High Court refuses interim payment application in Russian sanctions-related litigation

In the context of a claim by a Russian company against two banks for failing to pay sums due under on-demand bonds, the High Court has dismissed the claimant's application for an interim payment under CPR 25.1 for the entire value of its claim into court or a blocked account: LLC Eurochem North-West-2 v Societe Generale SA & Ors [2023] EWHC 2720 (Comm).

This decision will be of interest to financial institutions as it is yet another illustration of the rise in sanctions-related litigation in the banking and financial sector. Please see our previous blog posts on sanctions cases here.

In the present case, the court was satisfied that the company had not established any jurisdictional bases on which the court could make an order for the interim payment. In particular, the court was not persuaded that, if the claim went to trial the claimant "would obtain judgment", which was the condition relied upon by the claimant in support of its application under CPR 25.1(1)(k).

The court helpfully distinguished the recent decision in Mints v PJSC National Bank  [2023] EWCA Civ 1132 (see our blog post), in which the Court of Appeal confirmed that judgments can be entered in favour of Russian sanctioned parties. The court commented that there is a "significant difference" between the position in the present case, where the banks' defences rely on the very fact of sanctions, and the situation in Mints, where the existence of sanctions themselves do not form part of the substantive defence.

Importantly, in the exercise of its discretion, the court emphasised that it was proper to take into account the risk that the banks could be in breach of EU sanctions, and therefore exposed to criminal penalties, if they were required to make such a payment.

We consider the decision in more detail below.

Background

In 2020, the claimant Russian project company entered into a number of contracts with third-party contractors to design and construct a fertiliser plant in Russia. These contracts required the contractors to provide the claimant with on-demand bonds to protect the claimant against non-performance by the contractors, which were issued by the defendant banks and governed by English law.

In August 2022, following termination of the underlying contracts by the contractors, the claimant made demands under the bonds for payment by the banks of more than €212 million. However, the banks declined to make payment on the basis that to do so would breach international sanctions, because the claimant is part of a major international group which is closely associated with one of Russia’s wealthiest men, now subject to both EU and UK sanctions. Following that refusal, the claimant brought proceedings against the defendant banks in the English courts.

A few months after initiating the proceedings, the claimant filed an application for an interim payment of the entire value of its claim into court or a blocked account, pending determination of the claim at trial, under CPR 25.1(1)(c) (detention, custody or preservation of relevant property), 25.1(1)(k) (interim payment) and/or 25.1(1)(l) (payment or securing of a specified fund), or alternatively using the court's inherent jurisdiction.

The banks opposed this application, on the basis that: (1) there was no proper jurisdictional basis for making the order sought; and (2) in any event, the court should refuse to make any such order in the exercise of its discretion, in particular because an interim payment would itself constitute a breach of international sanctions and expose the banks to criminal sanctions.

Decision

The High Court found in favour of the banks and dismissed the Russian company's application. The key points which will be of interest to financial institutions are examined below.

Interim payment under 25.1(1)(k)

The court started by addressing the primary basis on which the application was brought, for an interim payment under CPR 25.1(1)(k) on account of any damages or debt or other sum (except costs) which the court may hold the defendant liable to pay. This rule expressly provides that one of the conditions specified in the rule must be satisfied in order for the court to make such an order. The condition relied on by the claimants required the court to be satisfied that if the claim went to trial, the claimant would obtain judgment in its favour.

The court noted that in defence of the claim, the banks rely on the principle in Ralli Brothers v Compania Naviera Sota y Aznar [1920] 2 KB 28 to the effect that a contract is invalid where its performance is unlawful in the place of performance. The banks' case is that they have been excused from performing/making payment under the bonds, and/or are obliged/entitled to withhold performance, and/or that the bonds have been discharged/terminated/frustrated, because payment is illegal under EU, French and Italian law.

In the court's view, the application was not a suitable occasion for an argument on the merits of the banks' defences, emphasising that there had been no application by the claimant for strike out or summary judgment.

The court considered and distinguished the recent Court of Appeal decision in Mints. It emphasised that the banks' defences rely on the very fact of sanctions, whereas in Mints, the Court of Appeal held that the entry of judgment in favour of a sanctioned person would not, in itself, constitute a breach of the UK sanctions against Russia. In Mints it was not argued that sanctions extinguished the defendants’ liability and therefore the existence of sanctions themselves did not form part of the substantive defence. This was a significantly different position from the present case.

In light of these findings, the court concluded that it could not be satisfied, on the face of the application, that the claimant would obtain judgment in its favour if the claim went to trial, as required by the relevant condition of CPR 25.1(1)(k).

Alternative bases for the claimant's application

The court then turned to the alternative bases relied on by the claimant.

First, the claimant contended that the sums claimed from the banks were a "relevant property" for the purposes of CPR 25.1(1)(c)(i) and it could therefore seek an order for detention, custody or preservation of that relevant property. However, the court said that sums claimed by way of debt or damages that are not identifiable or distinctive (ie not segregated) could not be considered as a "relevant property", which envisages an asset that is in some way identifiable.

Second, the claimant asserted that its claim related to a "specified fund" to be secured per CPR 25.1(1)(l). Again, the court found that there was no identifiable or ring-fenced fund in the hands of the banks, and that there was thus no specified fund to be secured.

Finally, the court said that it was not appropriate or necessary to order an interim payment, in particular because the order would have minimal utility to the claimant, and there was no "unjust enrichment" of the banks as they were not accruing any interest on a fund in their hands.

Most importantly, the court acknowledged that in the exercise of its discretion it was also proper to take into account the risk that the banks would be in breach of EU sanctions, and therefore exposed to criminal penalties, by making a payment into court or a blocked account, if ordered to do so.

Accordingly, the court found in favour of the banks and dismissed the claimant's application.

Herbert Smith Freehills LLP acts for Société Générale SA in the proceedings brought against it by LLC Eurochem North-West-2.