English court explains effect of sanctions on litigation

Why is this case of interest?

The decision in PJSC National Bank Trust v Mints [1] provides importance guidance for commercial parties on the effect of sanctions on litigation, where at least one of the parties has been sanctioned (“designated”) under the UK sanctions regime.

The court confirmed that entering judgment for a sanctioned party isn’t unlawful and doesn’t require a licence from the Office of Financial Sanctions Implementation (OFSI).

Payment by a sanctioned party of adverse costs, security for costs and damages awarded on a cross-undertaking are all acts licensable by OFSI.

The court briefly considered whether one of the claimants was “owned or controlled” by a designated person (in which case, they would also be subject to an asset freeze). It concluded (somewhat tentatively) that the relevant legislation didn’t extend to a designated person’s power to control companies through their political office, as opposed to personally [2].

While the judgment provides some clarity on the effect of sanctions on litigation, it doesn’t cover the position on enforcement of a judgment entered in a sanctioned party’s favour. Given the importance of the issues raised, it’s widely expected that the decision will now be considered by the Court of Appeal. Watch this space.

The UK sanctions regime

Before we look at the background to the claim and the court’s specific findings on the effect of sanctions on litigation, it’s worth a brief reminder of the UK sanctions regime.

The UK’s post-Brexit sanctions framework comprises the Sanctions and Anti-Money Laundering Act 2018 and the various regulations made under it, including the Russia (Sanctions) (EU Exit) Regulations 2019 which, at the last count, had gone through 17 sets of amendments. Together they introduce an asset freeze regime which applies to persons designated via a list.

It’s generally prohibited to: deal with the frozen funds or economic resources, belonging to or owned, held or controlled by a designated person; make funds or economic resources available, directly or indirectly, to, or for the benefit of, a designated person; or engage in actions that, directly or indirectly, circumvent the financial sanctions prohibitions.

OFSI has the power to grant licences for certain acts that would otherwise be unlawful.

The court stressed in this case that the UK legislation is “very far from coming into being independently or against the backdrop of a blank slate”. Instead it represents the continuation of a sanctions scheme which originated with the UN and was then picked up by the EU. This is a recurring theme throughout the judgment.

What’s the background to this case?

Two Russian banks brought a $850 million conspiracy claim in the English Commercial Court in 2019. Freezing orders were obtained against the defendants and the litigation was heading towards trial when Russia invaded Ukraine. The second claimant became a designated person under the UK sanctions regime, meaning that its assets are frozen and dealings in them are prohibited.

The defendants submitted that entering judgment for the claimants would be unlawful because it constituted dealing with or making available funds or economic resources to a designated person; and that various stages of the litigation couldn’t be completed without a licence (and there was no available licensing ground). Allowing the proceedings to continue while the sanctions remained in force would cause the defendants serious prejudice, because the claimants couldn’t lawfully satisfy adverse costs orders, provide security for costs, or pay any damages that may be awarded on the cross-undertaking given in relation to the freezing orders.

The defendants asked the court for a stay of the proceedings and a release from the undertakings they had given in connection with the freezing orders.

Effect of sanctions on litigation: What did the court have to say?

Can the court properly enter judgment on the claimants’ claim?

This part of the judgment is particularly detailed and complex, but ultimately the answer is yes.

In summary, there’s a principle sometimes described as “the principle of legality”, where certain fundamental common law rights won’t be treated as curtailed unless this is clearly authorised by primary legislation. The court concluded that, despite the breadth of the wording in the sanctions legislation, the level of clarity in intent which would be needed to derogate from the fundamental right of access to the court (outside of how to challenge a sanctions designation itself) had not been demonstrated. With no clear derogation, the principle of legality compels the answer that judgment can be entered.

The claimants had argued that construction of the relevant provisions must be informed by the backdrop, i.e. that the UK sanctions regime continues the approach adopted through the UN and the EU, where there’s no prohibition against entry of judgment in a pre-existing claim (i.e. one not related to the sanctions). The defendants argued that certain differences in wording in the UK legislation were deliberate and stopped the claimants relying on continuity. The court concluded that the language didn’t provide a clear indication of an intention to move away from continuity and to bar entry of judgments.

It’s interesting to note the court’s comments about the UK legislation being aimed at taking the country into a post-Brexit world. The court said it was worth bearing in mind that the defendants’ approach would mean taking the UK, a major international legal centre, fundamentally out of step with the EU in a way which would make it a less competent jurisdiction for dispute resolution than the EU and mark a change from 30 years of sanctions-related litigation.

Acts licensable by OFSI

Entry of judgment: Because of the conclusions already reached, it followed that there’s no requirement for a licence for the entry of judgment.

Adverse costs: The payment of an adverse costs order is licensable under the provision that enables payment of “reasonable professional fees for the provision of legal services”. The court found there was nothing in the language to limit the licence to professional fees of the designated person’s own lawyers.

Payments of adverse costs orders are a routine and necessary feature of adversarial litigation. In a large and complex case, even a party which is (or will be) successful overall can expect to be required to pay at least the occasional costs order to the other side in respect of interim applications. The legislators must be taken to be well aware of this fact of litigation life.

If a licence could be issued to a designated person to pay their own lawyers’ costs, but not to pay adverse costs, this would surely lead to arguments that the unlevel playing field created would require or justify a stay. In addition, an adverse costs order doesn’t benefit a designated person – it diminishes their assets.

Security for costs: The court reached the same conclusion in relation to payment of security for costs. If OFSI can issue a licence to pay existing and future adverse costs orders, it can also issue a licence to allow payment of security for costs for the very purpose of meeting such adverse costs orders. Such a licence could also fall under the provision that enables payment of “reasonable expenses associated with the provision of legal services”.

Damages on a cross-undertaking: An award of damages on a cross-undertaking has nothing to do with legal services provided to the person who gave it. It compensates the other party for the loss caused by the injunction and falls instead within the provision to “enable an extraordinary expense of a designated person to be met”.

How could OFSI refuse a licence when money is to be paid to a non-sanctioned defendant entitled to compensation under a decision of the English court? Again, the payment would reduce the designated person’s assets – furthering rather than undermining the object and purpose of the legislation.

The effect of sanctions on litigation: How we can help

Our multidisciplinary international trade lawyers are experienced in advising on and navigating the complexities of export controls and sanctions compliance and related issues. If you have any questions about the effect of sanctions on litigation, or need advice or assistance generally, please contact Andrew or Nick.

[1] PJSC National Bank Trust and another v Mints and others [2023] EWHC 118 (Comm)

[2] On a separate but related note, OFSI recently published updated guidance on enforcement and monetary penalties for breaches of financial sanctions, setting out what it will consider/take into account where an incorrect assessment of ownership and control of an entity is relevant to commission of the breach.