Knowledge

Bedell Cristin partner and Jersey Advocate Robert Christie and senior associate Dominic Corsini-Meek successfully acted for OWH SE i.L ("OWH") in a decision which will be of interest to sanctions lawyers and international arbitration practitioners alike.

The Royal Court of Jersey (the "Court") rejected an argument that the enforcement in Jersey of a New York Convention award would be contrary to the public policy embodied in Article 46A of the Sanctions and Asset-Freezing (Jersey) Law 2019 ("SAFL"). This provision provides a defence to civil liability for acts or omissions (including a decision not to fulfil a payment obligation) taken in the reasonable belief that they are necessary to comply with sanctions prohibitions.

The background facts

The underlying dispute arose in the aftermath of Russia's invasion of Ukraine in February 2022, and the imposition by the international community of wide-ranging sanctions on Russian banks, companies and individuals in response, which precipitated a steep fall in the value of the Russian rouble (the "rouble").

VTB Russia (PJCS) ("VTB Russia") was, and still is, one such sanctioned entity. On the same day as the invasion, it became inter alia a "designated person" under the UK sanctions regime (and consequently also under the Jersey sanctions regime). In addition, the German federal financial supervisory authority ("BaFin") had by that time begun to take a number of measures to ringfence VTB Russia's (almost) wholly owned subsidiary, a German bank then known as VTB Bank (Europe) SE, and since renamed as OWH, from any influence by VTB Russia. These included:

• appointing a special representative from Deloitte to monitor the sanctions compliance of OWH's payment decisions;
• an order banning OWH from making payments or asset transfers to VTB Russia or VTB Group companies which were detrimental to OWH (the consequence of which was that OWH put in place internal measures to prevent any payments to VTB Russia or the VTB Group);
• a ban on OWH granting loans or accepting deposits or dispersing any contractually agreed but not yet fully dispersed loans; and
• a ban on OWH making payments or other transfers of assets for the benefit of Russian credit institutions.

Prior to the invasion, in September 2019, OWH had entered into a currency swap contract with a Jersey company called RTI Limited, whose parent is the Russian entity, United Company Rusal International PJSC ("Rusal"), and is part of the Rusal Group. The Rusal Group is a substantial enterprise whose business is the production and sale of aluminium. The contract was designed to hedge the Rusal Group's exposure to the rouble, and was based on the familiar International Swaps and Derivatives Association ("ISDA") Master Agreement (2002 edition). It listed English law as the governing law, and any dispute was to be resolved by arbitration under the London Court of International Arbitration Rules ("LCIA arbitration") in England.

Owing to the above-mentioned drop in the value of the rouble, on 28 February 2022, OWH issued the first of a number of margin calls to RTI requiring payment of US$43.5 million. RTI did not initially pay the margin call because of concerns about US secondary sanctions, but subsequently also raised the question of Jersey sanctions. In this regard, Article 11 of SAFL makes it a criminal offence for a person to make funds available (directly or indirectly) to a designated person if the person knows, or has reasonable cause to suspect, the person is making the funds so available. The alleged concern was whether making payment to OWH would make funds available to VTB Russia.

Various exchanges took place between the parties, including a request made by OWH on 4 March that RTI make payment to a specifically designated account of OWH with the German Central Bank, Deutsche Bundesbank, "which will be reserved by us and where all payments are subject to review and approval by a special representative of [BaFin]".

On 23 March 2022, in view of the failure to pay the margin call, OWH sent RTI a Notice of Early Termination for an Event of Default designating 25 March 2022 as the early termination date (the "Early Termination Date"). A sum of €214m was calculated shortly afterwards as being due as a result.

Following a reference to LCIA arbitration by RTI (seeking confirmation that the termination was invalid), OWH was ultimately awarded €213,770,661.77 by the arbitral tribunal against RTI (as well as the guarantor, Rusal), and sought to enforce the award in Jersey.

RTI's public policy argument

RTI sought to rely on Article 44(3) of the Arbitration (Jersey) Law 1998 which provides that enforcement of a New York Convention award may be refused if it would be contrary to public policy to enforce the award, and in particular relied on Article 46A of SAFL.[1]

Approach of the Court

The Court had not previously considered the public policy exception to the enforcement of arbitration awards, and elected to follow the "very restrictive" approach adopted by the English courts in a number of previous decisions interpreting the equivalent provision in the English Arbitration Act 1996.

The Court also found that "Article 46A is intended to support the important public interest of Jersey playing its part effectively in supporting sanctions imposed by the UN or the UK." Jersey's public interest included considerations of international public policy, and was not purely domestic in nature. Furthermore, on its proper construction, Article 46A was equally applicable to payments in respect of transactions governed by a law other than Jersey law. The Court concluded that where an award had given no consideration to whether the defence provided for in Article 46A is available on the facts and the Court finds that it is so available, the public policy exception would be made out such that the award should not be enforced.

However, Article 46A of SAFL did not come into force until 8 June 2022 (i.e. a few months after the Early Termination Date). In accordance with the usual presumption against retrospectivity (which was not rebutted by the language used), Article 46A therefore only applies to acts carried out after the provision came into force.

As to the public policy reflected by the statutory provision, the Court went on to find that "the public policy of Jersey at the present time is that, in respect of acts carried out after Article 46A came into effect on 8 June 2022, there can be no civil liability in respect of such an act if, at the time of the act, the person carrying out the act reasonably believed that it was necessary to do so in order to comply with a sanctions obligation or prohibition (as defined in Article 46A)". However, it also held that "there is no public policy at the present time that this is also the position in relation to acts carried out before Article 46A came into effect". It followed that it would not be contrary to Jersey public policy to enforce the award.

The Court also considered whether, if it was wrong in reaching the above conclusion, a defence under Article 46A of SAFL was made out on the facts. In this regard, the Court considered the witness evidence provided in support of RTI's position and a number of contemporaneous documents including inter partes correspondence, advice received from RTI's lawyers and internal emails. The Court was persuaded that RTI did subjectively hold the required belief for the purposes of Article 46A of SAFL (accepting that its belief would be much influenced by the advice it was receiving from its lawyers), but concluded that this belief was not an objectively reasonable one because:

• there was no evidence that RTI or its advisers ever gave any real consideration to whether the BaFin measures and/or the suggestion of making payment to the Bundesbank account negated the risk of payment of the margin, amounting to a breach of Article 11 of SAFL; and
• there was no evidence that RTI or its advisers ever gave proper consideration to whether RTI could give a notice of Illegality under the contract rather than simply defaulting in payment (such a notice would have delayed OWH's ability to give notice of an early termination by a few days); i.e. RTI did not reasonably believe it was "necessary" to commit a breach of contract.

Commentary

This case shows what can happen when two strong public policies, namely the enforcement of Convention awards and compliance with sanctions, come into conflict. For acts occurring after 8 June 2022, it is clear that the public policy regarding compliance with sanctions will prevail in a case where the statutory test applies on the facts.