UK Sanctions Do Not Prevent Access To Justice
In the case of PJSC National Bank Trust and another v Mints and others [2023] EWHC 118 (Comm), the High Court held that UK sanctions in force against Russian banks did not prevent the banks from:
- Lawfully satisfying adverse cost orders,
- Providing security for costs, or
- Paying any damages that might be awarded on cross-undertakings given by the Defendants.
This judgment is important as it is one of the first to consider issues around the post-Brexit UK sanction regimes and the impact these sanctions have on litigation proceedings concerning UK asset freeze targets. In addition, Mrs Justice Cockerill also provided commentary on when an entity is considered ‘owned or controlled’ by a designated person.
Background to the UK Sanctions Case: Russian Banks’ Challenges
The proceedings were brought by two Russian banks for US$850 million. The Claimants, PJSC National Bank Trust (NBT) and PJSC Bank Otkritie Financial Corporation (Otkritie), argued that the Defendants, Otkritie’s former co-founder, Boris Mints, and his sons (among others) conspired with bank representatives to replace loans with worthless bonds.
In 2019, the Claimants obtained worldwide freezing orders against the Defendants, who gave cross-undertakings in damages. The banks were ordered to fortify the cross-undertakings by providing security.
Following Russia’s invasion of Ukraine, the UK Government imposed an asset freeze on Otkritie pursuant to the Russia (Sanctions) (EU Exit) Regulations 2019 (the UK Regulations). As a result, UK persons were prohibited from:
- dealing with funds or economic resources owned, held or controlled by Otkritie; and/or
- making funds or economic resources available to or for the benefit of Otkritie.
The Defendants claimed that NBT was subject to the same asset freeze because it was owned or controlled by at least two designated persons, namely the Russian President (P) and the Governor of the Bank of Russia (N). They sought a stay of proceedings (which had begun prior to the invasion) and for the undertakings against them to be released. This was on the grounds that, any judgment for the Claimants on the causes of action they were arguing would be unlawful as they would be in breach of the sanctions. In addition, some of the interlocutory stages were subject to Treasury licensing requirements, pursuant to the powers of the Office of Financial Sanctions Implementation (OFSI) under the UK Regulations. However, OFSI could not license several standard litigation steps including the satisfaction of adverse costs orders, the provision of security for costs, or the payment of any damages on the Claimants’ cross-undertaking.
Sanctions and Legal Impediments: Key Issues Highlighted
The High Court had three issues to consider, namely:
- Would a judgment for the Claimants be in breach of sanctions?
- Could OFSI issue a licence in relation to the satisfaction of adverse costs orders, the provision of security for costs, or the payment of any damages on the Claimants’ cross-undertaking?
- Is NBT owned and controlled by a designated person and therefore subject to UK sanctions?
The High Court’s decision
Issue one
The Court accepted that a cause of action is an “economic resource” because it could be used to obtain funds or financial assets and goods and services. A judgment debt could also be construed as a “fund” as it puts an obligation on a debtor to pay a sum of money.
Despite this, the Court concluded the entry of a favourable judgment was not caught by the restriction on dealing/making available. The reasoning behind this is that it was not clear that the legislation was designed to prohibit a designated person’s fundamental right to access to justice. This was despite the breadth of the UK Regulation’s wording and Parliament’s intention to allow a certain degree of curtailment of rights.
Issue two
Although OFSI had no power to license the entry of judgment in favour of designated persons no such licence was actually required. However, the High Court concluded that payment of an adverse costs order was licensable under Sch.5 Pt 1 para.3 of the UK Regulations. It therefore followed that OFSI could also issue a licence to permit the payment of security for costs for the purpose of meeting adverse costs orders, to enable the future payment of reasonable professional fees for the provision of legal services.
Regarding the damages on the cross-undertaking, the Court stated that these were not ordinary or routine costs, rather they occur only after an inquiry has been made concerning liability.
“Further it follows logically from where the argument goes elsewhere. How could OFSI refuse a licence when ex hypothesi money is to be paid to someone (a defendant) who is not sanctioned and who is, on this hypothesis, entitled to compensation pursuant to a decision of the English court. This is the more so as the diminution of a designated person’s assets, with no conceivable exchange of value or quid pro quo , would further, rather than undermine, the object and purpose of the Regulations.” para 195
Issue three
The definition of ‘ownership or control’ under the UK Regulations is a contentious one. The UK Regulations state that an entity is owned or controlled directly or indirectly by another person in any of the following circumstances:
- The person holds (directly or indirectly) more than 50% of the shares or voting rights in an entity,
- The person has the right (directly or indirectly) to appoint or remove a majority of the board of directors of the entity; or
- it is reasonable to expect that the person would be able to ensure the affairs of the entity are conducted in accordance with the person’s wishes.
The Claimants’ argued that the UK Regulations should not be interpreted as covering control by reason of office or employment. The Court agreed with this, stating:
“…it does appear to me to be significant that at the drafting level the sanctions were not drafted to take aim directly at the Russian State or its main entities — despite the fact that some earlier sanctions (e.g. against Iran, did do so). It also appears significant that the drafting so far as asset freeze is concerned appears to be primarily (though not exclusively) designed to operate at a personal level…” p 238
Mrs Justice Cockerill went on to conclude:
“It also seems implausible that it was intended that such major entities as banks (or other major entities such as Gazprom) were intended to be sanctioned by a sidewind, in circumstances where they would have no notice of the sanction and be unable themselves to challenge the designation under section 38 of the Act [UK Regulations] .” p 241
Future Implications of Sanctions and Access to Justice
Although Mrs Justice Cockerill’s remarks regarding ‘ownership or control’ were Obiter (meaning they were not essential to the overall decision), her comments indicate that the Courts seem prepared to view the meaning of ‘ownership or control’ narrowly. In addition, the judgment makes clear that sanctioned people and entities should not be denied access to the Court’s justice.
This case is currently being appealed.
To discuss any points raised in this article, please call us on +44 (0) 203972 8469 or email us at mail@eldwicklaw.com.
Note: The points in this article reflect sanctions in place at the time of writing, 07 September 2023. This article does not constitute legal advice. For further information, please contact our London office.
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