Key takeaways
Sanctions aren’t a free pass in court
Being under sanctions doesn’t excuse ignoring court orders.
Real risk must be proven, not assumed
Courts need solid evidence, not just concerns to change decisions.
Act early and bring strong evidence
Delays and weak arguments reduce chances of success.
The English Court has confirmed once again that it will not allow defendants involved in English Court proceedings to use UK and international sanctions as a reason not to comply with their contractual obligations or with court orders.
The background facts
The underlying contracts were eight aircraft leases entered into by two airline companies within the Russian Volga-Dnepr Group (Lessees) during the period December 2005 to January 2021. The defendant was a Dutch company within the Group that provided deeds of guarantee and indemnity to the claimants between June 2017 and August 2021 in order to guarantee the Lessees’ obligations under the leases.
Following Russia’s invasion of Ukraine and the imposition of international sanctions on Russia and certain Russian entities, the claimants sought to terminate the leases in March 2022. The claimants alleged that either events of default or events of loss under the leases had occurred and the Lessees were liable to pay various amounts in debt, indemnity or damages.
When the Lessees did not pay the amounts alleged to be owed, the claimants sought payment from the defendant under the guarantees. The defendant did not pay. Therefore, the claimants commenced English Court proceedings in relation to their claims under the guarantees. The claimants sought either summary judgment, alternatively an interim payment of the sums owed.
The defendant’s ultimate beneficial owner was a sanctioned individual under UK sanctions regulations, namely the Russia (Sanctions) (EU Exit) Regulations 2019. Therefore, the defendant had to apply for licences from OFSI (UK Office of Financial Sanctions Implementation) in order to be able to pay for legal representation. By the time the relevant licences had been granted, the defendant’s beneficial owner had become sanctioned by OFAC under US regulations also.
When the matter came before the Court, it adjourned the summary judgment application but declined to adjourn the interim payment application as requested. At the subsequent hearing of the interim payment application, the defendant was unrepresented because its lawyers did not have instructions to attend. The Court made an interim payment order that required the defendant to pay over US$200,000 in respect of its liability under the guarantees, and £50,000 in respect of costs liabilities.
The defendant did not make the interim payments as ordered and applied to vary the interim payment order. It argued that making the interim payments might mean it had breached sanctions regulations and, without a variation of the order, it was left in a position where it would either breach the interim payment order or breach sanctions regulations.
The Commercial Court decision
The Court has a discretion to vary or discharge an interim payment order where it considers this appropriate. Among other relevant matters, the Court will consider why the reasons a variation is requested were not before the Court when it made the order and whether there has been any delay in making the application for a variation.
On the authorities, it was common ground that the Court could make the interim payment order without itself breaching sanctions. Furthermore, if a person was unable to make a payment under a court order due to the absence of a licence, this was a factor that the Court could take into account when deciding whether to vary the order. However, it was not of itself determinative and did not require the Court to vary the order.
As to whether the Court should not make an order where the performance of that order involved the party being in breach of UK and US sanctions, the Court found the authorities relied upon by the defendant were mostly of limited relevance to the defendant’s application.
However, it highlighted the decision in O -v- C [2024] EWHC 2838 (Comm), a charterparty dispute in which the Court ordered the cargo to be sold and the proceeds of sale to be paid into Court. In that case, the Court accepted that there was a risk that the payment into court would be a breach of US sanctions. Nonetheless, it distinguished between a real, as opposed to fanciful, risk of prosecution. It concluded that the risk of prosecution was low and, balancing the competing risks, decided that the proceeds should be paid into court.
On the authorities, therefore, the risk that the interim payment order might require the defendant to make a payment to the claimants in breach of either UK or US sanctions was a factor to be taken into account when deciding whether it was appropriate to vary the terms of that order. However, it was only one factor to be taken into account. The risk did not require the Court to vary the order, nor did it take any priority over the other factors that the Court had to take into account.
As to the UK Sanctions Regulations 2019, specific reference was made to Regulation 11, which prevents a person (P) from dealing with “funds or economic resources owned, held or controlled by a designated person if P knows, or has reasonable cause to suspect, that P is dealing with such funds or economic resources.”. Per regulation 11(2), this is subject to an exception if a relevant licence is obtained.
In this case, UK sanctions were of limited relevance because the defendant’s only available assets to make the interim payment were held with ING Bank in US dollars, and were insufficient to make the full payment ordered, and the claimants had requested that the payment be made to a bank account in Ireland.
Furthermore, the defendant was a Dutch company. It was not a UK company for the purposes of the UK Russian sanctions regulations, which would only apply to the defendant’s conduct in the UK. The giving by the defendant of a payment instruction to its bank outside the UK would not be a breach of the regulations, even if the instructions were for payment of funds into an account in the UK. There was also no authority to support the proposition that receipt of funds into an account withing the jurisdiction was, without more, to be treated as dealing with those funds in breach of the UK Sanctions Regulations 2019.
The Court was also not persuaded that payment would put the defendant or their legal representatives in breach of the provisions of the Serious Crime Act 2007.
As to the relevance of US sanctions, it was agreed that ING would not make any payment of the sums held in US dollars without an OFAC licence. Those funds were also subject to the control of the Dutch Court and the Dutch Court would decide in what circumstances it would be prepared to release those funds. It was unlikely that the Dutch Court would release the funds if this would breach US sanctions. Therefore, any sums paid in respect of the interim payments would not be contravening US sanctions.
The Court decided not to vary the order. Among other things, there was no material change of circumstances, nor was there any evidence that the Court had overlooked UK and US sanctions when it made the original order. Furthermore, the defendant had waited till the last day for making payment under the order before making its application. The Court also noted that the claimants had undertaken not to pursue contempt proceedings against the defendant for its ongoing breach of the interim payment order.
Comment
The decision provides a useful summary of recent authorities dealing with sanctions-related issues. It confirms that the English courts continue to take a commercial and pragmatic approach to the scope and extent of UK and international sanctions regulations.
The difficulty, of course, is reconciling this approach in cases where parties are quite obviously concerned not to breach sanctions and would tend to take a conservative approach to the issue. Court proceedings of this nature may become unavoidable in order to resolve payment disputes of this type and so that a paying party feels suitably protected.