The ISDA Master Agreement and Sanctions
VEB, a Russian state development corporation, and a bank were parties to an English law ISDA Master Agreement (ISDA MA), under which they concluded currency swap transactions. The ISDA MA contained an arbitration clause requiring all disputes to be resolved by way of arbitration in the London Court of International Arbitration.
In 2019, the ISDA MA was amended to address the possibility that VEB might become subject to UK, US or EU sanctions. Specifically, the parties included a further termination event to cover such a scenario.
Following the Russian invasion of Ukraine in February 2022, VEB was targeted by US, UK and EU sanctions. The bank served its notice of termination pursuant to the 2019 amendment, and the parties agreed that a final net payment amount of USD 147.7m was due from the bank to VEB. However, in light of the applicable sanctions, the bank concluded that it was not permitted to make the payment to VEB.
Initiation of Russian Proceedings
On 19 May 2023, VEB issued proceedings in the Moscow courts seeking repayment of the outstanding sums, notwithstanding the arbitration clause in the ISDA MA. On 31 May 2023, the bank learned of the Russian court proceedings from monitoring court databases. The bank filed a challenge to the Russian court’s jurisdiction on 3 December 2023.
On 1 February 2024, the bank filed its application to the English High Court for an ASI and AEI. It argued that the Russian court proceedings were in breach of the London arbitration clause and sought to restrain VEB from taking further steps in the Russian court proceedings or from enforcing any substantive order.
English High Court grants ASI and AEI and dismisses challenges based on frustration and delay
On 5 February 2024, the English High Court granted the ASI and AEI on an ex parte basis.
In response, VEB raised two grounds of challenge:
- VEB argued that the arbitration agreement in the ISDA MA had been frustrated. VEB contended that sanctions gave rise to difficulties in securing legal representation, problems paying legal and LCIA fees, and impeded witnesses and party representatives from attending live in person at the hearing.
- VEB claimed that the bank’s delay in bringing the ASI and AEI applications were lengthy, unjustified, and caused significant prejudice to VEB and the foreign court.
The High Court rejected both objections and made the ASI and AEI permanent.
The court began by underscoring “the strong disposition of the English Courts to enforce and uphold arbitration agreements” and noted that the burden was on VEB to show “strong reasons” why the court should do otherwise. VEB failed to do so.
First, the court found that VEB came “nowhere near” establishing that the arbitration agreement had been frustrated. Whilst the conduct of an LCIA arbitration as a sanctioned entity was “more onerous”, performance was not so radically different from how the parties envisaged the arbitration would have been conducted at the time they agreed the arbitration clause to give rise to frustration. VEB would have been able to secure adequate legal representation from specialist solicitors and counsel, even if many barristers and law firms refused to act for sanctioned entities. Similarly, the court held that payment difficulties relating to legal and LCIA fees amounted to no more than evidence of increased inconvenience and administrative effort, but not a radically different performance or a denial of justice. The court added that arbitration proceedings can be conducted entirely virtually, and so there was no requirement that witnesses or party representatives attend a hearing in person.
Furthermore, the court highlighted that the parties had foreseen the risk of sanctions because they had amended the ISDA MA in 2019 to add sanctions as a termination event. The court inferred that both parties thus must have agreed that the arbitration clause was to continue to be binding even in the more onerous circumstance of sanctions being imposed on VEB.
Second, the court held that the bank’s 8-month delay in raising the ASI and AEI applications was justifiable. Although the court observed that 6-8 weeks was sufficient for the purposes of taking legal advice on Russian or English law, the bank faced a highly complex task in assessing its own exposure to potential enforcement and how best to de-risk itself. Crucially, the bank had not adopted a wait-and-see approach. Rather, it had consistently maintained that the arbitration agreement was binding on the parties. Whilst the court noted that the bank could have filed the applications a few weeks earlier, this delay had not materially increased the interference with the foreign court process or led to a waste of the foreign court’s time and resources.
Finally, the court attached weight to the need to uphold UK sanctions, which are a part of English law. The court was mindful of the fact that the Moscow court proceedings could give rise to a judgment in Russia which the sanctioned entity would then enforce against the bank’ assets in Russia (or any other jurisdictions where Russian court judgments are enforceable). This would effectively have enabled VEB to circumvent the sanctions.
Comment
Sanctions against numerous Russian entities have been in place for some time and look set to continue. This has brought with it an increase in litigation claims brought by sanctioned entities in the Moscow courts, often in what is claimed to be a breach of an arbitration or jurisdiction clause. What is clear from this case is that sanctions, while complicating the conduct of arbitration proceedings, do not render arbitration agreements inoperative or incapable of performance. The court’s comments on the ability of a Russian party to conduct litigation or arbitration in England are also helpful, as Russian parties commonly argue that they are hindered in their ability to conduct proceedings outside Russia.
In addition, the judgment reinforces the English courts’ robust approach to enforcing arbitration agreements in such circumstances. In granting both an ASI and AEI, the court gave the bank protection which was as comprehensive as it could offer; the ASI aims to stop the foreign proceedings from breaching the arbitration agreement and, should the Moscow court grant a judgment to VEB notwithstanding the ASI, the AEI will prevent enforcement of that judgment in England. Of course, whether the ASI is respected in Russia is another matter.
Finally, whilst the courts will not allow an indefinite delay, this case illustrates the courts’ pragmatic approach in considering the broader commercial context and the practicalities faced by parties when assessing delays in seeking judicial relief. In this case, the complexity of assessing the bank’s exposure to potential enforcement and devising a strategy to mitigate risk justified the 8-month period before seeking relief. Importantly, however, the bank had consistently maintained that the arbitration agreement was binding during this period.
Judgment
Barclays Bank Plc v VEB.RF
