Proposals to impose a system of contract sanctions that could stop English courts from enforcing commercial agreements entered into with ‘rogue states’ have been criticised by City lawyers as potentially damaging to London. 

A Foreign & Commonwealth Office consultation paper published earlier this year proposed contract sanctions on targeted regimes to discourage parties in countries that have not imposed sanctions from dealing with them. 

However, the City of London Law Society (CLLS) has warned that if the proposals go through, overseas disputes could move elsewhere, ‘to the detriment of London as a global legal centre’.

The response comes as foreign secretary William Hague warned today that the City may have to make ‘sacrifices’ and take a financial hit if the west steps up sanctions against Russia over the Ukraine crisis.

Clifford Chance partner Simon James, chair of the Society’s litigation committee, outlined detailed objections to the FCO plans in a statement:

* ‘The reach of the proposals… is too broad. Contract sanctions could only apply to contracts that UK nationals could not enter into and not to all contracts with sanctioned entities. Otherwise it would penalise UK and other businesses from carrying out lawful transactions and the effect would be similar to a comprehensive embargo on trade with targeted entities;

* ‘The consultation paper is unable to cite any instance of English courts having enforced contracts with targeted entities that would be prevented by contract sanctions; it is therefore highly questionable whether the proposal addresses a real gap in the current system of sanctions that undermines sanctions’ effectiveness;

* ‘The reason there is no real gap is that, in practice, no one selling goods to a regime already subject to sanctions in the UK would agree in the contract to the English courts having jurisdiction over disputes arising from the contract (and an English court would probably not have jurisdiction otherwise). As a result, there will be no effect on the behaviour of those the proposal seeks to influence;

* ‘An English court might in any event decline to enforce contracts of the kind targeted on grounds of public policy or the proper interpretation of the sanctions legislation.’

James added that the UK should not act alone in imposing contract sanctions ‘because that would have no real effect on those they are targeting, but it would drive business away from the UK to other jurisdictions’. He said: ‘Better to act in concert with all major economies.’

Alasdair Douglas, chair of the CLLS, said: ‘The government is acutely aware of the benefits to our economy of the use of English courts and arbitration in England by foreign litigants – I think it unlikely that they would wish to do anything to prejudice this position.’

The government’s response is expected later this year.