Enforcing arbitral awards under Russian sanctions

June 2023  |  SPECIAL REPORT: INTERNATIONAL DISPUTE RESOLUTION

Financier Worldwide Magazine

June 2023 Issue

The enforceability of awards is one of many characteristics that make international arbitration a desired method of resolution for cross-border disputes. Arbitral awards are final and binding on all parties. When a party fails to comply with the terms of an award, the successful party can seek enforcement through the courts. But what happens when the party seeking enforcement may be subject to an economic sanction?

This question has become increasingly relevant in light of Russia’s invasion of Ukraine in February 2022, and the subsequent response of international allies around the world to expand the list of Russian designated persons subject to economic sanctions.

The answer may not be so black and white. While enforcement of Russian sanctions is undoubtedly in the public interest, so too is the enforcement of properly authorised arbitral awards. Recent developments in the UK suggest that notwithstanding Russian sanctions, designated persons will not be precluded from judicial recourse and may have opportunities to pursue enforcement of arbitral awards.

‘Control’ by designated persons

Generally speaking, Russian sanctions prohibit, among other things, any person from dealing in any property that is controlled by a designated person. While the list of designated persons is contained within the legislation itself, the definition of ‘control’ varies across jurisdictions.

For example, in the US, any entity owned in the aggregate, directly or indirectly, 50 percent or more, by one or more designated persons is itself considered to be a designated person, according to the US Department of Treasury.

In the UK, an entity will be considered owned or controlled (directly or indirectly) by a designated person if the person holds (directly or indirectly) more than 50 percent of the shares or voting rights in an entity, if the person has the right (directly or indirectly) to appoint or remove a majority of the board of directors of the entity, or if it is reasonable to expect that the person would be able to ensure the affairs are conducted in accordance with the person’s wishes, according to the UK Office of Financial Sanctions.

In the EU, any person that has de facto control over an entity will itself be a designated person, as per the European Commission.

Unlike its foreign counterparts, Canada has not released any regulatory guidance regarding the issue of control. The consequences of this ambiguity were recently addressed by the Alberta Court of King’s Bench (ABKB) in Angophora Holdings Limited v. Ovsyankin.

In that case, the applicant, Mr Ovsyankin, was a judgment debtor of the respondent, Angophora. In December 2020, Angophora successfully obtained a final award in the London Court of International Arbitration (LCIA) and subsequently, in September 2021, an order from the ABKB recognising and permitting enforcement of the award in Alberta (REO). When Angophora began taking enforcement steps against Mr Ovsyankin, he brought a stay application on the grounds that Angophora was owned, held or controlled by or on behalf of a designated person, Gazprombank JSC. Mr Ovsyankin argued that because of this designation, enforcement would offend Russian sanctions. Importantly, Gazprombank did not become a designated person under Russian sanctions until February 2022, after Angophora had been granted the REO.

Angophora was a wholly owned subsidiary of Luxembourg investment fund MIR Capital SICAR (SCA). The investment fund was managed by MIR Capital Management (SA) and owned equally by two international banks, including Gazprombank.

The ABKB applied the tripartite test for a stay and in addressing whether there was a serious issue to be determined, considered whether there was a strong prima facie case that enforcement of the REO would offend Russian sanctions. Necessarily, this required the ABKB to determine whether Angophora was controlled by Gazprombank.

In the absence of a Canadian definition of ‘control’, the ABKB reviewed the regulatory guidance from foreign jurisdictions. They found that control was a “factual issue to be determined by the circumstances”. The evidence showed that while Gazprombank, as an equal partner, could not take unilateral action, it could unilaterally prevent action, and this constituted de facto control.

Having found that there was a strong prima facie case that Gazprombank had de facto control over Angophora, the ABKB proceeded to consider the other two elements of the test. The ultimate conclusion was that enforcement of the REO would not cause Mr Ovsyankin to suffer irreparable harm and the application was dismissed.

By dismissing the application, Angophora was within its rights to continue pursuing enforcement under the REO. While careful not to make any final findings on the issue of control, the ABKB stated that enforcement of the REO could offend Russian sanctions.

Notably, the ABKB drew a distinction between the sale of seized assets under the REO and the distribution of those proceeds – enforcing the REO through the sale of the assets would not necessarily constitute a breach of Russian sanctions, but distribution of those proceeds may.

The widespread applicability of this decision remains to be seen. As Angophora is the first Canadian decision to consider the issue of control under the Russian sanctions, persons in Canada engaging with sanctioned entities, or those who may be considered controlled by sanctioned entities, should exercise caution.

The comments of the ABKB suggest that whether enforcement is pursued in good faith is a potentially relevant factor. While this argument is easily made where an entity becomes a designated person after an REO is granted, greater challenges may exist where the designation occurs before an REO is granted. In these circumstances, businesses may wish to apply for a permit to carry out an activity or transaction that is restricted or prohibited pursuant to Russian sanctions. However, at least in Canada, these applications are considered on a case-by-case basis and can take several months to process.

Collectively, this guidance suggests that dealing with entities controlled by designated persons may offend Russian sanctions. Does this mean that a sanctioned entity will always be precluded from enforcement where an arbitral award has been properly authorised? Recent developments in the UK suggest not.

UK developments

In November 2022, the LCIA issued a publication notice that it had obtained a General Licence permitting designated persons, companies owned and controlled by designated persons or their legal representatives to make payments to cover their arbitration costs. Pursuant to the terms of the licence, the LCIA is further permitted to direct and receive such payments to use them to pay for arbitration costs.

Just as the ABKB in Angophora drew a distinction between the sale of assets under an REO and the distribution of those proceeds, so too has the LCIA acknowledged a distinction between an offer to pay funds and actual use of those funds. While the distribution of proceeds under an REO may offend Russian sanctions, the use of funds by the LCIA under its General Licence is permissible.

Clearly, the purpose of the General Licence is to strike a balance between two competing objectives: condemning Russia’s violation of Ukraine’s sovereignty and ensuring access to justice.

A sanctioned entity has recently been granted full access to the courts by the UK Supreme Court in Law Debenture Trust Corporation plc v. Ukraine. In that case, the UK Supreme Court dismissed a summary judgment application by the Law Debenture Trust Corporation plc (the trustee), acting on behalf of the Russian Federation, for Ukraine’s non-payment of eurobonds.

In 2013, Ukraine issued the notes to Russia and Russia paid the subscription money to Ukraine. The notes were constituted by a trust deed governed by the law of England and the parties agreed that any disputes would be within the exclusive jurisdiction of the courts of England.

Ukraine advanced several arguments on appeal including that Ukraine did not have the capacity to issue the notes, that the notes were entered into without proper authority, that Ukraine entered into the contract under duress and that the non-payment was a lawful countermeasure.

While the UK Supreme Court limited the issue for trial to whether Ukraine entered into the contract under duress, it nonetheless found that it was not plain and obvious Ukraine’s claim would fail and that it should be permitted to defend the claim.

Practical implications

The available regulatory guidance and recent case law makes it clear that dealing with designated persons or those who are controlled by designated persons poses a particularly unique set of challenges, both inside and outside of the courts.

Given that this remains a relatively novel issue, global businesses would be well suited to seek legal advice prior to engaging with, or pursuing enforcement against, entities that may have any nexus with a designated person.

 

Timothy St. John Ellam KC is a partner, Jordan Bierkos is an associate and Emily Ward is an articling student at McCarthy Tétrault. Mr Ellam can be contacted on +1 (403) 260 3533 or by email: tellam@mccarthy.ca. Mr Bierkos can be contacted on +1 (403) 260 3744 or by email: jbierkos@mccarthy.ca. Ms Ward can be contacted on +1 (403) 260 3592 or by email: emward@mccarthy.ca.

© Financier Worldwide

BY

Timothy St. John Ellam, Jordan Bierkos and Emily Ward

McCarthy Tétrault

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