6 minute read | May.23.2024
The English High Court has confirmed that UK courts do not consider sanctions a bar to enforcing arbitration clauses referring disputes to the London Court of International Arbitration (LCIA).
The court’s 10 May ruling confirms a prior interim order which required a party subject to UK sanctions to comply with the arbitration clause in an agreement and submit the dispute to arbitration administered by the LCIA. This ruling is noteworthy for those who follow either sanctions or arbitrations because it confirms that UK courts do not consider UK sanctions to be a bar to enforcing an arbitration clause.
In 2005, Barclays entered into a currency swap agreement (ISDA) with VEB, the state development bank of the Russian Federation. The agreement was governed by English law and referred disputes arising out of or in connection with the agreement to arbitration administered by the LCIA. The agreement was amended three times, including in 2019, when a termination event was added in case VEB became sanctioned. The arbitration clause in the agreement was not amended at that or any other time.
Following Russia’s invasion of Ukraine in February 2022, VEB became a designated person subject to an asset freeze in the UK (as well as in the EU and USA). Pursuant to the 2019 amendment, Barclays notified VEB of its early termination of the agreement.
Upon termination, Barclays owed VEB approximately US $147 million. Barclays does not dispute the amount owed. However, Barclays has refused to pay because doing so would breach the asset freeze obligation imposed by UK sanctions. Barclays further took the view that an application for a specific licence to make the payment to VEB would not succeed.
In breach of the arbitration clause in the agreement, VEB issued proceedings before the Abritrazh Court of the City of Moscow, demanding payment from Barclays. Barclays challenged the jurisdiction of the Russian courts and, in parallel, filed for an anti-suit injunction and anti-enforcement injunction before the English High Court, which were granted in interim form on 5 February 2024.
VEB challenged the interim order on the grounds that:
The frustration argument
Regarding frustration, VEB argued that the UK sanctions had the effect of impeding VEB’s access to justice and rendering the performance of the arbitration clause so radically different from what the parties originally envisaged that it was frustrated. To support this argument, VEB alleged that: (i) it experienced significant difficulty in retaining legal counsel; (ii) it faced problems in making payments to legal counsel and the LCIA; and (iii) key witnesses and party representatives may not be able to attend hearings.
The judge dismissed VEB’s arguments on frustration. While he acknowledged that since Russia’s invasion of Ukraine the pool of barristers and law firms willing to act for sanctioned entities had shrunk significantly, this did not effectively result in VEB being unable to retain adequate legal representation. He noted that VEB was in fact represented by counsel and solicitors in the present challenge to the interim order.
On the evidence, the judge was satisfied that if VEB had referred the dispute to the LCIA, it would have been able to retain adequate legal representation (albeit from a more limited pool). This simply made performance of the arbitration clause more onerous, but not impossible.
The judge likewise considered that UK sanctions had not made payments to the LCIA impossible, but only more difficult and slower. He noted that the LCIA had obtained a general licence from OFSI which allowed it to receive payments from designated persons. The fact that VEB had to channel payments other than through SWIFT and provide additional information amounted to no more than an increased inconvenience and administrative effort.
In relation to the attendance of VEB’s party representatives and witnesses, the judge noted that remote hearings were firmly established in arbitral practice and that they are particularly appropriate in disputes that are focused primarily on legal issues, such as in the present case.
Necessary to uphold UK sanctions as part of English law
Importantly, the Court noted that, based on the evidence available, VEB commenced proceedings in Russia in breach of the arbitration clause to evade the effect of UK sanctions.
The judge also considered that upholding UK sanctions as part of English law was a relevant and important consideration. It was plain that VEB wanted to obtain a favourable judgment in Russia (which it could not have obtained before an LCIA tribunal), and then take enforcement measures against Barclays’ assets in Russia and other jurisdictions where a Russian judgment can be enforced.
This judgment is a positive development for arbitration in the UK. It confirms that UK courts will enforce arbitration clauses providing for LCIA arbitration in existing contracts involving a designated contractual counterparty.
The decision sends a strong signal to designated persons that UK courts regard the LCIA and legal services general licences issued by OFSI as effective to protect a designated person’s right to access justice. Arguments by designated persons alleging problems in retaining legal representation or making payments outside the SWIFT system are likely to fail in future proceedings.
The decision naturally does not impede Russian designated parties from commencing proceedings in Russian courts where they would have ‘home advantage.’
In practice, the non-designated counterparty may still have to challenge anti-arbitration injunctions before Russian courts and commence anti-suit and anti-enforcement injunction proceedings in England. Nevertheless, it is positive development for English courts to confirm that arbitration clauses providing for LCIA arbitration will be upheld and enforced.