In a previous article[1] the author looked at the effects of sanctions on the construction industry. This article looks at the position on enforcement, be that of arbitral awards or court judgments, and the current sanctions regime from a UK perspective.

Once a judgment has been entered or an international arbitration award rendered in a dispute involving one or more entities subject to financial sanctions, parties should be aware of how the relevant financial sanctions regulations impact the final steps of this process.

Anyone interacting with a Designated Person must take care not to assist in circumventing or contravening a sanction, and thereby incurring criminal liability[2]. The provision of legal services to a Designated Person is not generally prohibited by financial sanctions. However, receipt of a payment from a Designated Person for the provision of legal services is only possible with a licence issued by OFSI. This should be applied for in advance[3].

The Enforcement Phase

Whilst the Designated Person’s right of access to the courts or to the arbitral process is not cut off by their subjection to financial sanctions[4], the sticking point with regard to the enforcement of a resulting judgment or arbitral award is that it involves the transfer of funds or other economic resources. When one or more sanctioned entities is involved, that is conduct which falls squarely within the scope of the prohibitions imposed by financial sanctions[5]. In the context of UK enforcement efforts, this means that parties must apply to OFSI for specific licences[6] authorising the satisfaction of such a judgment or award debt.

OFSI issues licences for the purposes set out by the relevant sanctions regulations. For example, in the case of the Russia sanctions, the purposes for which OFSI may issue licences are set out in Schedule 5 of the Russia (Sanctions) (EU Exit) Regulations 2019. These include the use of a Designated Person’s frozen funds or economic resources to satisfy a judicial, administrative or arbitral decision made before the date on which the person was designated[7]. No part of that Schedule explicitly authorises OFSI to issue a licence in respect of a judgment or award issued after the imposition of financial sanctions on the sanctioned entity.

Legal costs and fees

OFSI has expressed the view that court fees and payments into court for security for costs are licensable as “reasonable legal fees”, whereas the licencing ground for security for costs will depend on the circumstances of the case[8].

The recent judgment in PJSC National Bank Trust v Mints [2023] EWHC 118 (Comm), 27 January 2023 showed the court’s approach to these issues. Though this case did not concern the enforcement of a judgment, the judgment of Mrs Justice Cockerill provided significant guidance on the effect of financial sanctions on the sanctioned Claimants’ ability to pay an adverse costs order, their ability to satisfy an order for security for costs, and to pay out damages pursuant to a cross- undertaking.

In PJSC v Mints, the Claimant entities had obtained worldwide freezing orders against the Defendants to a conspiracy claim. Those orders had been subject to a cross-undertaking in damages, which the Claimants were then ordered to fortify by providing security. Following Russia’s invasion of Ukraine, the UK Government imposed financial sanctions on the Second Claimant. The Defendants argued that the First Claimant, being owned or controlled by Designated Persons, was also caught by the sanctions regime.

In short, Cockerill J found that the sanctions regime did not prohibit the Courts from issuing orders or judgments (these judicial acts were not capable of contravening the sanctions legislation): The Claimants should apply to OFSI for specific licences. Likewise, any money due to the Claimants pursuant to a favourable costs order could be paid following OFSI’s issuance of a Licence. The satisfaction of an adverse costs order and the payment of security for costs could be licensed by OFSI under paragraph 3, Schedule 5 as a reasonable professional fee for the provision of legal services or a reasonable expense associated with the provision of legal services.

Judgment and Award Debts

Also in PJSC v Mints, Cockerill J held that the payment of damages pursuant to a cross-undertaking would be licensable under paragraph 5, Schedule 5 of the Russia Regulations as being for an “extraordinary expense of a designated person”[9].

Such reasoning should apply by analogy to a final judgment debt, or to an international arbitration award debt. Though the decision is subject to appeal, it demonstrates the courts’ common sense approach to the sanctions regime.

The position seems to be that since the Courts and arbitrators remain free to issue judgments and awards in disputes involving sanctioned parties, the enforceability of such judgments and awards will now require the additional step of securing a specific licence from OFSI in the terms of the Order. Such a license would have to fit within one of the categories mandated by applicable sanctions regulations.

Public Policy (international arbitration) The Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”) provides a framework for national courts to enforce foreign arbitral awards, subject to a narrow set of possible objections to enforcement. One of these is found in Article V(2)(b)[10] which states that the competent authority may refuse recognition and enforcement of an award if this would be contrary to the public policy of that country. Thus, it is possible for parties resisting the enforcement of an arbitral award to argue that to enforce an award in the face of financial sanctions[11] would offend public policy and should therefore be denied or stayed until such time as the relevant sanctions are lifted.

The differing interpretations of public policy by national courts around the world[12] will play into an award beneficiary’s choice of enforcement jurisdiction. The law and courts of England and Wales interpret the notion of public policy restrictively to apply only to situations where enforcement would be “clearly injurious to the public good or, possibly, enforcement would be wholly offensive to the ordinary reasonable and fully informed member of the public on whose behalf the powers of the state are exercised”[13]. There is nonetheless nuance to the English courts’ approach, which will scrutinise the merits of any sanctions-based public policy objection to the enforcement of an arbitral award and reach determinations on a case-by-case basis.

Post-award interest

A further question which then arises is whether a sanctioned entity can realise interest accruing on a judgment or arbitral award debt, or only the principal sum. The answer depends on the sanctions regulation at issue.

In Ministry of Defence and Support for Armed Forces of the Islamic Republic of Iran v International Military Services Ltd [2019] EWHC 1994 (Comm) the Iranian Ministry of Defence was the beneficiary of an arbitral award which was accruing interest. The sanctioned Claimant had been successful in an international arbitration and applied to the English courts to enforce arbitral awards pursuant to section 101 of the Arbitration Act 1996. The Defendant argued that it had to delay payment of the sum owed under the Award indefinitely because of the effect of sanctions.

While the court held that the sum due under the award was recoverable, the post-award interest accrued in the span of time since the Claimant was designated as a sanctioned entity under applicable EU legislation was not recoverable. This was thanks to the so-called “no claims” clause of EU Regulation 267/2012, article 38(1), which aimed to prevent the satisfaction of any claim arising from the imposition of sanctions.

This decision turned on a specific provision of EU sanctions legislation which no longer applies following the UK’s departure from the European Union. The relevant “no claims” clause is not replicated in SAMLA, and the status of post-award interest for sanctioned entities is therefore less clear.

Comment

Where a financial sanction is relevant to the enforcement of a judgment or arbitral award, a specific licence must be applied for by the party which the award or judgment obliges to make a relevant payment or other transfer of assets caught by the financial sanction. This brings with it the possibility of a significant elapse of time before the licence can be issued and the anticipated transaction made. In the context of the enforcement of an award or judgment, the award or judgment creditor should bear this in mind as an additional delay before being put in funds following a success on the merits.

References

1. ‘Going Rogue’ - The Effects of Sanctions on the Construction Industry, by Vijay K. Bange, January/ February 2023, Construction Law.
2.  Sections 146, 148, Policing and Crime Act 2017; Monetary Penalties for Breaches of Financial Sanctions: Guidance (Updated 31 January 2023, OFSI). See, for example, Regulation 19 of The Russia (Sanctions) (EU Exit) Regulations 2019 makes it an offence intentionally to participate in an activity whose object or effect (direct or indirect) is to circumvent, or to enable or facilitate the contravention of the Regulations.
3. UK financial sanctions: general guidance (August2022), page 33.
4. For a wider treatment of the impact of sanctions on international arbitration, see The Impact of Sanctions on International Arbitrations, J. Jaremko, Duane Morris blogs, 11 April 2023 (URL: https://blogs.duanemorris.com/internationalarb itration/2023/04/11/the-impact-of-sanctions-on- international-arbitrations/).
5. The types of financial sanctions listed in Section 3 SAMLA include such positive obligations as freezing funds and economic resources, restricting the provision of financial services, preventing the making available of funds or economic resources, preventing access to financial services, and preventing the ownership, control or holding of a prescribed interest in designated entities.
6. Section 15, Sanctions and Anti-Money Laundering Act 2018 (“SAMLA 2018”).
7. The Russia (Sanctions) (EU Exit) Regulations 2019, Schedule 5, paragraph 6. A judgment debt or award debt incurred before designation as a sanctioned entity will be licensable as a prior obligation, see UK financial sanctions: general guidance (August 2022), page 34.
8. UK financial sanctions: general guidance (August 2022), paragraph 6.6.2.
9. PJSC National Bank Trust & Anor v Boris Mints & Ors [2023] EWHC 118 (Comm), paragraph 195.
10. In English law, section 103(3) of the Arbitration Act 1996 implements this provision.
11. The logic here is that the policy objective behind the asset freeze or other financial sanction measure would be undermined by allowing enforcement of the award.
12. Two recent French cases serve to demonstrate that national courts’ conceptions of public policy – even when this is characterised as international public policy (ordre public international) – are necessarily subjective and engage the forum state’s mores. See Sofregaz v. NGSC (CA Paris) and the rulings of the CJEU and French Court of Cassation in Al-Kharafi v Libyan Investment Authority.
13. DST v Rakoil [1990] 1 A.C. 295, at 316.

Republished by permission.