A case reflecting the impact of sanctions in the context of security for costs

This litigation raised issues regarding the effect of sanctions on the defendant banks’ ability to comply with their contractual obligations to pay sums due under certain bonds. 

In an earlier decision, the Court declined to order an interim payment for the total amount of the claim into court or into a blocked account because it took into account the risk that the banks would be in breach of EU sanctions if they were ordered to make such a payment.

This decision dealt with the effects of sanctions in the context of security for costs. The Court ordered the claimant to pay security for costs by way of a payment into court. In the circumstances of this case, a parent company guarantee or a parent company undertaking were not deemed adequate security equating with that provided by a payment into court. Among other things, the Court took into account a risk that the parent company might in due course itself become sanctioned.

The background facts

The claimant is a Russian company, whose parent company is incorporated in Switzerland. The claimant sought payment of Euros 12 million plus interest pursuant to on-demand bonds issued by the defendant banks. 

The bonds were issued in relation to engineering, procurement and construction (EPC) contracts regarding a fertiliser plant in Russia. The parties to the EPC were the claimant and an Italian contractor.

There was no dispute that the sums claimed under the on-demand bonds would be due if it were not for the fact that the defendants contended that payment to the claimant would breach EU sanctions. 

In particular, the defendants alleged that the claimant was owned or controlled by sanctioned individuals. 

Alternatively, the defendants argued that the claimant had assigned or pledged its rights under the bonds to various Russian banks, some of which were sanctioned. Therefore, payment under the bonds would constitute making funds available to or for the benefit of sanctioned Russian banks.

Additionally, the banks contended that performance under the bonds, even though they were governed by English law, was unlawful under EU sanctions regulations. Therefore, the obligations under the bonds should be treated as discharged, frustrated or terminated upon expiry of the bonds.

Security for costs

The defendants sought security for costs pursuant to CPR 25.13,2(a) on the basis that the claimant is resident outside the jurisdiction in Russia and Russia is not party to the 2005 Hague Convention, further or alternatively, on the ground that the claimant is a company and there was reason to believe it would be unable to pay the defendants’ costs if ordered to do so.

The defendants sought an order that the claimant pay an amount of almost £2 million into court by way of security for costs up to and including a case management conference.

The claimant objected in principle, submitting that the defendants were holding onto significant sums to which the claimant was entitled and that it was unlikely the defendants would recover their costs at the end of the day. 

Nonetheless, the claimant accepted that the jurisdictional threshold under CPR 25.13 for ordering security for costs had been met. However, it resisted an order for payment into court. Instead, it repeated its previous offers to provide a parent company guarantee on the basis that there was no doubt as to the parent company’s financial standing.

The defendants declined to accept a guarantee from the Swiss parent company because it submitted that this would arguably contravene EU, French and Italian sanctions regulations. 

The claimant, therefore, alternatively offered an undertaking from the parent company to the Court to pay any legal adverse costs that the claimant was ordered to pay but did not pay. Given that the defendants would need to apply for a licence from the relevant EU regulator before accepting any payment on the claimant’s behalf, whether following a payment into court or pursuant to a parent company undertaking, accepting the latter would not result in any additional delay.

The defendants declined to accept the undertaking because: 

1. a payment into court provided a readily realisable source of funds to satisfy any adverse costs order;
2. enforcement of the undertaking if there was non-compliance was unclear and uncertain; and
3. there was a risk that by the time the costs order was made, the financial position of the parent company would be very different.

The Commercial Court decision

The Court was satisfied that it was appropriate to order security for the defendants’ costs. As to the form of security, an undertaking was not the usual form of security. The baseline was payment into court. The Court had a discretion to order an alternative form of security, but only if the alternative was acceptable to the secured party and it amounted to an equally adequate form of security.

Whilst guarantees and undertakings were well-established forms of security, the undertaking offered in this case did not provide equivalent security in that it did not provide a readily realisable source of funds in the same way as payment into court, cash or a first-class London bank guarantee. Among other things, there were uncertainties surrounding the enforcement of such an undertaking. Enforcement would probably involve contempt proceedings which were a longer, more indirect and delayed route to enforcement.

The Court concluded that even if the parent company was good for the money, the undertaking provided a more complex and indirect alternative form of security that was not as good as a payment into court. 

The Court also noted that whilst the parent company appeared to have ample financial resources, there was a likelihood that it would be affected by sanctions in circumstances where it was contended that it was associated with, controlled and/or owned by sanctioned individuals. Although it was financially sound now, any costs order would not be payable until 2025 or even 2026. Even if the risk of sanctions and/or a change in financial circumstances was small, it was nonetheless relevant and rendered any proposed undertaking from the parent company less adequate as a form of security than a payment into court. 

Ultimately, the standard approach to security was that it was provided upfront. The Court concluded that it should order security for costs by way of a payment into court.

Comment

The decision is a reminder of the numerous ways in which both UK and EU sanctions continue to impact English court litigation. Even where parties are not currently subject to sanctions, it appears that the possibility that they may in due course become sanctioned can be a relevant consideration when the Court is dealing with procedural issues.