‘Loophole’ arises from UK anti-suit injunction ruling

Michael Fenn, Stacy Keen and Slava Tretyak of Pinsent Masons were commenting after the High Court refused to extend the scope of an ASI – a court order that place restrictions on others’ ability to bring claims in other jurisdictions – to third parties that were not party to an arbitration agreement.

In practice, the ruling confirms that a UK ASI may not offer protection in circumstances where proceedings are raised against a group company in Russia to recover the equivalent value of assets frozen by those bound to comply with UK sanctions.

Sanctions expert Stacy Keen said that UK entities and nationals are required to freeze assets owned, held or controlled by a UK designated person, and report annually to the UK’s Office of Financial Sanctions Implementation (OFSI) on the value of such assets. The UK maintains a consolidated list of directly targeted UK designated persons. However, the requirement to freeze assets extends to entities that do not feature on the consolidated list but are owned or controlled by a UK designated person. As of October 2023, £22.7 billion worth of assets frozen in relation to the Russia financial sanctions regime had been reported to OFSI since the beginning of Russia’s large-scale invasion of Ukraine in February 2022.

The case before the High Court revolves around a dispute between Renaissance Securities (Cyprus) Limited (Renaissance Cyprus) and six entities (together, ‘the defendants’). Assets belonging to the defendants are being withheld by Renaissance Cyprus, which is concerned that releasing them back to the defendants would breach its obligations under UK and US sanctions laws. Renaissance Cyprus considers that the defendants are either directly or indirectly subject to the sanctions regimes owing to the identity of who it believes is the defendants’ ultimate beneficial owner, but the defendants dispute the ownership claims and that they are subject to the sanctions regime.

The assets at issue in the dispute are the subject of an investment service agreement between Renaissance Cyprus and the various defendants. The agreement provides for disputes over the assets to be referred to arbitration before the London Court of International Arbitration (LCIA). Despite this, proceedings were initiated against Renaissance Cyprus in Russia by two of the defendants in a bid to recover their assets via that forum. The High Court considered the launch of those proceedings to be a breach of the arbitration agreement and granted Renaissance Cyprus an ASI, essentially requiring the defendants to bring an end to the Russian proceedings.

The parallel proceedings in Russia, however, were complicated by the fact that Renaissance Russia entities (RREs), sister companies to Renaissance Cyprus, were claimed to be “framing their own claims in Russia” against the defendants and by two of the defendants subsequently applying to the Russian courts to add the RREs as co-defendants in the proceedings they had raised there against Renaissance Cyprus.

In light of those developments, Renaissance Cyprus asked the High Court to vary the terms of the existing order requiring the second and sixth defendants (the respondents) to withdraw claims they raised against RREs in Russia. In its judgment, however, the High Court refused to do so.

The respondents’ position has been that while the RREs and Renaissance Cyprus are formally autonomous entities within the Renaissance Capital Financial Group, they “have a single decision-making centre, a single brand, are built into a single corporate structure, and are positioned as a single whole, where each link can and should be responsible for each other’s debts”. They assert in the Russian courts that the RREs are jointly and severally liable for losses to them owing from what they characterise as unfair conduct, as a matter of Russian law, arising from Renaissance Cyprus’ citing of sanctions as a reason not to return the assets to them.

Renaissance Cyprus has called the claims against RREs “a naked collateral attack” on its arbitration rights and claimed the entities have commenced them for the purpose of evading the ASI it obtained, the arbitration agreement they are subject to, and the international sanctions regime.

Mark Pelling KC, sitting as a High Court judge in this case, considered that there were two ways in which Renaissance Cyprus could have succeeded in applying for the ASI to be extended – firstly, if it could show that the RREs were subject to the arbitration agreement on a contractual basis, or, if not, if it could demonstrate that the claims brought in Russia had been brought vexatiously or oppressively for the purpose of circumventing the arbitration agreements. He considered that Renaissance Cyprus could not satisfy either of those requirements.

In relation to the contractual basis, the judge considered that, “as a matter of construction, the arbitration [agreement] was not intended to and does not apply to claims by or against either party by a non-party”.

In relation to the application of Renaissance Cyprus that the respondents’ claims against the RREs were brought on a vexatious or oppressive basis, the judge explained that Renaissance Cyprus had to show that the courts in England were clearly the more appropriate forum for the trial of the claims and that it was necessary in the interests of justice to grant the injunction taking into account considerations of comity – a legal principle that provides for mutual recognition of other countries’ laws and courts.

In that regard, Mark Pelling KC considered that there was an alternative jurisdiction for the claims to be held – Russia – and that the RREs’ consent to have their dispute with the respondents settled by arbitration offered no reason to sway things, as there would need to be “an agreement by all parties to the RRE litigation that the claims be referred to arbitration” for that.

Litigation expert Michael Fenn of Pinsent Masons said given the number of various proceedings around ASIs, this judgment is relevant to parties that have corporate affiliates in Russia and that are in dispute with a Russian counterparty.

“This judgment is particularly interesting because it appears to set a precedent on whether an ASI is available to affect a potential action against a non-party to an arbitration agreement. The judgment seems to give the answer that in consideration of that issue, the court will focus on considering an arbitration agreement as opposed to an exclusive jurisdiction clause.”

Slava Tretyak added: “It remains to be seen whether this ruling will give rise to similar applications against affiliated or the group companies to recover the equivalent value of frozen assets. It is something that businesses similar to Renaissance Cyprus, with affiliated entities in Russia and which, due to sanctions regimes, are unable to release assets of the other entities, should definitely keep on their radar.”