In an ongoing dispute between Barclays Bank and VEB, the state development bank of the Russian Federation, the English Commercial Court has granted (i) an anti-suit injunction (ASI) to prevent VEB from pursuing a claim that it commenced against Barclays in the Russian courts in breach of an arbitration clause, and (ii) an anti-enforcement injunction (AEI) to restrain VEB from enforcing any substantive order made by the Russian courts in relation to its claim.
The Court rejected VEB’s novel argument that the arbitration agreement had been frustrated as a result of sanctions imposed on VEB, putting down a clear marker that it considers that the imposition of sanctions does not mean sanctioned entities face obstacles to access justice and will not be sufficient to allow sanctioned parties to avoid their contractual obligations.
The Court’s decision to grant a final ASI and AEI (see Barclays Bank PLC v VEB.RF [2024] EWHC 1074 (Comm), followed its decision in February to grant the injunctions on an interim basis following a without notice hearing (Barclays Bank PLC v VEB.RF [2024] EWHC 225 (Comm)).
This case is another in a recent line of cases where parties have sought ASIs and AEIs to enforce their arbitration agreements, when faced with sanctioned counterparties who have breached their arbitration clauses by commencing proceedings in the Russian courts. For further examples, please see our blogs here and here.
Background
In 2022, VEB was designated as a sanctioned entity as a matter of UK, EU and US law. This led Barclays to terminate transactions entered into pursuant to an ISDA Master Agreement (Agreement) with VEB. Although termination of the Agreement resulted in Barclays owing money to VEB, Barclays was precluded from making payment owing to the asset freeze provisions imposed by sanction regulations that apply as a matter of English law.
The Agreement was governed by English law and provided for LCIA arbitration as the default dispute resolution mechanism. The Agreement also contained an asymmetric power which enabled Barclays to refer any claim commenced by VEB to the English courts rather than to arbitration.
Notwithstanding these dispute resolution provisions, VEB commenced proceedings against Barclays in Russia. Although Barclays challenged the jurisdiction of the Russian court on the basis of the agreed dispute resolution provision, on 5 December 2024, the Russian court gave directions for the resolution of both the jurisdictional and merits issues and scheduled a hearing for early February.
Barclays applied to the English court for an ASI to prevent VEB from taking any steps to further its claim before the Russian court and an AEI to prevent VEB from enforcing any substantive order made by the Russian court in relation to VEB’s claim.
Decision on the interim applications
In its decision following the without notice interim hearing, the Court noted that, as per the decision in The Angelic Grace, in order to grant an ASI, it needed to be satisfied to a high degree of probability that there was an arbitration or exclusive jurisdiction agreement between the parties. If that hurdle was overcome, then the ASI would generally be granted unless there were strong reasons which would make the order inappropriate (see our blogpost here for more discussion of the test).
The judge was “entirely satisfied” that an arbitration agreement applied here. Although VEB had submitted that the arbitration agreement was governed by Russian law, the Court held that it was governed by English law, because English law governed the substantive agreement, and that the law of an arbitration agreement “will almost invariably be held to be the same as the governing law of the substantive agreement“. The judge also rejected as “unarguable” VEB’s contention that the asymmetric provision invalidated the dispute resolution agreement as a whole, because English law gives effect to asymmetric arrangements of this sort and the clause was in any event irrelevant here because it only applied to disputes referred to arbitration by VEB.
The judge also dismissed VEB’s suggestion that it would be unable to obtain substantive justice in England and Wales because of the sanctions regime.
In relation to the application for an AEI, the Court held that there could be no sensible objection to an AEI in light of the terms of the agreement and the terms of the ASI that it proposed to grant.
Decision on the return date
On the return date, VEB argued that the arbitration agreement had become inoperative or alternatively incapable of performance by reason of frustration and should not be enforced. VEB submitted that the practical effect of the sanctions that had been imposed on it was to provide obstacles to VEB’s access to justice and to render the performance of the arbitration agreement so radically different from that which had been envisaged when the original contract was concluded that it was frustrated.
In support of this contention, VEB relied on (i) alleged difficulties securing legal representation (ii) alleged problems paying legal and LCIA fees and (iii) the inability of witnesses and party representatives to attend a hearing in person. The Court rejected VEB’s contentions and made the interim order permanent.
On the question of legal representation, the Court found that whilst the pool of lawyers potentially available to represent VEB in both Moscow and England had shrunk significantly following the imposition of sanctions, VEB was still able to find both specialist solicitors and leading counsel to represent it at the hearing. There were also other reported cases involving sanctioned entities in the Commercial Court. The “cab rank” rule for barristers also continued to apply, regardless of the existence of sanctions.
As for paying legal and LCIA fees, the evidence was that it was still possible for international payments to be made by VEB, and the LCIA had confirmed that it has a general licence to accept payments in respect of arbitrations.
VEB had submitted that its witnesses would have difficulties attending in-person hearings and that remote participation would not be fair. The judge commented that the use of remote hearings is now firmly established and has been found to operate well in both the Commercial Court and international arbitration. In this particular case, given that the issues between the parties were largely legal in nature, remote attendance by both parties was unlikely to lead to injustice or unfairness.
In summary, the evidence put forward by VEB came “nowhere near” establishing that the conduct of an LCIA arbitration as a sanctioned entity would be so radically different from how the parties envisaged the arbitration would be conducted at the time of contracting. Although performance may have been more onerous, there was no practical impediment of such a nature or degree as to amount to a denial of access to justice or frustration.
The judge also noted that the risk of sanctions was not unforeseen at the time of contracting – indeed the parties had amended their Agreement in 2019 in response to the risk of sanctions.
Comment
This is another pragmatic decision from the English Court, which demonstrates that it will employ all available tools to uphold arbitration agreements when parties are faced with a deliberate breach of contract. The Court will have regard to the wider picture when deciding whether to grant ASIs and AEIs – in this case, the Court placed weight on the need to uphold UK sanctions in circumstances where VEB was seeking to circumvent them by commencing proceedings in Russia.
Although such orders may be ignored by Russian parties and the Russian court, ASIs and AEIs may nonetheless provide some protection against the enforcement of Russian judgments in third country jurisdictions (as the Court noted in its decision following the interim hearing).
For further information, please contact:
Ajay Malhotra, Partner, Herbert Smith Freehills
Ajay.Malhotra@hsf.com
