Russian bank restrained from breaching LCIA arbitration agreement and side-stepping sanctions
Barclays Bank plc -v- VEB.RF [2024] EWHC 225 (Comm)
The English Court has made permanent an interim anti-suit injunction (ASI) and anti-enforcement injunction (AEI) granted to the claimant UK bank, Barclays, in respect of Russian Court proceedings initiated by the defendant, VEB, a sanctioned Russian state development bank. The Court deemed those proceedings to be in breach of an LCIA arbitration provision contained in the parties’ agreement.
The background facts
Barclays concluded an International Swaps and Derivatives Association Master Agreement with VEB in June 2005 (ISDA Master Agreement). The ISDA Master Agreement was subject to English law and contained a dispute resolution clause providing for LCIA arbitration.
The dispute resolution clause stated as follows:
“(b) Jurisdiction.
(i) Subject to (ii) and (iii) below, any dispute arising out of or in connection with this Agreement, including any question regarding the existence, scope, validity or termination of this Agreement (“Dispute”) or this subsection (b) (Jurisdiction), shall be referred to and finally resolved under the Rules of the London Court of International Arbitration (the “LC1A”), which Rules are deemed to be incorporated by reference into this subsection…” (Dispute Resolution Clause)
The parties amended the ISDA Master Agreement three times between 2013 and 2019. The last amendment was agreed in 2019 and addressed the possibility that VEB might become subject to sanctions by the UK, US or EU. Consequently, the effect of the amendment was to add that the imposition of sanctions against VEB would trigger a termination event. The Dispute Resolution Clause was not amended.
Following the Russian invasion of Ukraine in 2022, VEB became subject to UK, EU, and US sanctions and was disconnected from the SWIFT payment system.
VEB’s addition to sanction lists triggered a termination event under the ISDA Master Agreement (per the 2019 amendment), prompting Barclays to send a notice of termination of the ISDA Master Agreement. The termination was not disputed, and the parties agreed that a net final payment amount of USD147,770,000 was due to VEB from Barclays as a result of the swaps performed under the ISDA Master Agreement. A dispute then arose as to whether interest was payable and the amount of interest payable.
VEB proposed various methods to Barclays by which the final payment might be made notwithstanding the sanctions. However, Barclays’ view was that none of the proposed payment methods were permitted under the sanctions and that it was not able to make payment until UK sanctions were removed or special permission was obtained.
VEB then commenced proceedings in the Arbitrazh Court for the City of Moscow on 19 May 2023, claiming the final payment amount plus default interest (Russian Proceedings). VEB argued in the Russian Proceedings that whilst English law was applicable to the ISDA Master Agreement, that governing law may be overridden where the consequences of its application would contravene basic principles of Russian law and that the sanctions against VEB did so.
Further, VEB contended that the Russian Court had jurisdiction despite the Dispute Resolution Clause because it was overridden by Articles 247 and 248 of Arbitrazh Procedure Code (APC). In this regard, it should be noted that legislative amendments to Article 248 have been relied on by the Arbitrazh courts to claim exclusive jurisdiction over cases involving sanctioned Russian entities and to issue pre-emptive measures in those cases.
Barclays filed an application challenging the jurisdiction of the Russian Court and subsequently, in February 2024, successfully applied to the English Court for an ASI and AEI restraining VEB from pursuing the Russian Proceedings in breach of the Dispute Resolution Clause. On the return date, the Court decided that the injunctions should be maintained.
The Commercial Court decision
VEB argued that the injunctive relief should not be granted as: (a) the imposition of sanctions had frustrated the arbitration agreement as a matter of English law; and (b) Barclays had delayed about eight months from the commencement of Russian Proceedings before applying to the Court for injunctive relief.
Both arguments were dismissed. It was clear that VEB had commenced the Russian Proceedings in breach of an arbitration agreement which it accepted was valid under English law in order to get round the effect of the sanctions. Further, on the evidence, the arbitration agreement had not been frustrated and there was no delay of such a nature as to prevent the injunctions being made permanent.
Frustration
The Court considered whether the performance of the arbitration agreement would be “radically different” by reference to: (a) the terms of the ISDA Master Agreement; (b) the factual matrix; and (c) the parties’ knowledge and expectation of the risk at the time of the contract (the “multi-factorial approach”).
VEB accepted that it was not possible for the parties to comply with the arbitration agreement but sought to argue that the effect of sanctions was such that they impeded in practice VEB’s access to justice. Among other things, they alleged they would face difficulties with securing legal representation, paying their legal and/or LCIA fees, and that their witnesses would not be able to attend a London hearing in person.
The Court dismissed these arguments. It noted that VEB were able to secure specialist legal representation for the ASI proceedings and there was no indication that those representatives were unable to obtain payment for their services.
Whilst for a sanctioned entity, the pool of solicitors and counsel would be narrower and there could be administrative delays in effecting payment of legal fees and disbursements, that did not constitute a radically different performance or denial of access to justice but only increased inconvenience and administrative effort.
As to foreign witnesses, they could attend LCIA arbitration proceedings remotely.
Furthermore, by virtue of their amendment to the ISDA Master Agreement in 2019, the parties had clearly foreseen the risk that VEB might be sanctioned and yet they had not sought to amend the Dispute Resolution Clause. It could not, therefore, be said that the Dispute Resolution Clause was frustrated by sanctions against VEB.
Delay
While Barclays did not apply for the ASI until eight months after the Russian Proceedings had been commenced, the Court found that this delay had not materially increased the perceived interference with the Russian Proceedings or led to a waste of the foreign court’s time or resources. The Russian Proceedings were not far advanced and, as submitted by Barclays, they had to obtain advice on Russian and English law, consider the implications of sanctions regimes and identify any steps they could take to mitigate their commercial and operational risks amidst the Ukraine War and sanctions.
Comment
The English Court will not hesitate to grant an ASI to prevent breaches of contractually agreed arbitration agreements. However, a party intending to seek injunctive relief should not unnecessarily delay before doing so, in order that it does not jeopardise its right to obtain an injunction.
The decision also serves as a reminder that the bar for frustration is high. The fact that performance of the arbitration agreement would be more administratively onerous will not amount to a denial of access to justice or be sufficient to frustrate the arbitration agreement.
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