In an important judgment handed down on 27 January 2023, the Commercial Court clarified the effect of Russian sanctions on litigation that is pending before the English Courts.
In short, the Commercial Court held that the UK sanctions regime does not prevent a sanctioned claimant from pursuing a claim in England and that the regime will not be contravened if judgment is entered in favour of such a claimant. The Court has further clarified that the payment of costs in litigation by and/or in favour of sanctioned persons are activities for which a licence can be sought from the relevant sanctions authorities: PJSC National Bank Trust & anor v Mints & ors  EWHC 118 (Comm).
The current UK sanctions regime is to be found in the Sanctions and Anti-Money Laundering Act 2018 ("the Sanctions Act") and the regulations made under it. As a response to the Russian invasion against Ukraine, the following regulations were made under the Sanctions Act: Russia (Sanctions) (EU Exit) Regulations 2019 ("the Regulations").
Under the UK sanctions regime it is generally prohibited to deal with funds or economic resources belonging to, owned, held or controlled by a designated person. Making funds or economic resources available to, or for the benefit of, a designated person is also prohibited. However, HM Treasury Office of Financial Sanctions Implementation ("OFSI") may license certain specified activities which would otherwise breach the Regulations.
The claimants in these proceedings are two Russian banks. In 2019, the claimant banks issued proceedings in England alleging that the defendants were involved in a conspiracy with representatives of the claimants to enter into uncommercial transactions, whereby loans were replaced with worthless or near worthless bonds. The claimants obtained worldwide freezing injunctions against the defendants who also gave cross-undertakings in damages. The claim was quantified at US$850 million.
While the litigation was progressing, the second claimant was named on the sanctioned list by the UK Government as a "designated person". Although, the first claimant was not listed as a designated person, the first to fourth defendants argued that the sanctions regime equally applied to the first claimant because it was "owned or controlled" by at least two designated persons, including Mr Vladimir Putin.
In light of this, the first to fourth defendants made applications to stay the proceedings and asked that they be discharged from the undertakings they had given to the Court in the context of the worldwide freezing injunctions. They submitted that the effect of the Regulations was that: (i) it was unlawful for the Court to give judgment in favour of a designated person; (ii) common steps in litigation would also be unlawful, for example a designated person could not satisfy an adverse costs order or an order for security of costs; (iii) it was not possible for OFSI to authorise those acts because there was no ground for doing so under the Regulations; and (iv) there would be significant prejudice to the first to fourth defendants if the proceedings continued while sanctions were in force.
The Commercial Court dismissed the applications. Mrs Justice Cockerill noted that the right of access to the courts is a fundamental common law right and that such rights should not be curtailed unless it is clearly authorised by primary legislation. Having considered the Regulations, the Judge concluded that there was no clear derogation from the right of access to the Courts and she observed that had the legislation been intended to interfere with "core judicial functions", the "very clearest of words or implications would have been necessary". As such, the claimants were permitted to pursue the claim, notwithstanding that at least one of them was a designated person.
As regards the other matters challenged by the claimants, the Commercial Court confirmed that, while such matters were arguably prima facie unlawful when construed in isolation against the UK sanctions regime, they were activities for which a licence could be obtained. For example, the Court held that an order for the payment of adverse costs and/or an order for security for costs are matters for which a licence can be sought under Schedule 5, paragraph 3 of the Regulations as "reasonable expenses associated with the provision of legal services". The Court also held that damages pursuant to a cross-undertaking were capable of being licensed as "extraordinary expenses" pursuant to Schedule 5, paragraph 5 of the Regulations.
Given the Court's finding that a sanctioned claimant was entitled to pursue a claim, the question of whether the first claimant was also subject to the sanctions regime was of less importance. However, the court nonetheless addressed the issue briefly. Ultimately, the question turned on a discrete issue of interpretation of Regulations 7(2) and 7(4), in particularwhether they extend to a designated person's power to control companies through their office, as opposed to personally. On a review of the wording of the relevant Regulations, the judge found that they were only intended to cover direct or indirect ownership and, as such, would not apply to a situation where control could be exercised by a designated person by virtue of their public or political office. In reaching this decision, the Judge considered it to be significant that compared with some other sanctions regimes, the Regulations were not drafted to take aim directly at the Russian State but rather seemed to be primarily designed to operate at a personal level, as a way of inflicting "personal financial pain" on those associated with the regime. The judge also considered it to be implausible that such major entities as banks were intended to be sanctioned by a “sidewind”, in circumstances where they would have no notice of the sanction and be unable to challenge the designation.
This judgment provides important clarification regarding the impact of the sanctions regime on litigation in the English Courts. It confirms that designated persons do have the right to access the English Courts and that the costs a sanctioned claimant might be required to pay in the course of the litigation, including adverse costs and/or security for costs, are activities for which a licence can be obtained.
In light of the important issues raised by these applications and the potentially wide-ranging implications for litigation involving sanctioned parties, Mrs Justice Cockerill has granted the defendants permission to appeal on all points.