This blog discusses the effects of UK and EU sanctions and their impact upon litigation involving Russian companies in light of the High Court’s decision in Maroil Trading Inc and others v Burford Capital (UK) Limited and another.
Background
The Russia (Sanctions) (EU Exit) Regulations 2019 (SI 2019/855) (the Regulations) are said to have been made for the primary purpose of encouraging Russia to cease actions destabilising Ukraine or undermining or threatening the territorial integrity, sovereignty or independence of Ukraine (see Regulation 4). One of the key consequences of this Regulation is that it restricts the ability of Designated Persons (often Russian companies and oligarchs) from trading or benefitting from goods and services.
The Regulations, as intended, have wide reaching effects. The consequences extend to banning a Designated Person (or indeed any organisation which is owned, held or controlled by a Designated Person) from paying for the legal advice and representation it needs during the course of litigation.
It is possible to seek an exemption by way of a licence granted by the Office of Financial Sanctions Implementation (OFSI). Such a license can be obtained where the applicant reasonably requires permission to carry out an otherwise banned transaction for the purposes of paying professional fees or expenses in relation to the provision of legal services. However, these decisions are discretionary and of the many applications submitted to OFSI only a small number of licenses have been granted.
The case
The issues presented by the Regulations came to the fore in the case of Maroil Trading Inc . This case concerned an alleged fraud arising from events which took place in or around late 2016. The claim was valued at USD 90 million.
The Problem
Some of the defendants held funds which were, in the context of the Regulations, controlled by the parent company, PAO Sovcomflot. PAO Sovcomflot was, and remains, a Designated Person under the Regulations. The default position under the Regulations was that the defendants were prohibited from paying the fees of their solicitors or counsel (or any other legal expenses), and their solicitors were prohibited from accepting such payment.
The confirmation of PAO Sovcomflot being a Designated Person on 24 March 2022 was inconvenient timing for the defendants. The nine-week trial had been listed to commence in October 2022 and there was much case preparation to complete before then, including the resolution of disclosure issues and the production of expert evidence on foreign law and quantum, which could not be paid for.
Further, the defendants’ solicitors made an application to come off the record in light of the fact that they were not permitted to receive fees for their representation, and there was no way of knowing how long these circumstances would remain.
The question
In light of this predicament, the defendants sought the court’s permission to adjourn the trial for a year, pending the outcome of a decision from OFSI or other changes in circumstances.
The court resolved the adjournment question with reference to the legal principles consolidated in Bilta (UK) Ltd (In Liquidation) v Tradition Financial Services Ltd. The most relevant of these principles can be summarised as follows:
- The key question is whether, if the trial goes ahead, it will be fair in all the circumstances.
- The assessment of what is fair is fact-sensitive and should not be judged by the mechanistic application of any particular checklist.
- If the refusal of an adjournment would make the resulting trial unfair, an adjournment should ordinarily be granted, regardless of inconvenience to the other party or other court users, unless this were outweighed by injustice to the other party that could not be compensated for.
The court’s view: should the trial be adjourned?
Ultimately, Mr Justice Foxton was of the view that in light of the serious and complex nature of the dispute, and in light of the extent of the trial preparation to be completed before the trial start date, there could be no realistic prospect of the defendants being able to participate in a fair trial in October without the ability to pay their lawyers and experts.
The claimant submitted that notwithstanding the defendants’ current inability to pay legal fees, the defendants still had the prospect of receiving a licence from OFSI and there was still enough time before the trial to obtain such a license and continue with the necessary preparations before October.
The court was less optimistic about the OFSI application process. The court took the view that it could not rely on the possibility of the licence being obtained in time, if at all. There was no guarantee that the defendants’ application to OFSI would result in a licence being granted, and there was no guarantee that such a decision would be reached by OFSI with enough time to enable the defendants to complete the necessary trial preparation with the aid of their legal representatives. Further, it would be unrealistic to expect the defendants legal representatives to keep themselves available whilst waiting for positive developments from OFSI. As a result, Mr Justice Foxton was of the view that it was not possible to imagine the trial being conducted fairly if the trial dates were maintained.
The court ordered that the trial be adjourned for a year. The defendants were ordered to use their best endeavours to obtain a licence from OFSI, whilst in the meantime providing monthly updates to the claimant with respect to the same.
Implications for litigants
This case represents just one element of the impact that fast-moving geopolitics can have on litigation here in England and Wales. It also highlights an often-overlooked tension between political agendas, access to justice, and the ability to obtain and enforce judgments.
Assuming the case against the defendants is a strong one, the claimant unfortunately has no choice but to wait an additional year to obtain judgment, unless OFSI grant the defendants’ Licence or PAO Sovcomflot are removed from the Designated Persons list.
This is an undesirable result. It means an additional year without a remedy, not to mention the enforcement of any such remedy. This could be particularly detrimental to a claimant who continues to be adversely affected by the wrongs which are the subject of the litigation. What if the claimant simply does not have a year to wait? Presumably, this would factor into the perceived fairness of the litigation as discussed above, but it remains to be seen how the court would react to such a scenario.
This difficulty presents itself to both claimants and defendants who are closely connected with Designated Persons. Without an OFSI licence, presumably parties must simply play the waiting game in order to initiate or continue litigation, or else forego the advice and representation they would otherwise have utilised. Obvious concerns come to mind regarding limitation, as well as the possibility of a defendant associated with a Designated Person using this as an opportunity to avoid engaging in the litigation process in order to keep the claimant out of a remedy (though it is not suggested that this occurred in the present case).
