SWEDEN: An Introduction to Dispute Resolution

The Impact of Sanctions on International Arbitration in Sweden

Sweden has traditionally been a venue of choice for the resolution of so-called East-West disputes through international arbitration. Complications from the Russian war in Ukraine continue to affect the business climate as well as legal proceedings in Sweden. The sanctions introduced by the European Union against a considerable number of Russian entities and individuals affect both arbitral proceedings and court cases in multiple ways. Sanctioned entities or parties with connections to Russia struggle to obtain counsel in Sweden, causing delays and practical difficulties in case management. Initial uncertainties about the ability of arbitral institutions such as the Stockholm-based SCC Arbitration Institute to cater to sanctioned parties were resolved in July 2022 after lobbying the EU for a clarification. But issues remain, such as with payments under awards and judgments, which while exempt from the sanctions regime are often challenging because of a reluctance by banks to handle payments involving sanctioned parties and the need to procure authorisation by competent authorities for the release of frozen funds.

While sanctions were once viewed effectively as tools of economic warfare, such measures are today increasingly viewed as legal norms, more akin to countermeasures for breaches of international law. As a result, sanctions may be viewed as public law norms that may apply to an arbitral dispute as part of the governing law of the contract or the seat, or as overriding mandatory rules – ie, rules that can apply to the situation although the parties have not indicated that law as the applicable law to govern their relationship and resolve their dispute. This may impact the arbitrability of disputes and the recognition and enforcement of arbitral awards under the provisions of the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

Article V of the New York Convention 

Article V(2)(a) of the New York Convention allows courts and other competent authorities to refuse to recognise and enforce an arbitral award if the subject matter of the difference is not capable of settlement by arbitration under the law of that country. The same applies under the Swedish Arbitration Act. One may take the view that where the introduction of sanctions affects a contract, the contractual parties arguably no longer dispose freely of their rights and obligations under the contract, wherefore the dispute may not arbitrable.

Furthermore, Article V(2)(b) of the New York Convention permits courts in the enforcement jurisdiction to refuse to recognise and enforce awards that would be contrary to public policy. Public policy exceptions have been narrowly construed in Swedish and international practice, but the underlying political current obviously matters. Substantive public policy protects basic core values such as fundamental principles pertaining to justice or morality; rules serving the State’s essential political, social or economic interests; the duty of the State to respect obligations under international law; the forum State’s national interests; and its constitutional principles. Decisions as to the recognition and enforcement of awards affected by sanctions will therefore “depend on the specific features of the award, the impact of the enforcement and the performance required by the award on the sanctions regime in place, the question of whether the sanctions regime has been imposed by the UN, an individual State or a regional organization, the specific sanctions imposed, and of course the interpretation of the public policy exception”.

Public Policy Exemptions to Award Enforcement in Practice

For example, it comes as no surprise that the Ukrainian Supreme Court in 2020 refused enforcement of an award in favour of a sanctioned Russian party on public policy grounds. Ukraine had imposed sanctions against Russia due to Russia’s 2014 annexation of Crimea and the context of the case was sensitive: the award debtor was a Ukrainian strategical defence enterprise, the award creditor a sanctioned entity incorporated in Russia, the award was made in Russia and the contract upon which the award was based related to the sale of military items; all factors which reinforced the public policy argument. That said, the Ukrainian Supreme Court considered that the imposition of sanctions did not terminate the obligations of the debtor under the contract and the award: it just made them temporarily unavailable. Although the non-enforcement arguably interfered with the right to property, this restriction was deemed temporary, proportionate and legitimate.

A case currently pending before Swedish courts similarly concerns annulment of an arbitral award on grounds of public policy, based on the EU sanctions in effect against Russia before the invasion in February 2022. A Stockholm-seated arbitral tribunal had found a Belgian company in breach of a supply contract with a sanctioned buyer incorporated in Russia. The Belgian supplier had failed to deliver goods under the contract since the Belgian authorities refused to grant the necessary export licence. Under the award, the Russian buyer was entitled to repayment of advances it had paid under the contract, together with interest. The Swedish court has now stayed enforcement proceedings upon the Belgian company’s request, pending consideration of the annulment.

Concerns over enforceability may in some circumstances affect the making of awards, too, as arbitrators have a duty to render an effective award and may therefore need to consider any effects on enforceability caused by sanctions or related public policy objections.

What to Do About Interest? 

Sanctions may thus impact on the conduct of proceedings, the arbitrability of disputes, the validity of awards as well as their enforceability. In addition, a number of practical problems arise. For example, where payments cannot be made to a sanctioned entity under an award in a way that ensures that the funds can be appropriately frozen in accordance with the sanctions regime, the award debtor may be prohibited from complying with that award. Where possible, the amount in dispute may need to be deposited and only paid out after the sanctions have been lifted. Where payments can be awarded but not carried through, this raises the issue of what to do about interest. If interest is owed to a sanctioned party as a result of the application of sanctions preventing payment, this may even prevent interest from accruing, by analogy with case law from the United Kingdom. A related issue is how to apply interest where sanctioned parties face difficulties making timely payments under judgments and awards. This has recently been raised in a case under appeal to the Swedish Supreme Court.