High Court finds UK sanctions do not preclude entry of judgments in favour of Russian sanctioned parties

The High Court has considered the impact of the UK sanctions against Russia on various aspects of litigation involving a sanctioned party: PJSC National Bank Trust v Mints [2023] EWHC 118 (Comm).

The judgment raises important questions of law with wide implications for litigation involving sanctioned entities. The court's key finding was that the UK sanctions do not prevent the English court from entering judgment on a pre-existing (ie pre-sanctions) claim brought by the sanctioned person. There is no need for a licence from the Office of Financial Sanctions Implementation ("OFSI") in order to enter judgment. OFSI can, however, license a sanctioned party to (i) pay an adverse costs order, (ii) satisfy an order for security for costs and (iii) pay damages awarded in respect of a cross-undertaking in damages, which means that ongoing proceedings involving a sanctioned party do not necessarily prejudice the non-sanctioned party.

As part of an interesting obiter discussion of what constitutes "ownership" or "control" for the purposes of the UK sanctions regulations, the court expressed the view that this does not include control by virtue of a sanctioned person's political office, as opposed to personally (including through a trust structure) or (potentially) via a corporate officeholding.

In view of the importance of the issues raised, the judge gave permission to appeal the judgment to the Court of Appeal.

We discuss the UK sanctions regime in further detail in our previous blog post. You can also follow the latest developments in the sanctions space here.

Background

The litigation arises out of the claims by the Russian National Bank Trust ("NBT") and Bank Otkritie ("Otkritie") for USD 850 million. The claimants allege that the defendants conspired with representatives of the claimants to enter into uncommercial transactions with companies connected with the defendants, by which loans were replaced by worthless or near worthless bonds. The claimants obtained freezing orders against some of the defendants.

The litigation was progressing towards trial at the time when Russia invaded Ukraine. Shortly after the invasion, the UK Government imposed asset freeze restrictions against Otkritie and added it to the Consolidated List of Financial Sanctions Targets (the "List") maintained by OFSI, making Otkritie a "Designated Person". NBT has not been added to the List.

As discussed on our previous blog post, the Designated Persons added to the List are the primary targets of the asset freezes. Importantly, the asset freeze restrictions also extend to entities owned or controlled, directly or indirectly, by a Designated Person. The asset freeze restrictions are subject to certain listed exceptions, and acts which would otherwise breach the restrictions may be licensed by OFSI.

The defendants sought a stay of the proceedings and release from the undertakings which they have given to the court in connection with the freezing orders obtained against them. They argued that (i) the UK asset freeze restrictions applied to both claimants, including NBT on the basis that it is controlled by two Designated Persons, Mr Vladimir Putin (the Russian President) and Ms Elvira Nabiullina (the governor of the Central Bank of Russia); and while the sanctions against the claimants remained in force (ii) the entry of any judgment for the claimants would be unlawful; and (iii) continuing the proceedings would be prejudicial to the defendants as the claimants cannot lawfully satisfy adverse costs orders, provide security for costs or pay any damages that may be awarded on their cross-undertaking.

Decision

The High Court (Cockerill J) dismissed the defendants' applications, including for the reasons set out below.

Entering judgment in favour of sanctioned parties

The crux of the defendants' argument focused on the interpretation of the Sanctions and Anti-Money Laundering Act 2018 ("SAMLA"), and the Russia (Sanctions) (EU Exit) Regulations 2019 ("the 2019 Regulations") made under s.1 of SAMLA, which provided the basis for the extensive sanctions regime imposed in response to Russia's invasion of Ukraine. The question was whether the regime authorised a derogation from the fundamental right of access to the courts for the sanctioned parties. This engaged the "principle of legality" under English law, which (as was common ground) means that certain fundamental common law rights, including the right of access to the courts, will not be treated as curtailed unless this is "clearly authorised" by primary legislation. Cockerill J noted that such authority will ordinarily be express, but may in certain circumstances be implicit (as was argued by the defendants in this case) if the intention is sufficiently clear.

The defendants therefore had to establish that it was clear from the evidence that Parliament intended to make inroads on the right of the sanctioned parties to have access to the courts. This raised both broad and narrow questions of interpretation.

On the broader point, the claimants argued that the backdrop to SAMLA and the 2019 Regulations made it clear that they were not intended to preclude judgments being entered in favour of sanctioned persons. In particular, the claimants pointed out that the EU sanctions legislation which they replaced did not preclude entry of judgments, and that pronouncements made at the time of the UK legislation indicated that there was no intention to change that approach. The defendants argued that changes between the EU and UK legislation meant there was an intention to move away from continuity and bar entry of judgments. Cockerill J agreed with the claimants, that there was nothing in the broad approach to support the defendants' argument as to a clear intent to derogate from the fundamental right of access to the court.

The other facet of the defendants' argument focused on detailed points of construction, in particular a wide interpretation of "funds" and "economic resources" under s.1(1) SAMLA. Making "funds" available to a Designated Person, and dealing with "funds" or "economic resources" of a Designated Person, are prohibited under Regulations 11 and 12 of the 2019 Regulations. The Defendants argued that if the court entered judgment, a judgment debt – which, in their argument, constitutes "funds" – would thereby be made available to the claimants. The defendants further argued that changing a cause of action into a judgment debt is "dealing" with the funds or economic resources of the Designated Person, on the basis that the underlying cause of action ceases to exist because it merges in the judgment debt.

The claimants conceded that a cause of action can be an "economic resource", in particular where it is used to obtain funds or financial assets and goods and services, for example via assignment of a cause of action for money. During oral argument, the claimants further conceded that a judgment debt is a "fund" for these purposes.

However, Cockerill J rejected the defendants' argument that entering judgment was "dealing" with a fund (or economic resource). As to the argument of merger of a cause of action into the judgment debt, the judge considered that, as a matter of construction, the answer could not possibly hinge on this English law doctrine of merger. The judge held it is not a concept which would be applicable in the EU which sanctions regulations were transposed by the UK. Further support was found in the approach to licensing. The possibility to obtain a licence from OFSI for "the use of a designated person's frozen funds" to satisfy "a judicial … decision" (paragraph 5, Schedule 6, SAMLA) suggested strongly that the making of judicial decisions is permitted.

Cockerill J therefore held that a judgment on the claim of a sanctioned person can lawfully be entered, and that a licence from OFSI for the entry of judgment is not necessary. For the avoidance of doubt, steps relating to the enforcement of a judgment may separately be prohibited (in the absence of a licence); the judgment concerns the entering of a judgment itself.

OFSI licences

The court rejected the defendants' argument that OFSI did not have power under the 2019 Regulations to authorise payment in respect of adverse costs orders, security for costs or damages pursuant to the cross-undertakings. Cockerill J considered that the overall intention of the 2019 Regulations as regards licensing must be to "achieve a workable situation". In Cockerill J's view, "it would make no sense to allow some parts of litigation to progress only for the overall progression to be stymied by a bar on other parts". The judge held that:

• Schedule 5, Part 1, paragraph 3 of the 2019 Regulations permits OFSI to issue a licence to a designated person to enable it:
  • to pay a costs order in favour of the other party to litigation (ie 'adverse costs orders'); and
  • to make payment to satisfy an order for security for costs for the very purpose of meeting the adverse costs orders.
• Schedule 5, Part 1, paragraph 5 of the 2019 Regulations permits OFSI to issue a licence to a designated person to enable payment of damages pursuant to the cross-undertakings.

Cockerill J did not find there is a licensing ground in the 2019 Regulations for payment of post-judgment interest on costs. The judge held that if the costs order is issued, the court would order payment of costs (such payment to take place following the grant of a licence) and reserve the question of interest on costs.

Ownership and control via political office

In view of the decision on lawfulness of entering the judgment (and the fact that continuing the proceedings did not prejudice the defendants even if the claimants were subject to the sanctions regime), the question of whether NBT was owned or controlled by a Designated Person (and thus was also subject to the asset freeze) was less important and the court considered it only briefly.

The key point related to the interpretation of Regulation 7 of the 2019 Regulations which introduced two alternative conditions for treating an entity as being "owned or controlled directly or indirectly" by a Designated Person. One of these conditions is set out in Regulation 7(4). It is met if it is reasonable, having regard to all the circumstances, to expect that the Designated Person would (if they chose to) be able, in most cases or in significant respects, by whatever means and whether directly or indirectly, to achieve the result that affairs of a party are conducted in accordance with the Designated Person's wishes.

On the basis of Regulation 7(4), the defendants submitted that NBT is subject to the asset freeze because it is "owned or controlled" by two Designated Persons, Mr Putin (the Russian President) and Ms Nabiullina (the governor of the Central Bank of Russia). In the defendants' submission, it was reasonable to assume that the affairs of NBT (which is 99% owned by the Central Bank of Russia) were conducted in accordance with the wishes of the persons holding the offices of governor of the Central Bank and the Russian President. However, Cockerill J concluded that it was not the intention of Regulation 7(4) to catch a Designated Person's power to control companies through their political office, as opposed to personally.

She held that Regulation 7(4) must be looked at in its full context and not in isolation. The key piece of context was the other condition to establish "ownership" / "control" set in Regulation 7(2). The latter used the terminology of "holding" and was essentially about ownership, direct or through a chain of companies or via a nominee, and that lent force to the submission that Regulation 7(4) was a "backstop" to any form of ownership and control falling slightly outside Regulation 7(2).

An example given by the judge of such "backstopping" caught by Regulation 7(4) is "a situation where a Designated Person established a discretionary trust, the trustees of which own various companies, which in turn own underlying assets, and where the Designated Person might in fact have retained effective control of the companies within it, and be able to cause their affairs to be conducted in accordance with his wishes".

She also pointed out that certain Russian banks (and major Russian entities, such as Gazprom) were added to the sanctions list separately by name, so it seemed implausible that other entities owned or controlled by the state (or by the Designated Persons by virtue of their political office) were "intended to be sanctioned by a sidewind, in circumstances where they would have no notice of the sanction". In the judge's view, it was not the intention for parties to conduct complex investigations or gather evidence "because the [OFSI] list should generally set out the persons targeted".

Cockerill J therefore concluded (obiter) that NBT was not controlled by either Mr Putin or Ms Nabiullina for the purposes of the Regulations through their political office. She however noted that she saw the attractions of the argument that it is only political office which should fall outside Regulation 7(4). In the judge's view, there is at least some indication that control via corporate office could in principle be sufficient.