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Robert Dalling

Partner, Jenner & Block

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The imposition of sanctions often disrupts contractual relationships

Navigating financial sanctions in English law disputes

Navigating financial sanctions in English law disputes


Robert Dalling, Partner at Jenner & Block, discusses the key takeaways from recent litigation involving sanctions issues

The rise of financial sanctions imposed by the UK and other jurisdictions against Russia following its invasion of Ukraine in February 2022 has had a significant effect on private law disputes within the UK. Despite protections from liability for actions taken to comply with sanctions, sanctions issues have arisen in a number of contractual disputes. These cases involve important themes such as access to justice, force majeure and illegality, jurisdictional challenges, and the challenges faced by lawyers themselves when representing designated persons. This article explores the key takeaways from recent litigation.

The impact of sanctions on contractual relationships

The imposition of sanctions often disrupts contractual relationships. In recognition of this, the UK sanctions regime protects individuals and companies from civil liability for any act done in the reasonable belief that it is in compliance with sanctions laws (under s.44 of the Sanctions and Anti-Money Laundering Act (SAMLA)). However, the s.44 protection is not absolute. By way of example, acts taken to comply with non-UK sanctions will not fall within this protection.

The protections under the UK sanctions regime are separate from the common law doctrine of illegality, and from any contractual protections that the parties themselves might build into their agreements. In spite of the existence of these protections, however, we have seen cases raising complex questions about performance obligations and the applicability of contractual defences, such as force majeure or illegality.

In this section, we look at two examples of such cases.

Celestial Aviation Services Limited and others (the respondents) v UniCredit (the appellant) [2024] EWCA Civ 628

Between 2017 and 2020, Sberbank issued Letters of Credit (LoCs) to the respondents in relation to leases of aircraft to Russian companies. The appellant provided an additional guarantee to the LoCs by confirming them shortly after issue.

The leases were terminated during March 2022, and the respondents made demands for payment by the appellant under the LoCs. The appellant claimed that it was unable to make payment due to prohibitions on the provision of funds for, or in connection with, the supply of aircraft to Russia. It argued that payment under the LoCs would be ‘in connection with’ the underlying leases that supplied aircraft for use in Russia.

The appellant applied for and obtained licences from the EU and UK authorities and subsequently paid the principal amounts (excluding interest and costs) due under the LoCs to the respondents. An application for a licence in respect of US sanctions was outstanding as of the Court of Appeal’s decision. While the principal amounts due under the LoCs were settled, the respondents issued proceedings for the outstanding costs and interest.

Adopting a purposive interpretation of the language of the relevant prohibitions, the High Court originally found that the UK sanctions did not prohibit the appellant from paying the respondents because performance of the payment obligation by the appellant did not facilitate the supply of aircraft to Russia. Overturning the High Court’s decision, the Court of Appeal found that the appellant was entitled to refuse payments under UK sanctions. The Court of Appeal found that it sufficed that the funds would be provided ‘in connection’ with the lease arrangement intended to make aircraft available for use in Russia.

The Court of Appeal recognised (albeit in obiter remarks) that companies are entitled to the protections under s.44 of SAMLA when forced to ‘form a view about new legislation at short notice’. The Court of Appeal also clarified the scope of s.44, noting that it was not apparent that s.44 should protect a debtor from an action to recover a debt which is otherwise lawfully due but which has not been paid in the reasonable belief that payment would be in breach of sanctions. The evident purpose of s.44 is to ensure that a person is not pressurised into doing something that risks breaching sanctions by a fear of civil claims. However, the exposure to a debt claim is not a new financial exposure which might pressurise payment and, therefore, does not attract the same protection.

The Court of Appeal also considered the application of the ‘Ralli Bros’ principle. This is a limited exception to the general principle that enforceability of a contract governed by English law is determined without reference to illegality under any other law. The exception applies where contractual performance necessarily requires an act to be done in a place where it would be unlawful to carry it out. The Court of Appeal noted that the appellant was precluded from relying on the Ralli Bros principle, because it had not made reasonable efforts to obtain a licence from the US. The Court of Appeal rejected the High Court’s finding that cash payments or non-USD payments could be made to avoid US sanctions, as neither proposition formed part of the contract.

RTI Ltd (respondent) v MUR Shipping BV (appellant) [2024] UKSC 18

As a result of sanctions on Russia post-2022 affecting the Russian parent company of the respondent and thus the respondent itself, the respondent was no longer able to pay freight payments in USD (as was specifically provided for in the contract). The respondent offered to pay the appellant in euros instead of USD, and offered to bear any additional costs or exchange rate losses suffered by the appellant. The appellant maintained its right to payment in USD and sent a force majeure notice to the respondent.

The question for the Supreme Court was whether a reasonable endeavours provision in a force majeure clause requires a party seeking to rely on that clause to accept non-contractual performance, provided (1) it involved no detriment or prejudice to the party seeking to invoke force majeure, and (2) the non-contractual performance would achieve the same result as the performance of the contractual obligation in question.

The Supreme Court favoured certainty and predictability in commercial contracts and ruled that, unless there are clear words to the contrary, a party should not be required to accept an offer of non-contractual performance.

Jurisdictional challenges and forum shopping

Sanctions-related disputes often involve jurisdictional challenges, with parties vying to have their cases heard in more favourable forums. In this section we consider three recent cases.

Magomedov & Others v PJSC Transneft & Others [2024] EWHC 1176 (Comm)

In June 2023, Mr Magomedov and others commenced proceedings against Transneft and others, alleging two conspiracies. The High Court gave the claimants permission to serve Transneft and others outside the jurisdiction. In turn Transneft challenged the English court’s jurisdiction, with the jurisdictional challenge due to be heard in November 2024.

However, in the meantime Transneft applied for an anti-suit injunction (ASI) in Russia. An ASI gives Russian courts exclusive jurisdiction over disputes, and stops the other party from commencing or continuing foreign court proceedings. The Russian court granted the ASI, ordering penalties of USD 7.5 billion by Mr Magomedov if he failed to comply. The Russian court’s decision was based on the practical difficulties for Russian parties in engaging English lawyers.

Recognising that such tools should be used cautiously, the High Court granted Mr Magomedov an anti-anti-suit injunction (AASI) and an anti-enforcement injunction (AEI) on an interim basis, pending the determination of Transneft’s jurisdictional challenge in November 2024. The AEI was granted to prevent Transneft from seeking to enforce the penalty ordered by the Moscow Court (the High Court granted Transneft permission to appeal to the Court of Appeal on points of law, but to date no appeal appears to have been filed).

Barclays Bank plc v VEB.RF [2024] EWHC 1074 (Comm)

This dispute arose out of the termination of an ISDA Master Agreement, which led to USD 147,770,000 being due from Barclays Bank to VEB (the state development bank of Russia, which was designated in the UK in 2022). The Master Agreement had a dispute resolution clause that required disputes to be resolved under the Rules of the London Court of International Arbitration (LCIA). However, VEB commenced Russian court proceedings for the payment amount. Barclays unsuccessfully challenged the jurisdiction of the Russian courts. Barclays applied to the English court for an ASI (to restrain VEB from taking further steps in Russian proceedings) and an AEI (to restrain VEB from seeking to enforce any substantive order). The High Court granted Barclays an ASI and AEI against VEB in the form of an interim order.

The question for the High Court was whether the interim order should be made permanent or discharged. VEB argued that, as a result of the cumulative consequences of the designation of VEB under UK sanctions, the dispute resolution clause became inoperative or, alternatively, incapable of performance (whether by frustration or otherwise), and in any event should not be enforced. Acknowledging that the pool of lawyers willing to represent VEB had shrunk and that there would be added inconvenience for VEB in paying legal fees, the court found that the evidence submitted by VEB came nowhere near establishing that the conduct of an LCIA arbitration for a sanctioned entity would be radically different from how the parties envisaged the arbitration would have been conducted at the time they agreed to the dispute resolution clause. The High Court considered the wider picture, including that VEB commenced Russian proceedings to avoid the effect of sanctions, and ordered the continuation of the interim order.

Zephyrus Capital Aviation Partners 1D Ltd and others (claimants) v Fidelis Underwriting Limited and Others (defendants) [2024] EWHC 734 (Comm)

The judgment concerned challenges to the jurisdiction of the English court to hear claims under operator policies in respect of aircraft that remained in Russia following its February 2022 invasion of Ukraine. The agreements in question had exclusive jurisdiction clauses designating Russia as the place to bring disputes. This decision was significant because it provided an illustration of the English courts’ willingness to intervene where there is an exclusive jurisdiction clause in favour of the courts of another jurisdiction.

The key turning point for the High Court’s decision was the consideration of issues relating to access to justice in Russia, making a fair trial highly unlikely. It therefore concluded that the claimants passed the general test of providing ‘strong reasons’ for the court not to stay proceedings.

Access to justice for designated persons

While the UK legal framework does not prohibit designated persons from accessing courts, as already illustrated by the cases above, practical challenges for sanctioned parties in UK courts persist.

Such challenges were dealt with in Mints & Ors v PJSC National Bank Trust & Anor [2023] EWCA Civ 1132. The case relates to proceedings brought by National Bank Trust and 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 obtained a freezing injunction in support of the proceedings. Otkritie was subsequently designated.

The defendants sought an order to stay proceedings and discharge cross-undertakings given in connection with the freezing injunction. They argued that sanctions precluded judgment being entered against either of the claimants, and that 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.

Upholding the High Court’s judgment, the Court of Appeal found that a judgment can be lawfully entered for a designated person, establishing that the designated person has a valid cause of action. The ‘principle of legality’ meant that fundamental common law rights, in this case access to justice, can only be curtailed if that is clearly provided for in primary legislation, which was not the case here. Licences could be sought in respect of the actions related to costs and damages (the Court of Appeal judgment is subject to an appeal at the Supreme Court, but this has not been heard yet).

However, designated persons in practice encounter difficulties in pursuing or defending claims. In Magomedov v Transneft, Transneft argued that whilst it is not designated in the UK, it is subject to comprehensive US and EU sanctions, making it extremely difficult for it to transfer funds to the UK to pay lawyers, with Transneft’s original counsel having withdrawn following non-payment of fees. The courts acknowledge these difficulties, but also recognise that the UK has attempted to solve this issue. Specifically, a general licence under the Russia sanctions regime permits the payment of legal fees and expenses to UK lawyers by designated persons. However, the licence is subject to a cap of £500k. A designated person can apply for a specific licence if this cap is to be exceeded, although as many practitioners will be aware, licence applications are not always dealt with swiftly.

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