Court of Appeal confirms judgments can be entered in favour of Russian sanctioned parties but leaves uncertainty in relation to the "ownership and control" test

The Court of Appeal has confirmed that UK sanctions do not preclude the entry of judgments in favour of Russian sanctioned parties: Mints v PJSC National Bank Trust [2023] EWCA Civ 1132.

The court also held that the Office of Financial Sanctions Implementation (0FSI) is entitled to license a sanctioned party to pay an adverse costs order, security for costs or damages on a cross-undertaking in damages. It can also licence payment of a costs order in favour of a sanctioned party.

Significantly, although obiter (in light of the findings summarised above), the court also considered the "ownership and control" test under the UK sanctions regime, which sets out the circumstances in which companies which are not themselves designated persons must be treated as subject to asset freeze restrictions on the basis of their ownership or control by such persons. The court concluded that, contrary to the High Court's finding, there was no carve-out to the ownership and control test for control exercised through political office and, accordingly, it could be said that Mr Vladimir Putin (Russian President and a designated person) may be deemed to control "everything in Russia" for the purposes of the regulations.

Although obiter, the court's comments on this issue will plainly give rise to additional uncertainty for UK businesses dealing with Russian counterparties, particularly state-owned entities and government bodies (as well as businesses in other jurisdictions where UK sanctions have been imposed on political organisations and leaders).

It is unlikely that the UK government can have intended for all Russian companies to become subject to restrictions by virtue of Mr Putin's designation, in circumstances where only 160 businesses were listed as designated at the time of the first instance decision, and a Foreign Office press release issued at the time of the designation of the governor of the Central Bank of Russia, Ms Elvira Nabiullina, stated that the government did not consider that she controls the Central Bank of Russia for the purposes of the sanctions regime. In addition, although the court heard submissions on the interpretation of the relevant regulation, it was not asked to determine whether Mr Putin does in fact control every company in Russia and the court cannot be taken to have made a factual finding in these terms.

Nonetheless, it would likely provide clarity if the government would review the wording of the regulations in order to make its intentions clear.  In the meantime, clarification from OFSI as to the basis on which it will (or will not) take enforcement action based on this theory of control is likely to be welcomed by the market.

UPDATE (18 October 2023): The Foreign, Commonwealth & Development Office (FCDO) has published a statement noting that it is “carefully considering” the impact of the Court of Appeal’s decision. It states that the FCDO would look to designate a public body where possible when designating a public official, if it concluded that the relevant official was exercising control over the public body, and notes that the FCDO is exploring the options available to the government in clarifying this position further. For further information see this post on our FSR and Corporate Crime Notes blog.

Background

The appeal arose in ongoing proceedings brought by the claimants, PJSC National Bank Trust (NBT) and PJSC Bank Otkritie Financial Institution (Bank Otkritie), in respect of an alleged conspiracy between their representatives and the defendants to enter into uncommercial transactions with companies connected with the defendants. The claimants had obtained a freezing injunction in support of the proceedings.

Russia invaded Ukraine in the course of the proceedings and, shortly after, Bank Otkritie was made a "designated person" for the purposes of the UK asset freezing measures. NBT, which is 99% owned by the Central Bank of Russia, is not a designated person, and nor is the Central Bank itself.

The defendants sought an order to stay the proceedings and discharge cross-undertakings given in connection with the freezing injunction. They argued that: (i) the asset freeze restrictions extended to NBT because it is controlled by two designated persons – Mr Putin and Ms Nabiullina; (ii) the imposition of sanctions precluded judgment being entered against either of the claimants and (iii) the defendants would be prejudiced were the proceedings to continue, because the claimants could not lawfully satisfy adverse costs orders, provide security for costs or pay any damages awarded on their cross-undertaking.

High Court decision

The High Court (Cockerill J) dismissed the defendants' application, holding that if judgment could not be entered in favour of a sanctioned person, their fundamental common law right to access the courts would be curtailed. This had not been clearly authorised in the Sanctions and Anti-Money Laundering Act 2018 (SAMLA), and the Russia (Sanctions) (EU Exit) Regulations 2019 (2019 Regulations) made under s.1 of SAMLA. Nor, as a matter of statutory interpretation, would entering judgment in a sanctioned person's favour amount to making funds available to them or to dealing with their funds. The High Court therefore held that judgment can be entered on the claim of a sanctioned person.

The court ruled that OFSI is entitled to licence a designated person to pay adverse costs awards, security for costs or damages on a cross-undertaking. It also held that, even if it was reasonable to assume that the affairs of NBT are conducted in accordance with the wishes of Mr Putin and Ms Nabiullina (this point having been conceded by NBT), the "ownership and control" test does not encompass control obtained via political office.

We discuss the High Court decision in more detail in our blog post here.

Key issues before the Court of Appeal

The High Court granted permission to appeal, in view of the importance of the issues raised. The appeal concerned three issues:

• Entry of judgment issue: can a judgment be lawfully entered for a designated person by the English court following a trial at which it has been established that the designated person has a valid cause of action?
• Licencing issue: in circumstances where OFSI can license the payment of a designated person's own legal costs, can OFSI also license the payment by a designated person in respect of: (i) an adverse costs order; (ii) an order for security for costs; (iii) an order for damages pursuant to a cross-undertaking in an injunction?
• Control issue: does a designated person control an entity which is not a personal asset of the designated person, but over which the designated person is able to exert influence by virtue of the political office they hold at the relevant time?

Decision

The Court of Appeal (Sir Julian Flaux, Chancellor (who gave the lead judgment), Newey LJ and Popplewell LJ) dismissed the appeal.

Entry of judgment issue

The defendants' submissions focussed on whether the UK sanctions regime authorised a derogation from the fundamental common law right of access to courts. The Court of Appeal agreed with the High Court's ruling that this engaged the "principle of legality", a principle of statutory interpretation which provides that fundamental common law rights can only be curtailed if that is clearly authorised (either expressly, or in clear and unambiguous implicit terms) by primary legislation.

The Court rejected the defendants' submission that entering judgment would give rise to a judgment debt, which as a matter of statutory interpretation would make "funds" available to designated persons, and would amount to "dealing" with their funds, in breach of Regulations 11 and 12 of the 2019 Regulations. In addition, applying the principle of legality, the regulations do not amount to a clear and unambiguous prohibition on the court entering a judgment in favour of sanctioned persons.

The Court of Appeal agreed with the High Court's conclusion that the backdrop to the enactment of SAMLA and the 2019 Regulations made clear that Parliament intended to continue the EU sanctions regime (which SAMLA and the regulations replaced), without substantive changes. The previous regime permitted a judgment debt to be paid to sanctioned persons, provided the payment was made into a frozen account (and therefore presumably also for judgment to be entered), and so SAMLA and the 2019 Regulations cannot have been intended to introduce a radical change to the scope of the regime by blocking access to the courts without express wording to the contrary.

Even if the defendants had been correct that entry of a judgment was prohibited, it would not be appropriate to grant a stay of the proceedings. The principle of legality requires that the relevant provision is interpreted as authorising only such intrusion as reasonably necessary to fulfil the objective of the provision in question. Instead of staying the proceedings, the court could have instead entered a declaratory judgment or judgment on liability with quantum deferred.

Licencing issue

The Court of Appeal confirmed the High Court's finding that OFSI has the power under the 2019 Regulations to grant licences authorising payment of adverse costs orders, security for costs or damages pursuant to cross-undertakings.

Schedule 5, paragraph 3 of the 2019 Regulations permits OFSI to issue a licence "to enable the payment of… reasonable professional fees for the provision of legal services". This drafting is neutral as to whether the legal services are provided to the designated person or another party, and are wide enough to encompass both. It must therefore allow for the payment of adverse costs orders. It was common ground between the parties that if paragraph 3 permits the payment of adverse costs orders, it must also cover security for costs.

As for damages on the cross-undertaking, the Court of Appeal ruled that OFSI would be entitled to issue a licence under Schedule 5, paragraph 5 of the 2019 Regulations, which enables the payment of "an extraordinary expense of a designated person to be met". It held that any liability for such damages in excess of the security that had already been paid into court could be an extraordinary expense.

Control issue

Regulation 7(4) of the 2019 Regulations provides that an entity (C) is owned or controlled directly or indirectly by another person (P) if, inter alia, it is reasonable to expect that P would, having regard to all the circumstances, be able "by whatever means and whether directly or indirectly, to achieve the result that affairs of C are conducted in accordance with P's wishes".

The court noted that because it had found that judgment can be entered in the claimants' favour and they are entitled to obtain the necessary licences, the question of whether NBT is a controlled person under the regulation did not arise. The court nonetheless addressed the matter obiter, as it had been fully argued and is of general significance.

NBT had conceded at first instance that, if control by virtue of political office could amount to "control" for the purposes of the 2019 Regulations, then NBT would be regarded as controlled for these purposes. The court considered that the High Court had been wrong to conclude that Regulation 7(4) does not encompass control gained by virtue of political office. That is not borne out by the clear and plain language of the provision, and the use of the words "in all circumstances" and "by whatever means" makes clear that there is no limit as to how a designed person can achieve control.

Thus, the court concluded that NBT is controlled by Mr Putin and/or Ms Nabiullina, and went further by commenting that "Mr Putin is at the apex of a command economy. In those circumstances […], in a very real sense (and certainly in the sense of Regulation 7(4)) Mr Putin could be deemed to control everything in Russia.” Ms Nabiullina is the governor of the Central Bank of Russia, which owns 99% of NBT, and her political office reports to Mr Putin, as President.

The court recognised that its conclusions could give rise to absurd consequences, but considered that these arose from the UK government's designation of Mr Putin "without having thought through the consequences". This was not a matter for the court to resolve by putting a gloss on the language of the regulations. It was for the executive and Parliament to amend the wording of the regulations to avoid such a consequence.

Note: The Supreme Court granted permission to appeal in this case on 24 January 2024.