Hong Kong court grants anti-suit relief against sanctioned Russian bank

The Hong Kong Court of First Instance has granted an anti-suit injunction and related relief in favour of a German bank to prevent a sanctioned Russian bank from pursuing Russian court proceedings in breach of an HKIAC arbitration clause (Bank A v. Bank B [2024] HKCFI 2529).

The court rejected a threshold argument by the Russian bank that it did not have jurisdiction because the case involved "acts of state" (namely, an EU sanction and alleged expropriation by the German state) and matters of "foreign affairs" for which the Central People's Government was responsible under the Hong Kong Basic Law.

The court also dismissed the Russian bank's contentions that there were strong reasons not to grant anti-suit relief because there was no dispute between the parties, the Hong Kong arbitration would be futile, it would not receive a fair hearing in a Hong Kong arbitration, and the Hong Kong court would breach public policy by upholding the arbitration agreement and hence the EU sanction and alleged expropriation.

Given these findings and the "egregious breach" by the Russian bank of a previously granted interim anti-suit injunction (which it had ignored), the court granted the anti-suit relief requested by the German bank and ordered indemnity costs against the Russian bank.

Background

The German bank and the Russian bank had concluded an ISDA Master Agreement in 2003 in respect of various foreign exchange and derivatives transactions.

After the Russian invasion of Ukraine in February 2022, the European Union sanctioned the Russian bank and the German financial regulator took various actions in relation to the German bank (discussed further below).

On the day the Russian bank was sanctioned, the parties concluded a settlement agreement providing for the termination of their rights and obligations under all the outstanding transactions covered by the ISDA Master Agreement, pursuant to which the German bank was obliged to pay the Russian bank approximately EUR 113 million.  The settlement agreement was governed by English law and contained an HKIAC arbitration clause expressly stated to be governed by English law.

When the Russian bank demanded payment, the German bank claimed that it was prohibited from doing so by the EU sanction.

The Russian bank commenced court proceedings in Russia for recovery of the settlement amount, a freezing order over securities in the German bank's account with the Russian bank, and anti-suit injunctions prohibiting the German bank from commencing Hong Kong court proceedings, or arbitration proceedings outside Russia, in relation to the settlement agreement.  The Russian court gave judgment for recovery of the settlement amount in full and appeals by the German bank in the various Russian proceedings were dismissed.

The German bank had previously obtained an interim anti-suit injunction from the Hong Kong court.  It then applied for a final anti-suit injunction (to restrain the Russian bank from pursuing proceedings in breach of the HKIAC arbitration agreement), an "anti-enforcement" injunction (to restrain the Russian bank from seeking to rely upon any decision in the Russian proceedings which would interfere with the HKIAC arbitration), and related orders and declarations.

The alleged expropriation

One of the central arguments advanced by the Russian bank (going to both its jurisdictional and public policy arguments) related to alleged expropriation of its assets by the German state.  In this regard:

• The Russian bank held 99.39% of the shares in the German bank, with the remainder being held by another Russian company.  The Russian bank was in turn majority-owned by the Government of the Russian Federation;

• After the Russian invasion of Ukraine, the German financial regulator had: (i) issued orders which prohibited the German bank from various dealings with Russian entities (including the Russian bank); (ii) prohibited the Russian bank from exercising its shareholder voting rights and the German bank from following the instructions of the Russian bank; and (iii) appointed a special representative of the German bank with executive powers; and

• A trustee was then appointed by a German court to exercise the voting rights of the Russian bank and the minority shareholder.  The trustee passed a resolution for the German bank to enter into voluntary and solvent liquidation, and liquidators were appointed.

Jurisdiction challenge

The Russian bank objected to the court's jurisdiction on the basis that:

• It was seeking relief in the Russian proceedings against "acts of state", namely, the EU sanction and the acts of the German state in implementing and enforcing it (which had "culminated in the expropriation" of the German bank);

• The Russian court had exclusive jurisdiction in respect of such disputes, which were not arbitrable issues, and the Russian proceedings therefore did not breach the arbitration agreement;

• Under Articles 13 and 19 of the Hong Kong Basic Law, the Hong Kong courts do not have jurisdiction over "acts of state" such as "foreign affairs";

• When questions of fact concerning acts of state arise in the adjudication of cases, the Hong Kong courts must (pursuant to Article 19) obtain a certificate concerning those questions from the Chief Executive of Hong Kong, who is in turn required to obtain a certifying document from the Central People's Government; and

• In the absence of such a certificate in this case, the court had no jurisdiction to grant the requested relief.

The court rejected these arguments on the basis that no "state" or "acts of state" were involved, Article 19 was therefore inapplicable, and the court therefore had jurisdiction to decide the matters raised (which were arbitrable).  Its reasoning included the following points:

• The dispute related to rights and liabilities under the settlement agreement, and there was no claim by or against any state;

• Although the Russian bank was majority-owned by the Russian Federation, there was no claim or evidence that it was a state entity.  As to the German bank, it was a separate legal entity from the Russian bank.  The acts of the German financial regulator in securing the appointment of a trustee over the German bank could not be equated with the acts of the German state, and hence the claim of expropriation by the German state was rejected;

• The question for the court was simply whether there was a valid and binding arbitration agreement between the parties which applied to the dispute and the claims made in the Russian court proceedings;

• The arbitration agreement was severable from the settlement agreement and any alleged illegality and impossibility of performance of the latter could not affect the validity and operation of the former.  Nor did the impossibility of performance of any award affect the validity and enforceability of the arbitration agreement, the arbitration or the award;

• The court was not required to adjudicate on the validity or operation of the EU sanction in the EU or in Hong Kong.  Whether the EU sanction provided a valid defence to the claim for payment under the settlement agreement went to the merits of the claims in the Hong Kong arbitration.  The courts did not consider the merits when deciding on applications for anti-suit injunctions, which were made solely on the basis of a valid arbitration agreement; and

• An anti-suit injunction was an order in personam and not addressed to or binding upon a foreign court, and its issuance did not deny, call into question or interfere with the jurisdiction of the foreign court.

In reaching its decision, the court drew upon several important apex court decisions from Hong Kong and England, including:

• The landmark judgment of the Court of Final Appeal in Democratic Republic of the Congo v. FG Hemisphere Associates LLC (No 1) (2011) 14 HKCFAR 95, which explained that the ambit of the Article 19 certification procedure was "narrow" and that a certificate from the Chief Executive was only required when there was controversy or doubt about questions of fact concerning acts of state which needed to be resolved in the adjudication of the case, not when the relevant facts had been authoritatively established and were not in dispute;

• The judgment of the UK Supreme Court in Belhaj v. Straw [2017] AC 964, in which Lord Neuberger made observations on the various circumstances in which acts of state might arise under common law (none of which were found to apply in the present case); and

• The judgment of the House of Lords in Kuwait Airways Corp v. Iraqi Airways Co (Nos 4 and 5) [2002] UKHL 883, on which the Russian bank relied to emphasise the need for the Hong Kong courts to "speak with one voice", and work in harmony, with the executive of the government in matters of foreign policy.  In this regard, the court failed to see how its determination of the rights and liabilities of the parties under the settlement agreement and the arbitration agreement could be affected by or concerned with the foreign affairs or policy of the PRC as reflected in the single document (an order of the PRC Ministry of Commerce) cited by the Russian bank in support of its "one voice" argument.

Exercise of discretion

The court also rejected the arguments of the Russian bank (summarised in the introduction to this blog) that there were "strong reasons" not to grant anti-suit relief:

• Lack of dispute.  The court was satisfied that a dispute existed (namely, the Russian bank's breach of the arbitration agreement, which had not been admitted), contrary to the contention of the Russian bank that there was no dispute because it was common ground that payment of the settlement amount could not be made due to the EU sanction.  The court's finding in this regard can be contrasted with the recent decision of the Court of Appeal in CMBICDHAW Investments Ltd v. CDH Fund V Ltd Partnership and Others [2024] HKCA 516 (reported here), in which a jurisdictional challenge to an award was upheld due to the lack of a dispute between the parties.

• Futility of arbitration.  There was no reason to decline relief on the basis that the Hong Kong arbitration would be futile.  However, the tribunal might decide, that would be resolution of the dispute by the mode agreed and intended by the parties.  Any award for the German bank to pay the Russian bank would be valid and binding, even if performance was impossible due to the EU sanction.  Common law authorities, moreover, pointed to the practical utility of granting anti-suit relief in support of arbitration proceedings.

• Public policy: deprivation of fair trial.  There was no evidence that the Russian bank had been or would be deprived of a fair hearing in Hong Kong.  The EU sanction had no application in Hong Kong and therefore did not prohibit the Russian bank from paying its lawyers in Hong Kong (and it was clear in any event that the Russian bank had successfully procured legal services in Hong Kong).  As found previously in Linde v. RusChemAlliance [2023] HKCFI 2409 (reported here), a fair hearing would not be denied simply because the dispute in the Hong Kong arbitration turned on the existence and effect of the EU sanction.

• Public policy: giving effect to expropriation and EU sanction.  The claim of expropriation had already been rejected, and there was "no question" of the court giving effect to the EU sanction merely by granting anti-suit relief, or acting contrary to public policy as a result.  The relevant public policy was that of upholding the parties' autonomy and their agreement to arbitrate disputes in Hong Kong.  The EU sanction should be respected in so far as it had effects on rights or property located in the EU, and the courts and tribunal in Hong Kong would not call into question the acts of the EU within the territory of the EU.  As the EU sanction did not affect the rights or property of any PRC entity or entity in Hong Kong, there was no basis at all for the court to conclude that it would be contrary to the public policy of Hong Kong to grant the relief sought by the German bank and to uphold the arbitration agreement.

Comment

The decision comes one year after anti-suit relief was granted against another sanctioned Russian party in Linde v. RusChemAlliance [2023] HKCFI 2409 (reported here).  Similar arguments around access to justice and the futility of arbitration were rejected in that case.  Taken together, the decisions underline the willingness of the Hong Kong courts to take robust action to enforce arbitration agreements.