High Court orders payment into court by Russian claimant as security for defendant banks' costs in context of sanctions case

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 allowed the banks' security for costs application and ordered the claimant to make a payment into court of £1.85 million: LLC EuroChem North-West-2 v Société Générale S.A. & Ors (2023).

The decision will be of interest to financial institutions as it provides guidance on the court's approach to security for costs, particularly in cases involving parties subject to international sanctions. For our previous blog posts on cases dealing with the enforcement of contractual obligations where one or more of the counterparties are subject to international sanctions, please see here.

In the present application, the claimant accepted that it was appropriate to provide security under CPR 25.13(a) on the basis that it is resident in Russia which is not bound by the 2005 Hague Convention. The central battleground was whether the court should exercise its discretion to order payment into court (the banks' position) or order security by way of parent company guarantee by the claimant's Swiss parent company (the claimant's position).

The court emphasised that any alternative security offered must provide the same level of "copper-bottomed", adequate security that is equivalent to a payment into court, cash, or first-class London bank guarantee. It was not persuaded that the Swiss parent company guarantee offered was equivalent, because it did not provide a readily realisable source of funds in the same way. Even assuming the parent company was good for the money, the undertaking offered appeared to provide at best a more complex and indirect alternative form of security which was less good than a payment into court, and on this ground alone the court said it would hold that there was no equivalency.

But the court went further than this and considered the question of whether any guarantee (direct or via the court) offered equivalence in terms of safety, taking into consideration the date of trial and when the security would need to be enforced (ie in circumstances where the claimant has failed to pay a costs order). Given that the parent company is likely to be affected by sanctions in due course, in the court's view any form of guarantee to pay at some point in the future could not be said to be equivalent to a payment into court (even absent the jurisdictional issues present in this case).

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.

The banks subsequently applied for security for costs under:

1. CPR 25.13.2(a) (on the basis that the claimant is resident out of the jurisdiction and is not a person against whom a claim can be enforced under the 2005 Hague Convention); and/or
2. CPR 25.13.2(c) (on the basis that the claimant is a company and there is reason to believe that it will not be able to pay the defendant's costs if ordered to do so).

The banks sought an order that the claimant pay into court security for costs for the period up to and including the case management conference in an amount representing 70% of the costs incurred (up to the end of the security for costs application). The claimant offered to provide security by way of parent company guarantee by EuroChem AG, a Swiss entity. However, the banks provided evidence that they could not accept such a guarantee without (at least arguably) contravening EU, French, and Italian sanctions.

Decision

The High Court found in favour of the banks and allowed their security for costs application. The key points which will be of interest to financial institutions are examined below.

Jurisdictional threshold

The claimant accepted that it is resident in Russia which is not bound by the 2005 Hague Convention. Also, whilst it formally denied that there is reason to believe that it would not be able to pay the banks' costs if ordered to do so, it realistically took the position that it was appropriate to provide security (despite steps taken by Russia towards ratification of the 2019 Hague Convention). In the court's view, this was a tacit acceptance that the jurisdictional threshold under CPR 25.13 for an order for security was met.

Discretion of the court

The court was satisfied that it was appropriate to exercise its discretion to order security for costs. However, the central battleground of the application was whether the court should exercise that discretion to order payment into court (the banks' position) or order security by way of parent company guarantee by the claimant's Swiss parent company, EuroChem AG (the claimant's position).

The court emphasised that the parent company guarantee offered by the claimant was not a usual form of security. The baseline is a payment into court. The court acknowledged that other forms of security certainly are ordered with a degree of regularity, but only if either: (i) they are agreeable to the secured party; or (ii) the court is persuaded that they offer what one might term an equivalency.

The claimant relied on Rosengrens v Safe Deposit Safes Ltd [1984] 1 WLR 1334 to say that that as long as the opposite party can be adequately protected, it is right and proper that the security should be given in a way which is the least disadvantageous to the party giving that security, that it may take many forms, but as long as it is adequate, then the form is immaterial. However, the court noted that this underlines the importance of the adequacy of the security offered, and that any alternative security offered must be equivalent.

Adequacy/equivalency of security

The court emphasised that any alternative security offered must provide the same level of "copper-bottomed", adequate security that is equivalent to a payment into court, cash, or first-class London bank guarantee (as per Monde Petroleum SA v Westernzagros [2015] EWHC 67 (Comm) and World Challenge Expeditions v Zurich Insurance [2022] Costs Law Report 1039).

In the court's view, the undertaking offered was not equivalent because it did not provide a readily realisable source of funds in the same way as a payment into court, cash, or a first-class London bank guarantee. The claimant made various arguments to say that there was equivalence, which were ultimately rejected by the court. In particular:

• Agreement to submit to jurisdiction. The claimant offered to fortify the proposed undertaking by the Swiss parent company with an agreement to submit to the jurisdiction of the English court for the sole purpose of enforcement of the undertaking. Despite this offer, the court said it remained unclear how the proposed undertaking could be enforced. As the parent company was not resident within the jurisdiction, this would need to be via contempt proceedings, which would give a longer/indirect/delayed route in comparison to a payment into court. Even if the parent company was good for the money, the undertaking offered appeared to provide at best a more complex and indirect alternative form of security which was less good than a payment into court, and on this ground alone the court said it would hold that there was no equivalency.
• Similar undertaking accepted in other proceedings. The claimant pointed to an undertaking it gave to the court in similar terms, which was accepted in related antisuit proceedings where such undertakings to the court are the norm. The court commented that this did not establish an equivalence for the purposes of security.

The court also considered the question of whether any guarantee (direct or via the court) offers an equivalence to a payment into court in terms of safety, taking into consideration the date of trial and when the security would need to be enforced. It confirmed that where there is an undertaking to pay at some point in the future - after the end of trial when there has been a default in payment of a costs order – the court can have regard to the timeline beyond the current period (as per Kireeva v Bezhamov [2022] Costs LR 935). The court highlighted that although the Swiss parent company was more than amply resourced as at the date of the accounts provided to the court, those accounts were not current and the company is likely to be affected by sanctions in due course. In those circumstances, it could not be said that the protection afforded to the banks would be equivalent to a first-class London bank guarantee, cash, or payment into court (even without the jurisdictional issue discussed above).

Accordingly, the High Court found in favour of the banks and allowed their security for costs application, ordering the claimant to make a payment into court in an amount just under 70% of the banks' costs to date.

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