_sanctions and the new york convention: how arbitral tribunals address enforcement risks when drafting awards
Sanctions have become one of the most disruptive forces in international arbitration. While the New York Convention (“NYC”) provides a uniform framework for the recognition and enforcement of awards, sanctions regimes—EU, UK, OFAC, Swiss, and others—frequently obstruct compliance. The result is an unprecedented tension: tribunals must issue awards that are enforceable in theory across Convention jurisdictions, but they operate in a world where banks, licensing authorities, and local sanctions rules may prevent any actual transfer of funds.
This article examines a specific and rapidly growing dimension of the problem: how arbitral tribunals proactively address these enforcement risks through the drafting of awards.
1. The Issue: Why Drafting an Award Is No Longer Neutral
Tribunals traditionally assume that the NYC’s pro-enforcement mechanisms will carry the award across borders without further tailoring. Sanctions have changed this assumption. They create four critical risks at the enforcement stage:
1.1. Payment Blocks by Banks
Even when courts recognise an award, banks may refuse to execute the payment because the debtor or creditor is sanctioned, or because the sector is sensitive (energy, dual-use goods, transport). Therefore, “paper victories” cannot be realised.
1.2. Prohibition on Making Funds Available to Sanctioned Persons
Under EU and UK regulations, paying a sanctioned creditor may constitute an illegal provision of “economic resources”. Enforcement is legally risky for debtors, counsel, banks, and even arbitrators. Article 10.1 of Council Regulation (EU) No 269/2014, which reads: “The freezing of funds and economic resources or the refusal to make funds or economic resources available, carried out in good faith on the basis that such action is in accordance with this Regulation, shall not give rise to liability of any kind on the part of the natural or legal person or entity or body implementing it, or its directors or employees, unless it is proved that the funds and economic resources were frozen or withheld as a result of negligence.”
1.3. Need for Government Licences
Unfreezing the assets of an award debtor for the purpose of enforcing an arbitral award requires a specific authorisation from the competent authorities, which is granted only when certain conditions are met. Licences from relevant authorities may be required before payment is allowed. This delays enforcement by months or even years.
1.4. Currency and Jurisdictional Exposure
Obligations stated in USD or EUR may trigger compliance issues depending on the enforcement jurisdiction, the correspondent bank, or the nexus to US financial institutions.
The tension is therefore structural: tribunals must order payment, but the global sanctions architecture may criminalise or block that exact act.
2. Tribunal Solutions: How Awards Are Being Drafted to Survive Sanctions Risks
Arbitral tribunals have begun to adapt their drafting styles in order to preserve enforceability. The following mechanisms are increasingly common and form the emerging “best practice.”
2.1. Escrow and Blocked Accounts
Direct payment to a sanctioned party is often prohibited. Banks will not process the transfer, and courts may prevent enforcement on public-policy grounds. As a solution Tribunals order the debtor to deposit sums into a blocked account or an escrow account under the supervision of a neutral institution.
This allows:
- compliance with sanctions rules (funds remain frozen, not transferred),
- preservation of the creditor’s entitlement, and
- an enforceable structure acceptable to courts in Switzerland, the EU, and some common-law jurisdictions.
Swiss sanctions regime guidance explicitly states that positive balances in favour of a sanctioned counterparty may only be credited to a blocked account in Switzerland and must be frozen immediately (www.lenzstaehelin.com).
2.2. Multi-Currency Award Structures
Sanctions regimes, especially US and EU regulations, attach different compliance risks to different currencies. USD obligations may trigger OFAC jurisdiction even where parties have no US nexus. As a solution Tribunals increasingly:
- express the award in several possible currencies, or
- provide fallback formulas for conversion, and
- avoid requiring payment through correspondent banks based in the US.
However, banks may still refuse transfers even with a licence because of USD exposure and cross-border correspondent banks.
2.3. Delayed Performance Mechanisms
Immediate payment may be impossible if a licence is required or if the creditor is currently sanctioned. As a solution, Tribunals sometimes include:
- conditional performance obligations (“payment within X days after a licence is granted”),
- deferred deadlines, or
- alternative fulfilment methods tied to regulatory approval.
UIA’s guide on economic sanctions and arbitration emphasises the need to structure enforcement obligations taking licensing delays into account (www.uianet.org).
2.4. Sanctions Carve-Out Clauses
Debtors fear penalties for violating sanctions when paying award amounts. It could be argued that this makes compliance impossible. As a solution, Tribunals insert language stating that:
- obligations must be performed to the extent permitted by applicable sanctions laws,
- the debtor must apply for licences where necessary, and
- sanctions do not extinguish the underlying debt.
In its “Note to Parties, Arbitrators and Mediators on Sanctions” the Swiss Arbitration Centre emphasises that arbitrations must take account of sanctions regimes and that awards may need to reflect that payments are subject to regulatory authorization (www.swissarbitration.org).
2.5. Avoiding Findings on Illegality of Contracts
Award debtors often argue that sanctions render the underlying contract illegal, which they then use at the enforcement stage under Article V(1)(a) or (2)(b) NYC. Tribunals carefully:
- avoid declaring the contract illegal,
- frame sanctions effects as performance obstacles, not validity defects, and
- explicitly distinguish between illegality and regulatory restrictions.
Significant commentary on the validity of arbitral awards and public-policy aspects in sanction contexts discusses how tribunals tend not to treat sanctions as automatically invalidating contracts but rather as performance risk (www.navacelle.law).
2.6. Structuring Interest and Costs to Avoid Sanctions Triggers
Certain inflows (e.g., interest payments) may be considered “economic benefits” prohibited by sanctions. Banks scrutinise interest obligations more aggressively. As a result, Tribunals may:
- separate pre-award and post-award interest,
- allow interest to accrue only once funds are unlocked, or
- specify that interest will not increase while payment is frozen due to sanctions.
2.7. Tailoring the Award to Known Enforcement Jurisdictions
Enforcement may be sought in states with very different sanctions policies. A one-size-fits-all award may fail in one jurisdiction even if enforceable in another. As a solution, Tribunals increasingly:
- draft awards based on the anticipated enforcement geography (EU vs UK vs US vs Switzerland vs UAE),
- consult parties on probable enforcement targets during proceedings, and
- avoid language that could conflict with specific local public-policy positions.
Significant commentary in arbitration guides emphasises the importance of early enforcement risk assessment and drafting with enforcement jurisdictions in mind (www.globalarbitrationreview.com).
3. The Emerging Standard: Awards Designed for Financial Reality, Not Only Legal Theory
Sanctions have forced tribunals to shift their mindset. Drafting an award is no longer a neutral, formulaic exercise. It is a strategic act that determines whether the award can be executed in a world where:
- banks over-comply,
- licensing regimes cause delays,
- currencies trigger differing sanctions exposure,
- public policy varies dramatically across jurisdictions.
A tribunal that simply orders payment in one paragraph risks producing an award that is theoretically enforceable under the New York Convention but practically unusable.
In contrast, tribunals that adopt drafting techniques like escrow structures, multi-currency flexibility, sanctions carve-outs, and conditional performance mechanisms produce awards that are far more resilient.
4. Conclusion
The global sanctions landscape has redefined the enforcement environment under the New York Convention. Courts remain generally committed to the Convention’s pro-enforcement ethos, but practical realities—banking compliance, prohibited transactions, and licensing requirements—often obstruct execution despite favourable judicial rulings.
Tribunals have therefore stepped into a new role: anticipating enforcement risks and drafting awards specifically to survive them. This development represents one of the most important evolutions in modern arbitration practice. As sanctions continue to proliferate, the ability to draft enforcement-ready awards will be one of the essential skills expected of arbitrators and counsel alike.
Contact
Koray Dagdeviren, Lawyer (TR)
Afshin Ghassemi, Senior Principal