UK FCO Consults on 'Contract Sanctions'

The significance of sanctions in government policy is to be recognised, but it is important that changes to sanctions also recognise their effectiveness and the long-term damage they might do to UK economic interests.

The Foreign and Commonwealth Office has launched a consultation on Contract Sanctions, described in the article below from WorldECR, which includes a link to the consultation document.

Contract sanctions are intended to disallow UK Courts from settling contract disputes between targeted states and companies outside the jurisdiction of EU Member States - an extraterritorial extension of EU sanctions.

If introduced by the UK or EU alone, rather than the United Nations, Contract Sanctions would not deter, I believe, companies from entering contracts with target regimes. Contracts would increasingly be written under the law of other jurisdictions, therefore not achieving its intended outcome. However they would be of considerable detriment to the UK's economic interests.

The UK law, its Courts and its legal profession are important economic assets for the UK. English law has an eminent place in international trade and commerce and has retained its position despite the relative decline in the mercantile standing of the UK as a whole. Contract Sanctions would undermine the perception of the UK as an attractive jurisdiction in which to settle contractual disputes; creating a significant risk that the work leading from the UK's leading position would move to other jurisdictions in which Contract Sanctions do not apply. Contract Sanctions are likely to have serious knock-on effects on the UK insurance industry which has a similarly important place in the international insurance market.

Unilateral implementation of Contract Sanctions by the UK/EU would be a self-inflicted economic harm, without the effect of changing behaviours. I believe that targeted sanctions on individuals and asset freezes are a much more effective way of influencing behaviours.

An Article from WorldECR

The UK Foreign and Commonwealth Office ('FCO') has launched a consultation on a new sanctions mechanism which it describes as 'contract sanctions'. These, says the FCO, would deter commercial deals with targeted regimes, 'thereby increasing the scope and efficacy of sanctions tools at [the FCO's] disposal and further reduce the ability of targeted regimes to sustain themselves.'

The FCO consultation document explains: 'Contract sanctions would restrict the courts of participating states from enforcing contracts prospect ively entered into with a targeted regime. For example, the government of country X wishes to import goods which would, for example, sustain its ability to repress the civilian population. It cannot source these from the EU due to the sanctions regime in place.

But it is free to do so from countries that have not [imposed sanctions against country X]. The aim of contract sanctions would be to dissuade others outside the EU from entering into a contract to supply that country by making such a contract unenforceable in the courts of participating countries.'

It adds: 'If countries with other major legal jurisdictions imposed similar measures, this could provide a disincentive for those still prepared to supply goods to sanctioned regimes by casting doubt on the ability to enforce the contract in those jurisdictions with the regime or its successors.'

The document argues that the proposed new sanctions would have a wider application with greater potential to achieve desired results: 'Traditional sanctions prohibit the movement of certain goods, funds or persons. They only bind the countries that have signed up to them, and rely on those countries enforcing these prohibitions effect - ively. Contract sanctions have a potentially wider sphere of influence in that they act as a disincentive to anyone signing a contract with a target regime regardless of where the individual/entity is based. In this way they have greater potential to influence the behaviour of a wide range of international actors who may not be subject to e.g. EU law. This might be particularly useful when there is a lack of consensus over whether to adopt UK FCO consults on 'contract sanctions' "traditional" sanctions in response to a crisis.'

A London-based lawyer who was still studying the proposal as at time of writing told WorldECR: 'I am sceptical about this initiative. It sounds like an attempt to privatise and extend the sanctions by withdrawing legal structures in London. I would prefer to see more enforcement against serious violators while leaving private legal structures alone. The apparent extraterritorial extension strikes me as potentially abusive of the good reputation of English law. It all makes me uncomfortable.'

The consultation document has been sent to 'interested parties'. Responses are due by 14 March 2014.

See the consultation document here

Source: WorldECR