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On 6 October 2023, the Court of Appeal handed down judgment in Mints & Ors v PJSC National Bank Trust & Anor [2023] EWCA Civ 1132, a case connected to the long-running litigation brought by two state-owned Russian banks against the second claimant’s co-founder and members of his family, among others. The proceedings are some of the first to consider the impact of Russia-related sanctions on various aspects of litigation involving a sanctioned party.

Background

In June 2019, the respondent banks brought claims for US$850 million against the appellants (the first to fourth defendants to that claim) on the basis that they conspired with representatives of the banks to enter into uncommercial transactions with companies connected with the appellants by which loans were replaced with worthless or near worthless bonds. Freezing orders were obtained against the appellants.

The litigation was progressing towards trial when Russia invaded Ukraine in February 2022 and the second claimant, Bank Otkritie, was designated under the UK sanctions regime. The Secretary of State also sanctioned President Vladimir Putin and Ms Elena Nabiullina, the governor of the Central Bank of Russia, which is the 99% owner of the first claimant, the National Bank Trust (“NBT”).

The first to fourth defendants subsequently applied for a stay of the proceedings and a release of the undertakings they had given in connection with the freezing orders. They contended that NBT was subject to the same asset freeze as Bank Otkritie because it was owned or controlled by one or more designated persons within the meaning of Regulation 7 of the Russia (Sanctions) (EU Exit) Regulations 2019, namely Mr Putin and Ms Nabiullina, meaning that the entry of any judgment in the claimants’ favour would be a breach of sanctions. The defendants also argued that continuing the proceedings would be prejudicial to them as the claimants could not lawfully provide security for costs, pay any damages awarded on their cross-undertaking, or satisfy any adverse costs orders.

Issues on appeal

Mrs Justice Cockerill dismissed the application at first instance, giving rise to three issues on appeal:

1. the entry of judgment issue: whether a judgment can be lawfully entered for a designated person by the Court following a trial at which it was established that the person had a valid cause of action;
2. the licensing issue: where the Office of Financial Sanctions Implementation (“OFSI”) can license the payment of a designated person’s own legal costs, whether it could also license (i) the payment by a designated person of an adverse costs order; (ii) the satisfaction by a designated person of an order for security for costs; (iii) the payment by a designated person of damages pursuant to a cross-undertaking in an injunction and (iv) the payment of a costs order in favour of a designated person; and;
3. the control issue: whether a designated person “controls” an entity within the meaning of Regulation 7 where the entity is not a personal asset of the designated person, but the designated person is able to exert influence over it by virtue of the political office that he or she holds at the relevant time.

Findings

The Court of Appeal (per Sir Julian Flaux C, with whom Newey and Popplewell LJJ agreed) dismissed the appeal. It agreed with the first instance finding that the entry of a money judgment in favour of a designated person is not prohibited under the UK sanctions regime and that OFSI can license all the matters referred to above.

Given these conclusions on the first two grounds of appeal, the control issue did not arise. However, the Court considered it nonetheless, and concluded (non-bindingly) that it would have found in favour of the appellants. The Court agreed with the appellants’ assertion that the words “in all circumstances” and “by whatever means” in Regulation 7(4) do not have any limit as to the means or mechanism of control, and that control could be borne out of political and corporate office. Accordingly, the Court concluded that NBT was “controlled” within Regulation 7 by Mr Putin and/or Ms Nabiullina and, therefore, also subject to sanctions.

Implications

Sanctioned parties’ access to the Courts

The judgment signals that the Courts are being more prescriptive about the application of sanctions in practice. In particular, it makes clear that the sanctions regime does not preclude a sanctioned person’s right of access to the Court, and that such access should not be curtailed in the absence of clear statutory language. While steps to enforce a judgment may be prohibited in the absence of an OFSI licence, judicial consideration of a cause of action involving a sanctioned person does not require one.

Counterparties will need to be mindful not to overextend the consequences of a sanctions designation as an excuse to curb the rights of the designated person, and be prepared for the Courts to allow claims brought by sanctioned parties against them to proceed.

For their part, sanctioned claimants will need to be proactive in seeking the licences required from OFSI in connection with certain parts of the litigation process, including the payment of adverse costs, providing security for costs and/or damages awarded in respect of a cross-undertaking in damages.

Interpretation of “control”

In his concluding paragraphs, Flaux C stated that “in a very real sense (and certainly in the sense of Regulation 7(4)), Mr Putin could be deemed to control everything in Russia.” The effect of this interpretation appears to be that every Russian state-owned and potentially even commercial entity could be considered indirectly sanctioned under the UK regime.

The judge accepted the “absurd consequences” of this interpretation. However, Flaux C concluded that they arose “not from giving the Regulation its clear and wide meaning but from the subsequent designation by the government of Mr Putin, without having thought through the consequences that […] Mr Putin is at the apex of a command economy”.

The UK government has since made clear that the Court’s interpretation of Regulation 7(4) was not what it intended. On 16 October 2023, the Foreign, Commonwealth and Development Office (“FCDO”), which is responsible for the UK’s financial sanctions policy and managing the UK sanctions list, issued a statement saying that the case was “not decided” on the meaning of “control” for the purposes of Regulation 7. It added that:

“There is no presumption on the part of the Government that a private entity based in or incorporated in Russia or any jurisdiction in which a public official is designated is in itself sufficient evidence to demonstrate that the relevant official exercises control over that entity.

In the interests of reducing any uncertainty, we are exploring the options available to the Government in clarifying this position further.”

This response is not unexpected. When Ms Nabiullina was sanctioned in September 2022, the FCDO expressly stated that it did not consider her to control the Central Bank of Russia.

Furthermore, as noted by Cockerill J at first instance, a number of Russian state-owned banks and enterprises (such as Gazprom) have been specifically designated since Mr Putin was sanctioned, seemingly indicating that it is not the intention for other state-owned entities to be sanctioned by a sidewind.

We expect that the government clarification on this issue may take the form of further statements from the FCDO and/or OFSI in the short term, and possibly an amendment to the Regulations in the longer term.

In the meantime, counterparties should carry out thorough investigations into entities which are not designated under UK sanctions but may have a nexus to Russia, so as to ascertain whether they could be captured by the Court’s broad interpretation of Regulation 7.