While the Ukraine-Russia conflict continues, the prospect remains of the UK and EU strengthening sanctions on Russian entities, likely in co-operation with the US. The UK enacted sanctions against Russia in the form of the Russia (Sanctions) (EU Exit) Regulations 2019 (as amended, the “UK Regulations”) to replace the previous EU sanctions regime which applied in the UK before Brexit. There have been many updates to this legislation, placing further restrictions, particularly since the events in Ukraine from February 2022. There is little indication that these current sanctions will be removed any time soon.
The sanctions implemented so far are wide-ranging, applying to many areas, such as trade, energy, financial services etc.
Sanctions can often create significant obstacles in respect of a commercial transaction between parties, including access to justice using the formal dispute resolution procedure, the form of which is often agreed by the parties at the time of drafting the commercial agreement. From a dispute resolution prospective, the difficulties are usually faced by those individuals and companies which are subject to an asset freeze and/or travel ban. These difficulties could include the sanctioned entity/individuals facing issues with paying their lawyers, experts, and arbitrators (in case of an arbitration) without breaching sanctions.
In July 2022, the EU by way of Council Regulation 2022/1269 amended article 5aa) of EU Regulation 833/2014 by inserting a provision at article 5aa) that the following transactions are not prohibited under the sanction’s regime:
“transactions which are strictly necessary to ensure access to judicial, administrative or arbitral proceedings in a Member State, as well as for the recognition or enforcement of a judgment or an arbitration award rendered in a Member State and if such transactions are consistent with the objectives of this Regulation and Regulation (EU) No 269/2014”.
This exemption therefore permits parties who would otherwise be prevented from doing so by the EU’s sanctions to fund litigation, arbitration or an alternative dispute resolution platform. This protects parties’ rights to access to justice and offers them the essential opportunity to resolve a dispute via formal procedures previously agreed between the parties. Clear dispute resolution or arbitration clauses in contracts, clarifying the national law applying to the contract and the jurisdiction in which the dispute should be determined, provides parties with an orderly, structured route to resolving disagreements. Indeed, there are companies who might rely on sanctions to refuse to pay an invoice which is otherwise due. If negotiations fail, this issue is often difficult to resolve without a formal dispute resolution procedure. In such a case, it is likely that a designated party would have a limited number of options available to them should they be prevented from funding legal proceedings as a result of sanctions.
This EU amendment follows the decision of the Russian Supreme Court on 9 December 2021 in the case of JSC Uraltransmash v PESA (case no A60-36897-2020). The Russian Supreme Court interpreted amendments to the Russian Arbitrazh Procedure Code as stating that the Russian Arbitrazh courts would have exclusive jurisdiction over specific commercial disputes impacted by sanctions. This decision opened the possibility for a designated party in certain circumstances to obtain an anti-arbitration injunction in the Russian courts and thereby put a stop to arbitration procedures which have been opened elsewhere (and had some impact because of sanctions).
The EU amendment technically does not prevent Russian parties being able to rely on this anti-arbitration clause. Indeed, following the Russian Uraltransmash decision the anti-arbitration clause can be applied merely on the basis that the seat of the arbitration is in a country which has imposed sanctions against Russia. However, the EU amendment does at least provide parties in an agreement impacted by sanctions with the option of entering the regulated process of formal dispute resolution platforms, such as litigation or arbitration, to resolve a commercial dispute. It remains to be seen if this will reduce the number of commercial agreements descending into deadlock as a result of Russian sanctions. Even if a decision is reached in a formal dispute procedure in favour of either party, the impact of sanctions may nonetheless lead to issues with enforcement of the award or decision.
Lack of UK Exemption
In a post Brexit climate, the UK is no longer obliged to comply with EU Regulations. Nonetheless, in view of its commitment to a hard stance against Russia, the UK has imported many of the existing EU sanction provisions into its domestic legislation, and in some cases imposed even broader restrictions than the EU.
One crucial exception between the UK and EU sanctions regime is that, unlike the EU, the UK has not implemented a specific provision into UK legislation which permits a sanctioned party to transact to fund the dispute resolution procedure. While there is no restriction preventing the provision of legal services to a sanctioned entity/individual under the UK sanctions regime, it is not possible, in practice, for legal services to be provided to a sanctioned entity/individual. To receive funds for legal services, law firms are required to complete the lengthy process of applying to the UK’s Office of Financial Sanctions Implementation (OFSI) for a specific licence. Without such a specific licence, a law firm cannot accept monies from a sanctioned entity/individual. It can often take a substantial period of time for OFSI even to provide a first response to a licence application, especially considering the increased number of designations which has meant that there are now more circumstances where an individual or company affected by sanctions requires urgent legal advice, and where law firms need to apply for a licence to charge fees for that advice.
The absence in UK legislation of an exemption similar to EU Council Regulation 2022/1269 arguably restricts the access of sanctioned entities/individuals to justice. Difficulties remain for sanctioned parties to enter and fund dispute resolution procedures, despite there being a valid provision for such a procedure in the relevant contract. There are also obstacles to instructing lawyers to act on their behalf. If they have no licence, law firms cannot charge for their work for sanctioned entities and the number of UK law firms that are willing to take on Russian clients is dwindling. In addition, there remains the possibility that the UK will introduce further sanctions which encompass an increasing number of Russian-affiliated parties. There is currently no indication that the new leadership of Rt. Hon. Liz Truss as the UK Prime Minister will lead to a reverse of the UK’s harder stance against Russia or a lightening of its sanctions.
Rt. Hon. Liz Truss has only been recently appointed as the new UK Prime Minister and, with no end to the Ukraine – Russia conflict in sight, it remains to be seen if the UK will eventually follow the EU in implementing an exemption, similar to that which has been introduced by the EU, to make it easier for a sanctioned entity/individual to have access to justice.
The EU exemption does not completely prevent Russian parties relying on anti-suit injunctions against those states that have implemented sanctions against it. There are also limitations and uncertainties concerning what is permitted at the conclusion of a dispute, such as the enforcement of monies awarded in an arbitration when the assets are affiliated with a Russian entity. However, the EU exemption does widen the options for formal dispute resolution becoming available to Russian entities and other individuals impacted by such sanctions.
If dispute resolution mechanisms are not made available to commercial parties, with the result that disputes are frozen until sanctions are finally lifted, this could result in an excess number of claims being issued in European courts and arbitration institutions in a short period of time, once the parties are no longer impacted by the relevant sanctions. National courts and arbitral institutions will likely be overwhelmed. Should parties be able to resolve multi-national commercial disputes without delay, this may prevent a piling up of litigation and arbitration claims in the future.
Considering the fluctuating economic and political climate, particularly the onset of a substantial increase of the cost of energy bills, the UK situation may change, and measures may be implemented that permit parties affected by sanctions to urgently instruct lawyers and resolve disputes in the UK’s jurisdiction. However, for now, the UK’s obstacles to sanctioned parties funding formal dispute resolution proceedings and their access to justice continue.
 Note that the UK has updated this legislation by adding new restrictions (such as The Russia (Sanctions) (EU Exit) (Amendment) (No.14) Regulations 2022). Reference in this blog to the UK Regulations includes all the up-to-date sanctions currently in force.