécution dans les ordres juridiques des Etats des résolutions du Conseil de sécurité des Nations unies prises sur le fondement du chapitre VII de la Charte’ (1998) Revue internationale de droit comparé 539, 546 n 15; Landy-Osman (n 30) 602, n 11 and 604, n 15; Marchand (n 9) 73, n 51 and 92, n 73; Matringe (n 95) 643, 644, 646–647 and 656–657; James AR Nafziger and Edward M Wise, ‘The Status in United States Law of Security Council Resolutions under Chapter VII of the United Nations Charter’ (1998) American Journal of Comparative Law Supplement 421, 424 and 431; Saber Salama, L’acte de gouvernement—Contribution à l’étude de la force majeure dans le contrat international (Bruylant 2001) 32, n 25. A minority of authors, however, maintain that UN Security Council mandatory resolutions are self-executing within member states. For a detailed discussion of the controversy regarding the direct applicability of Security Council mandatory resolutions (including French case-law and further references to scholarly writing dealing with this question), see Marchand (n 9) 81–89, nn 61–69.

103
See Azeredo da Silveira, Trade Sanctions and International Sales (n 10) § 3.02[C].

104
Etat irakien v SA Dumez GTM, Cour de cassation, n 02-17344, 25 April 2006, JCPG 2006 II 10179, 2058. See also Giuseppe Cataldi, ‘L’application des décisions du Conseil de sécurité en droit interne’ in Rafaa Ben Achour and Slim Laghmani (eds), Droit international et droits internes, développements récents (Pedone 1998) 205, 221; Marchand (n 9) 90, n 70 and 95, n 78.

105
Under C-term contracts, delivery must be made on board the vessel at the port of shipment (Incoterms 2010, CFR and CIF terms) or by handing the goods over to the carrier (Incoterms 2010, s 4A of the CPT and CIP terms). Under F-terms, the delivery may also have to be made alongside the ship (Incoterms 2010, s 4A of the FAS term) or on board (Incoterms 2010, s 4A of the FOB term) at the port of shipment. C-term and F-term contracts are therefore often characterised as ‘shipment contracts’.

106
Under D-term contracts, the seller’s delivery obligation is extended to the port or place of destination (see Incoterms 2010, s 4A of the DAT, DAP, and DDP terms). These contracts are therefore often characterised as ‘arrival contracts’.

107
In this case, the buyer may, however, attempt to argue that because the sanction prohibits the shipment of the goods to the target state, the contract’s purpose is frustrated.

108
Under the term EXW (‘Ex Works … named place’), the seller fulfils its delivery obligation by making the goods available to the buyer at the named place of delivery in the seller’s own country (Incoterms 2010, s A4 of the EXW term).

109
Brunner (n 49) 134.

110
ibid.

111
See UNSC Res 687 (1991) against Iraq, para 29 (implemented by Council Regulation (EEC) 3541/92 of 7 December 1992) and other Security Council resolutions referred to in n 11 above.

112
See Air France v Libyan Airlines, Cour d’appel du Québec, 31 March 2003, (2003) Rev arb 1365, 1371, n 25, (2003) ASA Bulletin 630, 636; unpublished ICC Award in Case 7698 of 24 May 2006, quoted in Marchand (n 9) 118, n 102. See also Racine (n 11) 99–100, nn 13–14; Alain Prujiner, ‘Note—Cour d’appel du Québec, 31 mars 2003: Canada: Le refus des juges québécois d’intervenir dans un arbitrage international avant la sentence finale’ (2003) Rev arb 1385, 1389; Philippe Pinsolle, ‘Note following CA Quebec, 31 March 2003, Air France v Libyan Arab Airlines’ (2003) ASA Bulletin 649 and following.

113
See, for example, Article 38 of Council Regulation (EU) 267/2012 of 23 March 2012 concerning restrictive measures against Iran and repealing Regulation (EU) 961/2010, and Article 11 of Council Regulation (EU) 833/2014 of 31 July 2014 concerning restrictive measures in view of Russia’s actions destabilising the situation in Ukraine, according to which ‘[n]o claims in connection with any contract or transaction the performance of which has been affected, directly or indirectly, in whole or in part, by the measures imposed under this Regulation, including claims for indemnity or any other claim of this type, such as a claim for compensation or a claim under a guarantee, notably a claim for extension or payment of a bond, guarantee or indemnity, particularly a financial guarantee or financial indemnity, of whatever form, shall be satisfied …’ See also UNSC Res 418 (1977) imposing a mandatory arms embargo against South Africa, which ‘call[ed] upon all States to review … all existing contractual arrangements with and licenses granted to South Africa relating to the manufacture and maintenance of arms, ammunition of all types and military equipment and vehicles, with a view to terminating them’ (para 3).

114
This phrase appears in most resolutions of the United Nations Security Council imposing trade sanctions. See, for instance, UNSC Res 864 (1993), para 20, UNSC Res 1127 (1997), para 10, and UNSC Res 1173 (1998), para 17 (Angola); UNSC Res 232 (1966), para 2 and UNSC Res 253 (1968), para 7 (Rhodesia); UNSC Res 661 (1990), para 5, UNSC Res 670 (1990), para 3, and UNSC Res 687 (1991), para 25 (Iraq); UNSC Res 757 (1992), para 11 and UNSC Res 1160 (1998), para 10 (Yugoslavia); UNSC Res 748 (1992), para 7 and UNSC Res 883 (1993), para 12 (Libya); UNSC Res 841 (1993), para 9 and UNSC Res 917 (1994), para 12 (Haiti); UNSC Res 1132 (1997), para 11, UNSC Res 1306 (2000), para 9, UNSC Res 1298 (2000), para 9, UNSC Res 1267 (1999), para 7 and UNSC Res 918 (1994), para 15 (Sierra Leone); UNSC Res 1333 (2000), para 17 (Afghanistan); UNSC Res 1343 (2001), para 22 (Liberia); UNSC Res 1298 (2000), para 9 (Erythrea and Ethiopia).

115.
While the parties may not exclude by contract the application of an economic sanction, they may agree on the sanction’s impact on their rights and obligations, provided that their agreement neither is in conflict with, nor defeats the purpose of, the sanction.

116.
See, inter alia, Cissé (n 8) 702, n 40; Xavier Dieux, ‘Questions relatives aux effets de la contrainte étatique sur les contrats économiques internationaux—Un point de vue belge’ (1987) Revue belge de droit international 184, 201; Ferjani and Huet (n 94) 758, n 28; Saber Salama, ‘Le sort des contrats conclus avec des opérateurs irakiens à la suite de la levée de l’embargo’ (2003) Revue de droit des affaires internationales/International Business Law Journal 887, 888, n 2.

117.
ICC Award in Case 2478, 1974, (1975) Journal du Droit International 925, 926.

118.
Bulgarian Chamber of Commerce and Industry Award 56/1995, 24 April 1996, CISG-online 435. Exemption was, however, denied on the ground that the prohibition was already in force at the time of the conclusion of the contract and was therefore foreseeable.

119.
Hungarian Chamber of Commerce and Industry Award, 10 December 1996, CISG-online 774.

120.
Final Award in Case 1491, 20 July 1992, (1993) Yearbook of Commercial Arbitration 80, 87, n 22. The contract, under which the subcontractor had agreed to supply to the main contractor parts of a plant to be built in Iraq, was considered to fall within the purview of the EU and Italian sanctions against Iraq.

121.
See McDonnell Douglas Corp v Islamic Republic of Iran, 591 F Supp 293 (ED Mo 1984), in which a military aircraft builder was excused from performance on the ground that a US federal government order prohibited the transfer of all Iranian property back to Iran.

122.
See Eastern Air Lines, Inc v McDonnell Douglas Corp, 532 F2d 957 (5th Cir 1976), in which the US Government’s informal military priorities policy was found to excuse the delayed performance of an aircraft seller.

123.
See Harriscom Svenska, AB v Harris Corp, 3 F3d 576 (2nd Cir 1993), in which a seller was excused on the ground that uncontradicted evidence showed that the government would not have authorised the seller to continue to sell products to Iran, and that the government had the power to compel compliance.

124.
Translation available at <http://www.legifrance.gouv.fr/Traductions/en-English/Legifrance-translations>. The original text reads: ‘Il n’y a lieu à aucun dommages et intérêts lorsque, par suite d’une force majeure ou d’un cas fortuit, le débiteur a été empêché de donner ou de faire ce à quoi il était obligé, ou a fait ce qui lui était interdit’.

125
‘Secondary sanctions’ are directed against persons and entities located outside the sanctioning and the target states but which have ties with the target state. ‘Tertiary sanctions’ are directed against persons and entities located outside the sanctioning and the target states and which have ties with persons or entities, also located outside the target state, which themselves have ties with the latter state. The first serious case of secondary sanctions was associated with the Arab-Israeli conflict, during which the Arab League imposed secondary sanctions on foreign firms which maintained commercial ties with Israel (see Mahmood Bagheri, International Contracts and National Economic Regulation—Dispute Resolution through International Commercial Arbitration (Kluwer Law International 2000) 85). The ‘boycott of Israel’ organized by the Arab League required foreign firms dealing with Arab countries to refrain from using a subcontractor, supplier, bank, shipper or insurer that had been blacklisted as a result of commerce with Israel, and to terminate existing contracts with any such subcontractor, supplier, bank, shipper or insurer. As part of its sanctions programmes against Cuba, Iran, and Libya, the United States threatened to impose penalties on foreign firms which would not refrain from doing business with these countries (see the Helms-Burton Act signed by President Clinton on 12 February 1996 following the downing of two private US planes by the Cuban government (Pub L No 104-114, 110 Stat 785 (1996) codified at 22 USC paras 6021–6091), and the ILSA signed by President Clinton on 5 August 1996 to ‘help deter Iran and Libya from supporting international terrorism or acquiring weapons of mass destruction’ (Pub L No 104–172, 110 Stat 1541 (1996)); the ILSA was replaced by the Iran Sanctions Act (ISA) (50 USC para 1701 note) in 2006 and reinforced by the Comprehensive Iran Sanctions, Accountability, and Divestment Act (CISADA Pub L 111–195) in 2010 as well as by the Iran Freedom and Counter Proliferation Act (IFCA 22 USC Ch 95) in 2013).

126
Indeed, these sanctions do not prohibit the performance of transactions with the target, but rather threaten with penalties and/or denial of privileges individuals and entities that would fail to comply with these sanctions’ terms.

127.
See Bruno Leurent, ‘Les implications des législations de sanction et de blocage sur les relations juridiques privées internationales’ in Gherari and Szurek (n 2) 277, 283. From a prescriptive jurisdiction standpoint, secondary and tertiary sanctions differ from extraterritorial sanctions (defined above), under which the sanctioning state prohibits individuals and entities that are purportedly under its prescriptive jurisdiction from carrying out business with certain targets. This being said, one must acknowledge that secondary and tertiary sanctions are used as a tool to coerce foreign persons and entities into severing their commercial and/or financial ties with the target state and thus into complying with the terms of a sanctions programme, just like persons and entities that are under the jurisdiction of the sanctioning state, which explains why secondary and tertiary sanctions are often discussed by authors in the context of extraterritorial sanctions.

128.
Azeredo da Silveira, Trade Sanctions and International Sales (n 10) 319, n 480.

129.
See Leurent (n 127) 283.

130.
See the Preamble to the UNIDROIT Principles.

131.
These conditions are mirrored in the first paragraph of the 2003 ICC Model Clause on Force Majeure, and often in standard contractual clauses. The first paragraph of the 2003 ICC Model Clause on Force Majeure reads as follows: ‘Unless otherwise agreed in the contract between the parties expressly or impliedly, where a party to a contract fails to perform one or more of its contractual duties, the consequences set out in paragraphs 4 to 9 of this Clause will follow if and to the extent that that party proves: (a) that its failure to perform was caused by an impediment beyond its reasonable control; and (b) that it could not reasonably have been expected to have taken the occurrence of the impediment into account at the time of the conclusion of the contract; and (c) that it could not reasonably have avoided or overcome the effects of the impediment’.

132.
On the suspension of the obligation to perform in kind under Article 79 CISG, see Azeredo da Silveira, Trade Sanctions and International Sales (n 10) § 8.02.

133.
See the illustrative lists of impediments typically beyond the control of the parties, laid down in Brunner (n 49) 206–207; Dionysos P Flambouras, ‘The Doctrines of Impossibility of Performance and Clausula Rebus Sic Stantibus in the 1980 Convention on Contracts for the International Sale of Goods and the Principles of European Contract Law: A Comparative Analysis’ (2001) Pace International Law Review 261, 267 available at <http://www.cisg.law.pace.edu/cisg/biblio/flambouras1.html>; Pascal Pichonnaz, Impossibilité et exorbitance—Etude analytique des obstacles à l’exécution des obligations en droit suisse (art. 119 CO et 79 CVIM) (Press Universitaire de Fribourg 1997) 392, n 1693.

134.
See, inter alia, Brunner (n 49) 207 and 264; Flambouras (n 133) 267; Pichonnaz (n 133) 392, n 1693. An economic sanction may be considered an impediment within the obligor’s control if the latter is a governmental or administrative entity or a state instrumentality (company owned or run by the sanctioning state). On this question, see Marchand (n 9) 292–298, nn 349–355. See also Cissé (n 8) 704, n 43; Dieux (n 116) 203 and following; Landy-Osman (n 30) 621–622, nn 63–65 and references cited therein; Ingeborg Schwenzer, in Ingeborg Schwenzer (ed), Schlechtriem & Schwenzer: Commentary on the UN Convention on the International Sale of Goods (CISG) (3rd edn, OUP 2010) 1071, n 17 ad Article 79 and references cited therein.

135.
National Oil Company v Libyan Sun Oil Company, Case 4462, Final Award on Force Majeure, 31 May 1985, (1991) Yearbook of Commercial Arbitration 54, 61, n 18.

136.
Macromex Srl v Globex International Inc, American Arbitration Association Interim Award of 23 October 2007, CISG-online 1645.

137.
See Brunner (n 49) 171; Yesim M Atamer, in Stefan Kröll, Loukas A Mistelis and Maria del Pilar Perales Viscasillas (eds), UN Convention on Contracts for the International Sale of Goods (CISG) (CH Beck Hart Nomos 2011) 1063, n 22 ad Article 79; Schwenzer (n 134) 1079, n 37 ad Article 79; Ingeborg Schwenzer, Pascal Hachem and Christopher Kee, Global Sales and Contract Law (OUP 2012) 661, n 45.51. The failure of a supplier is always within the range of foreseeable occurrences, and if the seller can reasonably be expected to overcome the supplier’s failure to deliver the goods, the latter’s non-performance must be considered to be within the seller’s sphere of risks and responsibilities.

138
The parties’ agreement determines the goods’ ‘degree of genericity’.

139.
Nor can a seller claim exemption if its supplier’s default resulted from the seller’s failure to apply for the necessary import or export authorisations.

140.
See Brunner (n 49) 322; Schwenzer (n 134) 1074, n 27 ad Article 79.

141.
The ability to perform financial obligations is a prerequisite to all sales contracts and therefore falls within the buyer’s sphere of risk and responsibility. See Brunner (n 49) 167–170; Joseph Lookofsky, Understanding the CISG—A Compact Guide to the 1980 United Nations Convention on Contracts for the International Sale of Goods (3rd edn, Wolters Kluwer 2008) 140, n 6.19 and 154, n 6.32; Ulrich Magnus, ‘Force Majeure and the CISG’ in Petar Šarčević and Paul Voken (eds), The International Sale of Goods Revisited (Kluwer Law International 2001) 1, 16; Joseph M Perillo, ‘Force Majeure and Hardship under the UNIDROIT Principles of International Commercial Contracts’ in Contratación internacional—Comentarios a los Principios sobre los Contratos Commerciales Internacionales del UNIDROIT (Universidad Nacional Autónoma de México/Universidad Panamericana 1998) 111, 121–122; Jan Kleinheisterkamp, in Stefan Vogenauer and Jan Kleinheisterkamp (eds), Commentary on the UNIDROIT Principles of International Commercial Contracts (PICC) (OUP 2009) 773, n 18 ad Article 7.1.7.

142.
See Fritz Enderlein and Dietrich Maskow, International Sales Law: United Nations Convention on Contracts for the International Sale of Goods (Oceana 1992) 327, n 7.3 ad Article 79; Peter Schlechtriem, Uniform Sales Law—The UN-Convention on Contracts for the International Sale of Goods (Manz 1986) 104.

143.
‘For example, if a specific type of oil was only produced in Iraq and was not obtainable due to the international embargo, a seller would not bear the risk of procurement’ (Flambouras (n 133) 268, footnote 20).

144.
See Brunner (n 49) 432–433; Schwenzer, Hachem and Kee (n 137) 661, n 45.51.

145.
In the case of an asset freeze, however, it may be difficult for the buyer to establish that the impediment was reasonably unforeseeable, considering that a freeze of assets is a measure often imposed directly in reaction to the actions and conduct of the individual or entity targeted by the measure. Whether a buyer will be exempted from liability for failure to make a payment following an asset freeze will therefore depend on the circumstances surrounding the imposition of the measure, considering that ‘an act of public authority making performance impossible is not beyond the obligor’s control if its issuance was caused by the obligor’s conduct’ (Brunner (n 49) 168).

146.
In an arbitral award regarding a dispute opposing a US seller of chicken leg quarters to a Romanian buyer, the sole arbitrator held that ‘[t]he Romanian government’s decision to stop all chicken imports on virtually no notice to the industry … would not have been reasonably contemplated as a risk assigned to the Seller at the conclusion of the contract, as no prior ban experienced by either party was taken as precipitously’ (Macromex Srl v Globex International Inc, American Arbitration Association Interim Award of 23 October 2007, CISG-online 1645). Regarding the question of the foreseeability of sanctions by state instrumentalities, see Marchand (n 9) 282, n 331.

147
In this respect, it is interesting to note that in a 1985 decision, the Swiss Federal Tribunal refused to discharge a Swiss company (T. AG) under Article 119 SCO following this company’s failure to build and deliver a nuclear installation (‘Mini 8067’) to Pakistan. The Federal Council had prohibited the export of another installation (‘Makro 8062’), not the export of Mini 8067, and it was therefore not established that performance of the contract regarding Mini 8067 had become impossible. Furthermore, the Federal Tribunal held that even if the export of Mini 8067 had been prohibited, discharge would have been denied given that export prohibitions in the nuclear sector are foreseeable. The Tribunal explained: ‘Le débiteur répond de l’impossibilité juridique si, lorsqu’il a promis la prestation, il savait − ou devait savoir en faisant preuve de la diligence nécessaire − que les circonstances pourraient l’empêcher de s’exécuter. … L’art. 8 al. 2 [Loi fédérale sur l’utilisation pacifique de l’énergie atomique] dispose ce qui suit: Le Conseil fédéral et les organes désignés par lui sont autorisés, dans l’exercice de leur surveillance, à ordonner en tout temps les mesures qui s’imposent pour assurer la protection des personnes, des biens d’autrui et de droits importants, pour sauvegarder la sûreté extérieure de la Suisse et garantir le respect de ses engagements internationaux; ils sont également compétents pour veiller à l’exécution de ces mesures. … [P]our l’entrepreneur, il était prévisible que de telles interventions étaient possibles. La disposition précitée porte expressément que les autorités peuvent ordonner “en tout temps” les mesures qui s’imposent. Un contractant engagé dans la technologie nucléaire doit toujours s’attendre à d’éventuelles mesures destinées à permettre au Conseil fédéral de faire face aux développements parfois imprévus de la politique internationale en matière d’énergie. T. AG est incontestablement spécialisée dans le secteur de la technique nucléaire. Elle était au courant de la législation fédérale en la matière et des mesures d’application que les autorités fédérales pourraient prendre. Elle pouvait en tenir compte en négociant le contrat et stipuler des réserves ad hoc pour le cas où la livraison n’aurait pas lieu. En l’espèce, elle n’a rien fait de tout cela; elle répond donc de l’inexécution consécutive à une interdiction d’exporter’ (Bank K und T AG v M Co., 3 September 1985, Swiss Federal Tribunal, 111 II 352, c 2a, JdT 1986 I 73, 74–75).

148
Some may even contend that in cases in which a UN Security Council mandatory resolution for the imposition of sanctions is adopted before the conclusion of the contract, the impediment already exists at that time. Considering that such resolutions are directed to states and do not create rights or obligations for private operators, this view is not compelling: private operators face an impediment from the moment the said resolution has been transposed into domestic or Community legislation. In any event, in neither case should the defaulting party be granted exemption, given that in both cases the impediment is reasonably foreseeable at the time of the conclusion of the contract.

149.
See Matray (n 49) 94, who refers to ICC Award no 1782, 1973 (1975) Journal du Droit International 923 and following. The dispute pertained to a contract between a German company and a Yugoslavian company, under which the former had agreed to deliver trucks and ensure their maintenance on three construction sites located in an Arab country. The German company failed to carry out the maintenance part of the deal and invoked force majeure, alleging that its representatives, of Israeli origin, could not obtain the necessary visas to enter the said country. The arbitrators ruled that this did not make performance impossible as the German company could have made other arrangements so as to carry out its obligation. See also National Oil Company v Libyan Sun Oil Company (n 135) 54 and following. In this award (discussed above and below), one of the issues examined by the tribunal was whether the US government’s 1981 order declaring that US passports were no longer valid for travel to Libya constituted, under the force majeure excuse, a ground for the suspension of Sun Oil’s performance under an Exploration and Production Sharing Agreement (EPSA) entered into with NOC. The tribunal interpreted the contractual clause on force majeure (Article 22 EPSA) in light of Article 360 of the Libyan Civil Code (the applicable law) to conclude that ‘under the meaning of Art. 22, non-performance by a party or delay in performing contractual obligations is excused when an unforeseen circumstance beyond the control of the parties occurs, which circumstance constitutes an obstacle such that an obligor, normally diligent, having the same obligations and placed in the same situation, could not have overcome it’ (National Oil Company v Libyan Sun Oil Company 60–61, n 16). The tribunal held that the above-mentioned 1981 US Government order did not constitute one such circumstance, given inter alia the following: it could not be inferred from the EPSA that the only commonly envisaged mode of performing the EPSA by Sun Oil was one involving the use of Sun Oil personnel with US passports (National Oil Company v Libyan Sun Oil Company 63, n 28), and Sun Oil had failed to provide evidence that it was impossible for it to hire non-US personnel (National Oil Company v Libyan Sun Oil Company 63, n 27).

150.
See ICC Award 5864, 1989 (1997) Journal du Droit International 1073 and following. Under the disputed contract, a US company was acting as a consultant for a Libyan company. In 1986, the US President prohibited US nationals from carrying out activities in Libya. The US company was, however, authorised to pursue its activities provided that they be completed within a few months. The tribunal granted the US company exemption on grounds of force majeure, holding that beyond the allocated time-frame, the US company could not have been expected to overcome the prohibition by hiring another company or by delegating its work to a foreign daughter company, as this would have contravened the US prohibition and the terms of the authorisation.

151.
See Brunner (n 49) 322; Pichonnaz (n 133) 402, n 1742; Ingeborg Schwenzer and Christiana Fountoulakis, International Sales Law (Routledge-Cavendish 2007) 567.

152.
If performance was due before the prohibition became effective, the defaulting party cannot be granted exemption given that, in this case, it simply faced no impediment to performance.

153.
In Macromex Srl v Globex International Inc (discussed above), the arbitrator found that by shipping the goods to an alternative port proposed by the buyer, the seller could reasonably have avoided a ban imposed by the Romanian government on all chicken imports not certified as of 7 June 2006. Thus, even though the ban imposed by the Romanian government was considered an impediment beyond the seller’s control and one that the latter could not reasonably be expected to have foreseen at the time of the conclusion of the contract, the unavoidability condition was not satisfied and the seller was denied exemption under Article 79 CISG (American Arbitration Association Interim Award of 23 October 2007, CISG-online 1645; this interim award was fully integrated in a Final Award dated 12 December 2007 (CISG-online 1647), confirmed by the US Federal District Court of the Southern District of New York on 16 April 2008 (CISG-online 1653), and subsequently by the US Court of Appeals, 2nd Cir, on 26 May 2009 (CISG-online 1837)).

154
In past cases in which as a result of the closing of traffic routes a different itinerary had to be selected, the impediment was often considered reasonably surmountable despite the additional costs that this would entail. In cases decided under American and English law, carriers (in charter contracts) and sellers (in sales contracts) who were to bear cost and freight were therefore often denied discharge. One may refer to the cases related to the closing of the Suez Canal following hostilities in the Middle East in 1956 and 1967. No discharge was granted despite the fact that ocean carriers and sellers were compelled to take a longer route around the Cape of Good Hope and consequently bear costs that largely exceeded the agreed price. See, for instance, American Trading & Production Corp v Shell International Marine Ltd, 453 F2d 939 (2nd Cir 1972); Transatlantic Financing Corp v United States, 363 F2d 312 (DC Cir 1966).

155
As noted by Brunner, ‘[t]he fact that both parties contemplate a particular method of performance does not in and of itself mean that the method should be exclusive’ (Brunner (n 49) 325; emphasis omitted). Whether a method of performance expressly or implicitly agreed upon by the parties is exclusive (or of fundamental importance) must be determined based on both the terms of the contract and the circumstances.

156
See Brunner (n 49) 327.

157
Schwenzer (n 134) 1069, n 14 ad Article 79.

158
Whether a specification is non-essential or non-exclusive is to be determined ‘by way of contract interpretation in the light of all relevant circumstances’ (Brunner (n 49) 324).

159
Hans Stoll, in Peter Schlechtriem (ed), Commentary on the UN Convention on the International Sale of Goods (CISG) (2nd edn, Clarendon Press 1998) 612, n 24 ad Article 79. See Brunner (n 49) 323 and 367.

160
Van Houtte, ‘The Impact of Trade Prohibitions on Transnational Contracts’ (n 59) 146; Van Houtte, ‘Les effets des sanctions économiques sur les contrats transnationaux’ (n 22) 203–204, n 17; Matray (n 49) 95.

161
National Oil Company v Libyan Sun Oil Company (n 135).

162
ibid. 60–61, n 16.

163
See also the observations above on this case.

164
As stated by the sole arbitrator in Sapphire International Petroleums Ltd v National Iranian Oil Company (15 March 1963), ‘it is a fundamental principle of law, which is constantly being proclaimed by international courts, that contractual undertakings must be respected. The rule pacta sunt servanda is the basis of every contractual relationship’ (ILR 1967 136, 181).

165
The party responsible for obtaining, for instance, import or export authorisations may be explicitly designated in the contract (Brunner (n 49) 127). Alternatively, the party that is responsible for import or export clearance may be identified by reference to, or incorporation in, the contract of an ‘International Commercial Term’ or ‘Incoterm’ (‘Incoterms’ being commercial terms published by the ICC, which lay down duties of exporters and importers regarding the handling of the goods (transportation and delivery) and allocating to each of them certain costs and risks). The Incoterms 2010 (effective since 1 January 2011) typically provide that each party bears the risk of obtaining those public authorisations that are necessary for the performance of its obligations. Under the 2016 UNIDROIT Principles, the duty to apply for a public permission affecting the performance of the contract rests on the party that has its place of business in the state whose permission is required, provided that the other party does not also have a place of business in the state in question (Article 6.1.14(a)). In all other instances (that is, if neither party has or both parties have a place of business in that state), the party whose performance requires permission shall take the necessary measures (Article 6.1.14(b)). In other words, each party must procure those authorisations that are necessary for the performance of its contractual obligations. According to Brunner, ‘[t]hat principle may be considered to constitute an international trade usage in the form of a supplementary rule to be applied when neither the contract nor the law requiring the permission or the circumstances clearly specify which party is under an obligation to apply for the required public authorisation’ (Brunner (n 49) 128, footnote 662). For a discussion of situations in which the obligee must assist the obligor in the authorisation application process and situations in which the obligee is in charge of seeking the authorisation, see Azeredo da Silveira, Trade Sanctions and International Sales (n 10) 238-240, nn 378–380.

166
This is the case under Article 6.1.14 UNIDROIT Principles; see Brunner (n 49) 130; Perillo, ‘Force Majeure and Hardship under the UNIDROIT Principles of International Commercial Contracts’ (n 141) 126.

167
See Azeredo da Silveira, Trade Sanctions and International Sales (n 10) 230, n 364; Brunner (n 49) 140-141.

168
See Azeredo da Silveira, Trade Sanctions and International Sales (n 10) 230-231, n 364; Brunner (n 49) 141 and 165.

169
If the contract allocates the duty to apply for the necessary authorisations without specifying whether this duty is one of specific result or one of best efforts, ‘the standard of duty depends on the construction of the relevant term or terms of the contract’ (Brunner (n 49) 136). As noted by Brunner, ‘elements such as the (actual or constructive) knowledge of the party in charge of the necessity to obtain a public permit, its position in the industry, the knowledge of the other party or explicit or implicit representations to the other party that there would be no problem obtaining permits may be relevant in determining that the obligor assumed the risk of obtaining a particular permit’ (ibid. 290-291).

170
Brunner (n 49) 129 and 264. More generally, a party that guarantees its ability to perform notwithstanding the need to obtain an import or export authorisation, must be considered to have assumed the risk that the authorisation be denied. Also, reference to or incorporation of a 2010 Incoterm in the contract implies that the party responsible for the goods’ import or export clearance must obtain, at its own risk, the necessary authorisation.

171.
Brunner (n 49) 112.

172.
Brunner (n 49) 132.

173.
See the CIETAC Award, 7 August 1993, CISG-online 1060, ruling on a dispute that arose from a contract for the sale of guns and the buyer’s failure to pay the purchase price following a denial of US ‘import approval’ due to the design of the guns. The tribunal held that ‘the necessity of getting import approval could have been foreseen by [Buyer], because the law has been in effect for many years in the U.S.’ and that ‘[Buyer] shall be liable and take the risk for getting the import approval’.

174.
Azeredo da Silveira, Trade Sanctions and International Sales (n 10) 230, n 363.

175.
Brunner (n 49) 132-133, 165 and 264; Hans Stoll and Georg Gruber, in Peter Schlechtriem and Ingeborg Schwenzer (eds), Commentary on the UN Convention on the International Sale of Goods (CISG) (2nd edn, OUP 2005) 828, n 37 ad Article 79; Stoll (n 159) 611, n 21 ad Article 79. Contra: Atamer (n 137) 1085, n 73 ad Article 79, according to whom ‘if the duty is an absolute one, i.e. the attainment of permission is guaranteed, … the relevant party must also assume the risk of any rejection after such changes to the law’.

176.
Brunner (n 49) 133.

177.
If performance is authorised, the defaulting party may be granted exemption from liability for the delay caused by the authorisation procedure.

178.
See Brunner (n 49) 247 and 363; Vincent Heuzé, La vente internationale de marchandises—Droit uniforme (LGDJ 2000) 430, nn 475 and 476; Niklas Lindström, ‘Changed Circumstances and Hardship in the International Sale of Goods’ (2006) Nordic Journal of Commercial Law, n IV.2.2; Lookofsky (n 141) 143, n 6.19 and 155, n 6.32; Magnus (n 141) 21; Schwenzer (n 134) 1080, n 41 ad Article 79.

179.
UNSC Res 1298 (2000), para 16: sanctions were established for a 12-month period, at the end of which the Security Council decided not to extend the sanctions, which therefore expired.

180.
UNSC Res 1306 (2000), para 6: diamond sanctions were imposed for an initial period of 18 months.

181.
UNSC Res 1333 (2000), para 23: measures against the Taliban, decided in December 2000, were imposed for an initial period of 12 months.

182.
UNSC Res 1343 (2001), paras 9 and 10: arms sanctions were established for an initial period of 14 months, while diamond and travel sanctions were established for an initial period of 12 months. UNSC Res 1478 (2003), para 17: timber sanctions were established for an initial period of ten months. UNSC Res 1521 (2003), para 18: arms, travel, diamond and timber sanctions were established for an initial period of 12 months.

183.
UNSC Res 1493 (2003), para 20: arms sanctions were established for an initial period of 12 months.

184.
UNSC Res 1572 (2004), paras 7, 9 and 11: arms sanctions were established for an initial period of 13 months, while travel and financial sanctions were imposed for an initial period of 12 months.

185.
The UN Charter does not provide for an automatic expiration of sanctions after a given period of time or after the occurrence of a given event.

186.
See Alexander Kern, Economic Sanctions—Law and Public Policy (Palgrave Macmillan 2009); Geisinger, Bärtsch, Raneda and Ebere (n 9) 419–420; Grelon and Gudin (n 30) 655.

187.
To determine whether timely performance by one party is of the essence to the other, the terms of the contract must be considered as well as the nature and purpose of the contract, the branch of activity the latter party is involved in, and possible contractual commitments towards third parties.

188.
In this case, it is not commercially sound to compel the defaulting party to remain ready to resume performance at whatever time the sanction is lifted, since its contractual party has lost interest in that performance.

189
See Atamer (n 137) 1092, n 87 ad Article 79; Brunner (n 49) 246–247; Magnus (n 141) 21; Pichonnaz (n 133), 389, n 1680; Peter Schlechtriem and Petra Butler, UN Law on International Sales—The UN Convention on the International Sale of Goods (Springer 2009) 201, footnote 547 and 207–208, n 295; Peter Schlechtriem and Claude Witz, Convention de Vienne sur les contrats de vente internationale de marchandises (Dalloz 2008) 258, n 381; Grelon and Gudin (n 30) 655.

190
Hungarian Chamber of Commerce and Industry Award of 10 December 1996, CISG-online 774.

191
ibid. n 11.

192
ICC Award in Case 7575, 2002 (2010) Journal du Droit International 1378 and following.

193
In the words of the arbitrator: ‘Dès lors qu’il est constaté que des livraisons de marchandises ont bien eu lieu, on ne peut qu’en déduire que si un cas de force majeure s’est produit, il n’est intervenu qu’en cours d’exécution du contrat et ne pourrait donc affecter que les obligations contractuelles non encore exécutées. … Aujourd’hui, les sanctions internationales prise [sic] à l’encontre de la République socialiste fédérative de Yougoslavie ayant été levées, l’arbitre ne voit aucun élément permettant d’étayer l’existence d’une quelconque cause de force majeure relativement au lieu d’exécution du contrat’ (ibid. 1380).

194
See, for example, ICC Award 1512, 1971 (1976) Yearbook of Commercial Arbitration 128 and following; ICC Award no 6281, 26 August 1989 (1990) Yearbook of Commercial Arbitration 96 and following, (1991) Journal du Droit International 1054 and following, CISG-online 8.

195
See, for instance, ICC Award in Case 2291, 1975 (1976) Journal du Droit International 989 and following, in which the tribunal stated that ‘[i]t is a rule of the lex Mercatoria that the performances on the financial plane stay in equilibrium and that is why in almost every international contract “the price is determined according to the conditions which exist in the moment of the conclusion of the contract and it will vary according to the parameters, which reflect the variations of values of the different elements that compose the product or the performance”’ (ibid. 989). See also the 20 September 1985 decision of the Iran-US Claims Tribunal, which stated that the ‘concept of changed circumstances, also referred to as clausula rebus sic stantibus, … has in its basic form been incorporated into so many legal systems that it may be regarded as a general principle of law’ (Questech Inc v The Ministry of National Defence of the Islamic Republic of Iran, Iran-US CTR 1985 107, 122). See also, inter alia, the arbitral award of 5 May 1997 in Islamic Republic of Iran v Cubic Defense Systems, Inc (ICC Case 7365/FMS, ULR 1999 796 and following), in which the tribunal held that ‘[u]nder the laws of contract in all municipal legal systems exceptions to the basic notion of pacta sunt servanda have been developed on the ground that in particular circumstances fairness and justice require the making of a legal excuse for non-performance of contractual promises. … Moreover, from the covenant of good faith and fair dealing which is implied in each contract follows that in a case in which the circumstances to a contract undergo … fundamental changes in an unforeseeable way, a party is precluded from invoking the binding effect of the contract’ (ibid. 797–798). For scholarly writing on this question, see, inter alia, Brunner (n 49) 413; James Gordley, ‘Impossibility and Changed and Unforeseen Circumstances’ (2004) American Journal of Comparative Law 513, 525; Hans Van Houtte, ‘Changed Circumstances and Pacta Sunt Servanda’ in Emmanuel Gaillard (ed), Transnational Rules in International Commercial Arbitration (ICC Publication 1993) 105, 115 and following and references cited therein; Nagla Nassar, Sanctity of Contracts Revisited: A Study in the Theory and Practice of Long-Term International Commercial Transactions (Martinus Nijhoff 1995) 201; Perillo, ‘Force Majeure and Hardship under the UNIDROIT Principles of International Commercial Contracts’ (n 141) 119; Joseph M Perillo, ‘Hardship and its Impact on Contractual Obligations: A Comparative Analysis’ in Saggi, Conferenze e Seminari 20 (Centro di studi e ricerche di diritto comparato estraniero 1996) 1, 13.

196
See, for instance, Article 1198 of the Argentine Civil Code, Articles 478–480 of the 2002 Brazilian Civil Code, Article 868 of the Colombian Commercial Code, para 313 of the German Civil Code, Articles 1467–1469 of the 1942 [#FOOTNOTE_NR#]Italian Civil Code, Article 6:258 of the 1992 Dutch Civil Code, Articles 1440–1446 of the Peruvian Civil Code, Article 437 of the Portuguese Civil Code, and Article 451 of the 1994/1995 Civil Code of the Russian Federation.

197
In Austria, Spain and Switzerland, for instance, courts have endorsed the possibility of contract adaptation on grounds of changed circumstances.

198
Brunner (n 49) 404. See the references in Schwenzer, Hachem and Kee (n 137) 668, footnote 188.

199
See para 2-615 UCC and Section 261 Restatement (Second) of Contracts.

200
Official comment no 6 on para 2-615 UCC provides that ‘[i]n situations in which neither sense nor justice is served by either answer when the issue is posed in flat terms of “excuse” or “no excuse”, adjustment under the various provisions of this Article is necessary, especially the sections on good faith, on insecurity and assurance and on the reading of all provisions in the light of their purposes, and the general policy of this Act to use equitable principles in furtherance of commercial standards and good faith’.

201
See Section 265 Restatement (Second) of Contracts.

202
See the Law Reform (Frustrated Contracts) Act 1943.

203
According to Article 6.2.2 UNIDROIT Principles, ‘[t]here is hardship where the occurrence of events fundamentally alters the equilibrium of the contract either because the cost of a party’s performance has increased or because the value of the performance a party receives has diminished, and (a) the events occur or become known to the disadvantaged party after the conclusion of the contract; (b) the events could not reasonably have been taken into account by the disadvantaged party at the time of the conclusion of the contract; (c) the events are beyond the control of the disadvantaged party; and (d) the risk of the events was not assumed by the disadvantaged party’.

204
Tom Southerington, ‘Impossibility of Performance and Other Excuses in International Trade’ in Tuula Ämmälä (ed), Publication of the Faculty of Law of the University of Turku (Private law publication series B:55 2001), n 2.4 available at <https://www.cisg.law.pace.edu/cisg/biblio/southerington.html>.

205
See Anja Carlsen, ‘Can the Hardship Provisions in the UNIDROIT Principles Be Applied When the CISG Is the Governing Law?’ (1998) n III available at <https://www.cisg.law.pace.edu/cisg/biblio/carlsen.html>.

206
On the question of lasting consent as the foundation of contractual liability, see Perillo, ‘Force Majeure and Hardship under the UNIDROIT Principles of International Commercial Contracts’ (n 141) 118-119; Perillo, ‘Hardship and its Impact on Contractual Obligations’ (n 195) 13.

207
Article 6.2.3(1) and (2) UNIDROIT Principles reads as follows: In case of hardship the disadvantaged party is entitled to request renegotiations. The request shall be made without undue delay and shall indicate the grounds on which it is based. The request for renegotiation does not in itself entitle the disadvantaged party to withhold performance.

208
Article 6.2.1 UNIDROIT Principles stipulates that ‘[w]here the performance of a contract becomes more onerous for one of the parties, that party is nevertheless bound to perform its obligations subject to the following provisions on hardship’. This provision ‘acts as a reminder that the general duty is to perform and that relief is very much the exceptional case’ (Ewan McKendrick in Vogenauer and Kleinheisterkamp (n 141) 716, n 4 ad Article 6.2.1; emphasis omitted).

209
Article 6.2.3(3) and (4) UNIDROIT Principles reads as follows: Upon failure to reach agreement within a reasonable time either party may resort to the court. If the court finds hardship it may, if reasonable, (a) terminate the contract at a date and on terms to be fixed, or (b) adapt the contract with a view to restoring its equilibrium.

210
Islamic Republic of Iran v Cubic Defense Systems, Inc., ICC Award of 5 May 1997 in Case 7365/FMS, ULR 1999 796 and following (confirmed on 7 July 1998 by the United States District Court, SD California, 29 F. Supp. 2d 1168).

211
ibid. 797 (summary of the award).

212
The contracts contained a choice-of-law clause designating the law of Iran, but the parties eventually agreed to the complementary and supplementary application of general principles of international law. The tribunal held that ‘[a]s to the contents of such rules, the Tribunal shall be guided by the Principles of International Commercial Contracts, published in 1994 by the UNIDROIT Institute, Rome’ (ibid. 797).

213
ibid. 797-798.

214
Azeredo da Silveira, Trade Sanctions and International Sales (n 10) § 11.01[B][1].

215
For a thorough discussion of the remedies available under the CISG in situations of hardship, see Azeredo da Silveira, Trade Sanctions and International Sales (n 10) § 11.01[B][2].

216
In Kessedjian’s opinion, if performing the contract, once an impediment is lifted, would entail ‘adverse consequences’ for one of the parties, one should ‘use Article 7 and the good faith requirement to say that, in such a case, parties are under an obligation to adapt the contract … since it is difficult to imagine that the force majeure event[,] however … temporary it may be, would have no impact on the initial equilibrium of the contract’ (Catherine Kessedjian, ‘Competing Approaches to Force Majeure and Hardship’ (2005) International Review of Law and Economics 415, 418). Also, without dealing specifically with the CISG, Blessing suggests that if a certain time has elapsed, ‘[o]nce the intervening trade sanction is lifted, … the parameters of the resurrecting contract might have to be renegotiated in good faith, since the resuming of the performance might have become substantially more onerous to the aggrieved party (typically for the party that will have to resume its works). Thus, an Arbitral Tribunal might have to consider carefully the impact of such sanctions … It might have to declare the contract terminated or extinct due to its suspension over a longer period of time, and determine the consequences thereof’ (Blessing, ‘Impact of the Extraterritorial Application of Mandatory Rules of Law on International Contracts’ (n 27) 67; see also Marc Blessing, ‘Mandatory Rules of Law versus Party Autonomy in International Arbitration’ (1997) 14(4) Journal of International Arbitration 23, 34–35).

217
See Peter Schlechtriem, in H Flechtner (ed), ‘Transcript of a Workshop on the Sales Convention: Leading CISG Scholars Discuss Contract Formation, Validity, Excuse for Hardship, Avoidance, Nachfrist, Contract Interpretation, Parol Evidence, Analogical Application, and Much More’ (1999) 18 Journal of Law and Commerce 191, 237. Article 50 CISG reads: ‘If the goods do not conform with the contract and whether or not the price has already been paid, the buyer may reduce the price in the same proportion as the value that the goods actually delivered had at the time of the delivery bears to the value that conforming goods would have had at that time. However, if the seller remedies any failure to perform his obligations in accordance with article 37 or article 48 or if the buyer refuses to accept performance by the seller in accordance with those articles, the buyer may not reduce the price’.

218
Azeredo da Silveira, ‘Economic Sanctions and Contractual Disputes Between Private Operators’ (n 16) 374.

219
Azeredo da Silveira, Trade Sanctions and International Sales (n 10) 299–300, n 456.

220
In a decision rendered in 1995, the Rechtbank van Koophandel of Hasselt, Belgium, held price fluctuations to be foreseeable events in international trade and to result in an economic loss included in the normal risks of commercial activities (Vital Berry Marketing v Dira-Frost, Rechtbank van Koophandel, Hasselt, Belgium, 2 May 1995, CISG-online 371). In a case decided in 1997, the Oberlandesgericht of Hamburg denied the seller’s exemption claim following its supplier’s failure to deliver the goods and a tripling of the market price for the goods. The Court held that ‘[t]he Seller is also not exempted by the fact that acquiring the goods elsewhere would have led to considerable financial loss because it would have had to pay a higher price. The Seller generally bears the risk of considerable extra expenses in connection with acquiring the goods elsewhere, even the loss of transactions, as it has accepted the risk of acquiring the goods and the risk that they cannot be acquired at a certain price’. The Court added: ‘Despite of the triplication of market price that had to be paid … an excess of the absolute limit of sacrifice is not given … For parties doing business in a sector that has a very speculative aspect the limits of reasonability are very high’ (Oberlandesgericht, Hamburg, Germany, 28 February 1997, CISG-online 261). A similar opinion was handed down by the Cour d’appel of Colmar, France, on 12 June 2001, in which the Court held that in a long-term contract like the one between the buyer and the seller, ‘price fluctuations, even sudden and significant, are not exceptional and, a fortiori, are not unforeseeable. Besides, when becoming involved in such a long and restrictive supply agreement … the [Buyer], an experienced professional acting in the international market, should have arranged either guarantees of performance of the contractual obligations entered into in respect of the [Seller], or means of revision of these obligations. Otherwise, it should bear the risk of non-performance’ (Société Romay AG v SARL Behr France, Cour d’appel, Colmar, France, 12 June 2001, CISG-online 694; confirmed by the Cour de cassation on 30 June 2004, CISG-online 870). See also Bulgarian Chamber of Commerce and Industry Award of 12 February 1998 in Case 11/1996, CISG-online 436; and ICC Award in Case 6281, 26 August 1989 (1990) Yearbook of Commercial Arbitration 96 and following, (1991) Journal du Droit International 1054 and following, CISG-online 8.

221
Similar clauses were incorporated in other Security Council resolutions. See n 11 above.

222
The requirement laid down in the quoted portion of Security Council Resolution 661 (1990) was intended to permanently protect the contractual counterparts of Iraqi parties from being held liable after having complied with the UN sanctions programme, and to prevent the performance of transactions affected by the sanctions, considering the seriousness of Iraq’s behaviour.

223
See Blessing, ‘Impact of the Extraterritorial Application of Mandatory Rules of Law on International Contracts’ (n 27) 67, footnote 75; Van Houtte, ‘Les effets des sanctions économiques sur les contrats transnationaux’ (n 22) 207–208, n 21 and references cited therein; Landy-Osman (n 30) 630–631, nn 83–85. An often-cited decision is the 1990 decision SA Lesieur International v Société Norasia Line, LPA (Tribunal de commerce, Nanterre, 31 October 1990, Les Petites Affiches, 28 December 1990, n 156-21). The dispute pertained to a sales contract between SA Lesieur International and a Kuwaiti buyer, the performance of which was affected by the sanctions against Iraq. The Tribunal de commerce of Nanterre ratified the parties’ agreement regarding the contract’s termination and authorised SA Lesieur International to regain possession of the goods. It is noteworthy that in this case, the buyer and the seller had agreed on the termination of the contract.

224
See Azeredo da Silveira, Trade Sanctions and International Sales (n 10) § 7.01[A][2] and § 10.02.

225
See, however, van Houtte, ‘The Impact of Trade Prohibitions on Transnational Contracts’ (n 59) 147, who argues that ‘[t]he substantial threat of punishment by a foreign government … can constitute “force majeure”’; van Houtte, ‘Les effets des sanctions économiques sur les contrats transnationaux’ (n 22) 205, n 18; Matray (n 49) 95, according to whom ‘the risk of a foreign accusation can render the performance of an agreement dangerous to the extent that one cannot reasonably require its performance. The serious threat of a foreign sanction can therefore constitute a case of force majeure’; Pichonnaz (n 133) 404, n 1753, for whom ‘[o]n peut … imaginer que les sanctions en cas de violation d’un embargo rendent généralement l’obstacle insurmontable’.

226
According to proponents of the legal norm approach, if the risk of penalty could lead to an exemption of the defaulting party despite the sanction itself being disregarded, mechanisms of private international law discussed earlier would lose their raison d’être. Irrespective of any potential conflict with principles of public policy or of the stringent conditions that ought to be satisfied for an overriding mandatory rule to be taken into account, economic sanctions would be given effect on the sole ground that the sanctioning state may impose penalties. Thus, the efficiency of economic sanctions would be directly and solely dependent on the severity of penalties that the sanctioning state would threaten to impose in case of non-compliance. It would be unnecessary to examine whether the prohibition itself is to be taken into account and constitutes a legal impediment. This would arguably encroach on the principle of party autonomy, under which the parties’ freedom to agree on contractual terms and to select the applicable law should in principle only be limited by overriding mandatory rules. See Azeredo da Silveira, Trade Sanctions and International Sales (n 10) 209, n 337.

227
In addition to forfeiture proceedings against property involved in a violation, penalties for breach of a sanction typically include fines.

228
It is noteworthy that although a state cannot enforce its laws through material means of coercion on foreign territory, it may threaten to impose penalties on all those—whether located within the enacting state or within the territorial jurisdiction of another state—that would fail to comply with these laws (Juillard (n 43) p. 26).

229
In some of its resolutions, the Security Council itself has called upon states to enact domestic legislation providing for the imposition of penalties and to bring proceedings against those that would act in violation of domestic measures implementing these resolutions. See, for instance, UNSC Res. 333 (1973), para 4; UNSC Res. 820 (1993), para 19; UNSC Res. 841 (1993), para 12; UNSC Res. 864 (1993), para 21; UNSC Res. 1267 (1999), para 8; UNSC Res. 1295 (2000), paras 16 and 27; and UNSC Res. 1306 (2000), para 17. If penalties are imposed by one state against individuals located or entities incorporated in another state, the latter state’s assistance will be necessary for the enforcement of these penalties.

230
Joern Rimke, ‘Force Majeure and Hardship: Application in International Trade Practice with Specific Regard to the CISG and the UNIDROIT Principles of International Commercial Contracts’ (1999-2000) Pace Review of the Convention on Contracts for the International Sale of Goods 197, 197 available at <https://www.cisg.law.pace.edu/cisg/biblio/rimke.html>. The principle is spelt out, for instance, in Article 1.3 UNIDROIT Principles, which provides that ‘[a] contract validly entered into is binding upon the parties. It can only be modified or terminated in accordance with its terms or by agreement or as otherwise provided in these Principles’.

231
Ingeborg Schwenzer, ‘Force Majeure and Hardship in International Sales Contracts’ (2008) Victoria University of Wellington Law Review 709, 709.

232
Magnus (n 141) 1.

233
The situation may be compared to the one in which a party is compelled by the courts of one state to provide information that is confidential under the law of another state, and this law is not taken into account by the deciding court in the context of proceedings carried out in the former state. ‘[F]oreign secrecy laws often carry penal sanctions for disclosure of confidential information. Thus, an American discovery order requiring confidential information subject to the foreign law would create hardship against the party having knowledge of the information’ (Bernhard Grossfeld and Paul C. Rogers, ‘A Shared Value Approach to Jurisdictional Conflicts in International Economic Law’ (1983) International and Comparative Law Quarterly 931, 945).

234
Even though penalties could possibly be imposed only after the contract is performed, the contractual equilibrium must be considered disrupted from the moment the sanction is in force and the obligor is under threat of penalty. Arguably, the same cannot be said with respect to threats of penalties under secondary and tertiary sanctions, such as future denial of exports from the sanctioning state or loans from financial institutions of that state.

235
See McKendrick in Vogenauer and Kleinheisterkamp (n 141) 718, n 3 ad Article 6.2.2. See also van Houtte, ‘Changed Circumstances and Pacta Sunt Servanda’ (n 195) 117; ICC Award in Case n 9479 (1999), in which the arbitral tribunal asserted that ‘a change in the law [can] be the source of hardship. It may well be the case, when a new law makes the performance of the contractual obligations of a party more onerous or when the value it receives from the performance of the other party is severely reduced’ ((2001/2) ICC Bull. 67, 70).

236
McKendrick in Vogenauer and Kleinheisterkamp (n 141) 721, n 14 ad Article 6.2.2.

237
Perillo, ‘Force Majeure and Hardship under the UNIDROIT Principles of International Commercial Contracts’ (n 141) 128-129. See also Jennifer M. Bund, ‘Force Majeure Clauses: Drafting Advice for the CISG Practitioner’ (1997-1998) Journal of Law and Commerce 381, 391. In particular, risks that are commonly associated with a given type of contract cannot give rise to hardship.

238
See Brunner (n 49) 214; Schwenzer, ‘Force Majeure and Hardship in International Sales Contracts’ (n 231) 714-715.

239
Based on a comparative law analysis, Brunner has suggested that in ‘standard situations’ (that is, situations where there is no specific risk assumption by the parties and the existence of the obligor would not be seriously and effectively endangered if it were to perform the contract under its original terms), the contractual equilibrium must be altered by at least 100 percent to be deemed fundamentally altered (Brunner (n 49) 428-435). Others concur when discussing specifically the requirements of Article 79 CISG (Enderlein and Maskow (n 142) 325, n 6.3 ad Article 79; Klaus Peter Berger, Private Dispute Resolution in International Business—Negotiation, Mediation, Arbitration (Kluwer Law International 2006), Vol. II, 491, n 24-66). For one author, ‘[a] 150-200 per cent margin seems to be advisable’ (Schwenzer, ‘Force Majeure and Hardship in International Sales Contracts’ (n 231) 717) given that ‘[t]he suggested ‘100 per cent threshold’ seems to be based upon considerations of domestic markets[,] [whereas] … [i]n an international market, one may expect the potentially aggrieved party to insist on incorporating terms for a possible adjustment in the contract or otherwise assuming the risk for higher fluctuations than usually occur on domestic markets’ (ibid. 716-717; see also Schwenzer (n 134) 1076, n 30 ad Article 79).

240
See Brunner (n 49) 426 and 427; Pichonnaz (n 133) 408-409, n 1778; Schwenzer (n 134) 1076, n 30 ad Article 79; Schwenzer, ‘Force Majeure and Hardship in International Sales Contracts’ (n 231) 716; Stoll (n 159) 618, n 40 ad Article 79.

241
Fines for breach of a sanction are typically a fixed amount or a multiple of the amount involved in the transaction.

242
An increase in the costs of performance that would otherwise not be considered beyond the limit of sacrifice may be considered reasonably insurmountable if performance would cause the obligor’s ruin. As suggested by Schwenzer, ‘in cases where the financial ruin of the obligor is imminent, the threshold for allowing hardship may be lowered’ (Schwenzer, ‘Force Majeure and Hardship in International Sales Contracts’ (n 231) 716). See also Stoll (n 159) 618, n 40, footnote 135 ad Article 79.

243
Azeredo da Silveira, Trade Sanctions and International Sales (n 10) 347-348, n 525.

244
As noted by Brunner, ‘[t]he “reasonable” time period during which renegotiations can be held should [indeed] be limited in order to avoid dilatory tactics by a party’ (Brunner (n 49) 489). This time period will depend on ‘the particular circumstances of the case, including the nature of the dispute, any risk of prejudice for either party caused by the delay in setting up and attending the renegotiation process, and the reasonable prospects of success’ (ibid. 490).

245
Azeredo da Silveira, Trade Sanctions and International Sales (n 10) 348, n 526.

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ICC Dossiers

Chapter 7

Chapter 7: Economic Sanctions, Force Majeure and Hardship¹

INTRODUCTION

I. CHARACTERISATION OF ECONOMIC SANCTIONS FROM A PRIVATE LAW PERSPECTIVE

I.A. The Traditional Datum Approach

I.B. The Legal Norm Approach

II. APPLICATION OF ECONOMIC SANCTIONS BY DOMESTIC COURTS AND ARBITRAL TRIBUNALS

II.A. Unilateral and Autonomous Community Sanctions

II.B. Multilateral Sanctions—Sanctions Adopted under Chapter VII of the UN Charter

III. EFFECTS OF ECONOMIC SANCTIONS ON THE RIGHTS AND OBLIGATIONS OF PRIVATE OPERATORS UNDER INTERNATIONAL LAW INSTRUMENTS

III.A. Economic Sanction as a Ground for Exemption from Liability for Non-Performance

III.A.1. Exemption from Liability for Non-performance While the Sanction Is in Force

III.A.2. Adaptation of the Contract in Situations of Hardship Once the Sanction Has Been Lifted

III.B. For Proponents of the Legal Norm Approach, the Risk of Penalty for Breach of a Sanction as Ground for an Adaptation of the Contract

CONCLUDING REMARKS

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ICC Dossiers

Chapter 7

Chapter 7: Economic Sanctions, Force Majeure and Hardship1

III.A.1. Exemption from Liability for Non-performance While the Sanction Is in Force

III.A.2. Adaptation of the Contract in Situations of Hardship Once the Sanction Has Been Lifted

Chapter 7: Economic Sanctions, Force Majeure and Hardship¹