Disputes in a world of sanctions: issues with the administration of justice

Stavros Pavlou
Patrikios Legal, Limassol
spavlou@pavlaw.com

The restrictive measures introduced by the United States, the European Union, the United Kingdom and others in respect of the actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine are undoubtedly of an unprecedented nature. On the other hand Russian anti-sanctions measures are changing the landscape in unrecognisable ways.

By February 2024, the EU imposed its 13th package of sanctions against Russia. The economic sanctions have also been extended to 31 July 2024 with the possibility that they will be extended again for as long as the conflict continues. Although such sanctions are part of a continuous effort to impose severe economic, political and other consequences on Russia for its war against Ukraine, they create obstacles to the effective administration of justice and the rule of law.

The two major sanctions regulations are:

(1) Regulation (EU) No 269/2014 concerning restrictive measures in respect of the actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine, as amended (Regulation 269); and

(2) Regulation (EU) No 833/2014 concerning restrictive measures in view of Russia’s actions destabilising the situation in Ukraine (Regulation 833).

Russia has introduced laws aimed at alleviating the sanctions on Russian companies and individuals but also targeting ‘unfriendly states’ as well as companies ‘controlled’ by individuals and/or structures seated in such ‘unfriendly states’.

Furthermore in a step overturning established international law principles, Russia has enacted laws to give exclusive jurisdiction to the Russian courts over disputes involving Russian sanctioned entities or individuals, nullifying arbitration and choice of law clauses and creating havoc in cross-border disputes involving such entities.

The sanctions by the EU, and similarly the US and the UK have carve outs to ensure that the rule of law is safeguarded. Regulation 833, which prohibits in article 5n, the provision of ‘legal advisory services’, directly or indirectly, to the Russian Government, or legal persons, entities or bodies established in Russia, contains a very significant exception. Provision has been made to exclude the applicability to services that are strictly necessary for the exercise of the right of defence in judicial proceedings and the right to an effective legal remedy, as well as to those strictly necessary to ensure access to judicial, administrative or arbitral proceedings in a Member State and for the recognition or enforcement of a judgment or an arbitration award rendered in a Member State. Furthermore, the preamble clarifies that the term ‘ “Legal advisory services” does not include any representation, advice, preparation of documents or verification of documents in the context of legal representation services, namely in matters or proceedings before administrative agencies, courts or other duly constituted official tribunals, or in arbitral or mediation proceedings.’

The provision of legal services to Listed Persons, always carried a number of concerns, all of which risk undermining to some extent the fundamental rights of access to justice and legal representation. Such concerns, primarily included reputational matters for the lawyers involved, potential liability for sanctions’ circumvention and a risk of failure to receive legal fees.

Clearly, the prohibition to offer legal advisory services is very broad and the derogations provided for by the Regulation itself do not make it any easier when one has to decide whether or not to represent a client. In fact, the prohibition may very well deter legal practitioners who are EU nationals or operating in the EU, from offering legal services to Russian entities at all, in order to ensure compliance with the sanctions, because even when the advice refers to a matter that is of a contentious nature that may lead to court proceedings, a practitioner may worry, whether any advice given outside the strict context of a court action, contravenes Article 5n of Regulation 833.

All the above indicate that economic sanctions may affect fundamental rights and the rule of law. Access to justice is a fundamental right protected by both the EU Charter of Fundamental Rights (the Charter) and the European Convention of Human Rights (ECHR). It encompasses a number of human rights such as the right to a fair trial under Article 6 of the ECHR and Article 47 of the Charter and the right to an effective remedy under Article 13 of the ECHR and Article 47 of the Charter.[1]

The European Commission has stated that ‘sanctions on “legal advisory services” have been designed so as to preserve access to justice and the right of defence’.[2]

In a recent UK judgment in PJSC National Bank Trust & another v Boris Mints & others,[3] the Commercial Court examined whether it could enter judgment in favour of a Claimant who was sanctioned by the authorities. The Court held that while the sanctions regulations intended to restrict the rights of sanctioned entities there was no clear restriction to the fundamental right of access to courts and it would require clear wording to ‘interfere with core judicial functions in this way’.

Russian anti-sanctions are numerous so we will concentrate on only some of them. There are also many prohibitions on trade and financial transactions. As a sample of the problems created we summarise the relevant sanctions below.

• The payment of certain debt to foreign creditors from ‘unfriendly states’ by Russian debtors may be made in a special rouble account in a Russian Bank opened by the debtor in the name of the creditor, a so called ‘C-account’ and the creditor cannot transfer those funds outside Russia. Obviously this raises the question as to whether the debt obligation is satisfied in such a manner. Within Russia the answer would be yes but outside Russia this unilaterally instigated alternative method of payment, unwarranted by the original agreement, will not be recognised as a performance of the debt obligation.
• Russian debtors are protected from insolvency proceedings in Russia by their creditors in certain circumstances, including where the creditor is a foreign entity or individual.

Article 248.1 of the Arbitraz Court Procedural Code, provides that Russian courts can exercise exclusive jurisdiction over disputes involving sanctioned individuals and entities, in the absence of a contrary agreement between the parties. Such exclusive jurisdiction under Article 248.1(4) exists if:

• The jurisdiction and dispute resolution clause provides for the dispute to be resolved in a foreign jurisdiction or by arbitration.
• The agreed method is unavailable or inoperative vis a vis a party that is sanctioned and claims not to be able to have access to justice in the foreign court or tribunal as a result of the sanctions.
• Proceedings are threatened in a foreign state, the sanctioned party may apply to the Russian Arbitrazh Court for an anti-suit injunction against the opposing party, as provided for in Article 248.2.

The English High Court in the recent case of Renaissance Securities (Cyprus) Ltd v Chlodwig Enterprises Ltd & Others [2023] EWHC 2816 (Comm), granted an anti-suit injunction and an anti-anti-suit injunction to a company for the purposes of preventing the defendants in the case, who were subject to UK and US sanctions, from bringing proceedings in Russia under Article 248.

The Claimant in this case was a financial services company holding assets in trust for the Defendants, who were sanctioned by the US and UK. The assets were frozen by the sanctions and the Claimant refused to transfer them to the Defendants in Russia for fear of breaching the sanctions. The Defendants initiated proceedings in Russia utilising Article 248.2. The Claimant applied ex-parte and in private to the English High Court for an anti-suit injunction in favour of the contractually agreed method of dispute resolution, an LCIA Arbitration. They also applied for an anti-anti-suit injunction to prevent the Defendants from applying to the Russian Court for an antisuit injunction against Renaissance.

The English High Court considered the Defendants conduct as a flagrant breach of the arbitration clause and issued both injunctions requested by the Claimant.

The Renaissance case is indicative of the issues created by the application of Article 248.2, but does not tell the whole story. If the Claimant before the Russian Court is a Russian entity or individual without assets abroad, and is prepared in the case of an individual not to travel to the jurisdiction where an anti-suit injunction is granted, the fact that the injunction is issued has little practical significance, if it cannot be backed by threat of contempt proceedings.

What happens if the anti-suit injunction is ignored and the Russian entity proceeds with the Russian proceedings, while the foreign entity proceeds with arbitration or litigation? We could very well end up with conflicting judgments or a Russian judgment and a conflicting award. In countries with bilateral treaties recognising Russian judgments, provided due process was available to the non-Russian party, there is only one ground for refusing recognition, applicable in such a case, that of public policy. While public policy has been called an ‘unruly horse’, it seems this would be the only basis for defending the recognition proceedings.

Effective and efficient dispute resolution requires certainty and clarity. In the era of worldwide conflicting sanctions we are far removed from this ideal.