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UK Supreme Court grants final anti-suit injunction to terminate Russian proceedings in breach of arbitration agreement7 October 2024

Introduction

The UK Supreme Court (“UKSC”) granted an anti-suit injunction (“ASI”) restraining a Russian company, RusChemAlliance (“RCA”), from pursuing court proceedings in Russia. The UKSC held that RCA was bound by a contractual agreement for disputes to be arbitrated in Paris and breached that agreement by commencing proceedings in Russia. The UKSC’s decision in UniCredit Bank GmbH v RusChemAlliance LLC [2024] UKSC 30 upheld the Court of Appeal (“CA”) decision, which was the first time that an English Court held that it had jurisdiction to grant a final ASI in respect of an arbitration agreement seated outside England and Wales. This was the case, even in the absence of an express choice of English law for the arbitration agreement, as the contract was governed by English law.

The judgment considers key issues including (1) the impact of Article 248 of the Russian Arbitration Procedural Code, which grants Russian courts exclusive jurisdiction over disputes between Russian and foreign entities arising from foreign sanctions; (2) the approach to determining the governing law of an arbitration agreement; and (3) the extent of the English court’s powers and willingness to grant an ASI.

Background Facts

RCA entered into two contracts for the construction of LNG and gas processing plant facilities in Russia with two German contractors (“Contractors”). RCA agreed to pay, in stages, approximately €10 billion to the Contractors and made the first advance payment of €2bn.

The Contractors arranged for UniCredit Bank GmbH (“UniCredit”) to provide on demand bonds to guarantee performance of their obligations. The bonds provided for English governing law and ICC arbitration seated in Paris.

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"Following sanctions imposed by the EU against Russian individuals and entities, the Contractors halted performance under the contracts, citing EU sanctions as the reason, although RCA was not designated as a sanctioned entity."

Following sanctions imposed by the EU against Russian individuals and entities, the Contractors halted performance under the contracts, citing EU sanctions as the reason, although RCA was not designated as a sanctioned entity. This prompted RCA to terminate the contracts, alleging breach by the Contractors. RCA made a demand under the bonds for the return of the advance payment. UniCredit refused payment and argued that they were prohibited from doing so due to the EU sanctions. RCA disputed that the sanctions afforded a valid ground for refusing payment.

Despite the arbitration agreements in the bonds, RCA commenced proceedings against UniCredit in the Russian Arbitrazh Courts, which accepted jurisdiction. It pleaded that the arbitration agreements were unenforceable as the EU sanctions violated Russian public policy, and that the Russian Arbitrazh Court had exclusive jurisdiction as a result of Article 248 of the Russian Arbitration Procedural Code. Article 248 has been applied broadly by the Russian courts; there have been a significant number of cases where they have assumed jurisdiction and issued ASIs prohibiting foreign court or arbitration proceedings or refused enforcement of foreign judgments or arbitral awards. Unsurprisingly, the Arbitrazh Court found that the dispute fell within its exclusive competence and the arbitration agreements could not be enforced. However, it stayed the proceedings in Russia pending the UKSC decision.

Lower Court Decisions

UniCredit obtained an interim ASI from the English court but its application for a final ASI was dismissed. The High Court held that (1) the arbitration agreements were governed by French law; and (2) the English Court did not have jurisdiction to grant an ASI. The CA overturned that decision and granted a final ASI against RCA, requiring it to terminate the Russian court proceedings. In doing so it concluded that there was a serious issue to be tried on the merits, a good arguable case that the claim fell within one of the relevant jurisdictional gateways and England and Wales was the “proper place” to bring the claim. RCA appealed to the UKSC.

UKSC Decision

The UKSC concurred with the CA and dismissed RCA’s appeal. The question of jurisdiction depended on whether the CA was right to decide that:

  1. the arbitration agreements in the bonds were governed by English law (the “Governing Law Issue”); and
  2. England and Wales was the proper place in which to bring the claim (the “Proper Place Issue”).

The Governing Law Issue

UniCredit relied on the fact that the claim was in respect of a contract governed by English law as a jurisdictional gateway to the English courts. An arbitration agreement is treated as a separate agreement to the main contract. Although the contracts were governed by English law, the arbitration agreements also had to be governed by English law for the claim to fall within the jurisdictional gateway. The bonds provided for English governing law and ICC arbitration seated in Paris. However, they made no express reference to the governing law of the arbitration agreement.

"The UKSC considered that the only relevant question was whether the arbitration agreements in the bonds were governed by English law."

The UKSC considered that the only relevant question was whether the arbitration agreements in the bonds were governed by English law.

It had, in a previous decision (Enka Insaat Ve Sanayi AS -v- OOO Insurance Company Chubb [2020] UKSC 38 (“Enka”)), laid down the approach to determine the governing law of an arbitration agreement. The general principle is that where the main contract stipulates an express governing law, the arbitration agreement in the contract would usually be deemed to have the same governing law despite the choice of a foreign seat. This general principle may be displaced where the law of the seat provides that the arbitration agreement itself will be governed by the law of the seat.

Subsequently, in Kabab-Ji SAL v Kout Food Group [2021] UKSC 48 (“Kabab-Ji”) the UKSC also considered what system of law governed the arbitration agreement. The general principles identified in Enka were applicable to ascertain whether the parties had chosen the law which was to govern their arbitration agreement and if so, what law they had chosen. The contract in Kabab-Ji provided that disputes would be settled under the rules of the ICC in Paris and that the governing law of the contract was English law. The UKSC found that there was no good reason to infer that the parties intended to carve out the arbitration clause from their choice of English law to govern their contract and therefore the arbitration agreement was governed by English law.

Applying those principles, the UKSC agreed with the CA that the application of this exception depends on all the circumstances, including what the parties can fairly be taken to have known about the content of the law of the seat. On the evidence, French law does not consider that a choice of a Paris seat meant that French law was to govern the arbitration agreement, but that the law governing the arbitration agreement depends on the parties’ common intention. This fell short of what Enka contemplated would be sufficient for the exception to apply and thus the general principle applied. There were no good reasons to infer that the parties intended the arbitration agreements to be governed by French law as the law of the seat of arbitration. The arbitration agreements in the bonds were governed by the governing law of the bonds, namely English law.

The Proper Place Issue

The UKSC and the CA considered where the case can suitably be tried for the interests of all parties and for the ends of justice. This may require determination of whether there is a real risk that justice will be unobtainable in the “natural forum” for the claim. Both the CA and UKSC concluded that England was the proper place for UniCredit’s claim to enforce the arbitration agreement, on the basis that UniCredit was unlikely to obtain effective justice in either France or Russia.

The UKSC and the CA considered that French courts are not able to grant ASIs. In theory, UniCredit could obtain an ASI order from the French-seated tribunal, but that would take time and such an award would not be enforceable in Russia. Without the protection of an ASI from the English Court, RCA would likely apply to the Russian court for an anti-arbitration injunction. Evidence shows that Russian courts readily grant such injunctions and UniCredit would have to comply with that injunction in light of the assets it has in Russia.

Further it was highly likely that a Russian court would grant judgment in favour of RCA, applying Russian law, and such a judgment could be readily enforced in Russia.

"The UKSC and the CA considered where the case can suitably be tried for the interests of all parties and for the ends of justice."

Discussion

There has been an increasing number of claims commenced by Russian parties before the Russian courts, notwithstanding arbitration agreements in the underlying contracts. This has resulted in a corresponding increase in ASI applications, both in England and elsewhere, including in Hong Kong in Linde GmBH v RusChemAlliance LLC [2023] HKCFI 2409 where the Hong Kong Court granted an interim ASI against RCA.

The UniChem decision confirms at the highest level that the English courts are willing to grant an ASI against a foreign party where it has commenced court proceedings in breach of an arbitration agreement with a seat outside of England and Wales. An English court would have jurisdiction if the arbitration agreement (and not just the main contract) was governed by English law. The ASI granted against RCA rested on the general rule established in Enka that the law of the arbitration agreement is the law of the main contract. However, this would be displaced if the draft reforms to the UK Arbitration Act 1996 come into force in its current form. Section 1 of the draft bill provides that in the absence of an express parties’ choice, the default law of the arbitration agreement is the law of the seat. To avoid uncertainty, it is advisable that contracting parties expressly state the law of the arbitration agreement in their contracts.

To grant an ASI, the English Court would also need to be the proper place for the claim, which requires determining whether there is a real risk that justice will not be obtainable from the natural forum for the claim. In this case, the English courts placed emphasis on the fact that ASIs were not available in France. It is presently unclear what the position would have been if ASIs were available in the seat of the arbitration, though it would arguably increase the effectiveness of the arbitration seat and thereby potentially reduce the need for the English courts to assist. It would be more straightforward for the English court to grant an ASI if the arbitration agreement provided for an English seat, as in Renaissance Securities (Cyprus) Limited v Chlodwig Enterprises Limited & Ors [2023] EWHC 2816 (Comm).

ASIs remain an important tool to ensure that arbitration agreements are upheld. Entities with contractual relationships with Russian parties should be cognisant of the risk that their counterparts may commence proceedings in Russia in breach of arbitration agreements and should promptly assess their strategies in such circumstances.

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