UK Court Says Sanctions on Russian Bank Don't 'Frustrate' Arbitration Agreement

The U.K. High Court of Justice on May 10 made permanent a court order blocking sanctioned Russian entity VEB from taking a dispute with Barclays Bank to an arbitration court in Russia. The court rejected VEB's claim that British sanctions "frustrated" an arbitration agreement between the parties.

The dispute stemmed from an agreement between VEB and Barclays for currency swap transactions, which included a provision terminating the deal if VEB were to be sanctioned by the U.S., the U.K., the EU or any EU member state. The Russian bank was sanctioned in 2022 following Russia's invasion of Ukraine, and Barclay terminated the agreement.

Although a final $147 million payment was due to VEB, Barclays held the payment "in its capacity as a banker rather than as a trustee or agent." The two sides disagreed on whether the payment is required and how interest should be calculated.

Last May, VEB brought proceedings to a Russian court, which Barclays challenged in the U.K. as violating the parties' agreement to submit disputes to the London Court of International Arbitration (LCIA). The Russian bank said sanctions "frustrated" the arbitration agreement due to the bank's "alleged difficulties with securing legal representation," "alleged problems paying legal fees and LCIA fees" and "the inability of witnesses / party representatives to attend live in person at a hearing."

The U.K. High Court said that while the "pool of lawyers" willing to represent VEB "has shrunk significantly," the bank hasn't persuaded the court that the evidence "shows that this occurred to the extent that VEB can say that it has effectively been denied adequate legal representation." The court said that had VEB referred its dispute to the LCIA, "it would have been able to secure adequate legal representation from specialist solicitors and counsel."

And while it's now more difficult for VEB to pay legal fees -- due in part to the bank's exclusion from the SWIFT interbank transaction system -- it's still possible for the bank to make these payments, the court said.

The court also found that VEB's delay in referring the matter to LCIA arbitration required the court to issue the anti-suit injunction. The judge appealed to the "wider picture" in extending the injunction, finding that "it seems to be clear that VEB has commenced the Russian Proceedings in breach of an arbitration agreement, which it accepts is valid under English law, in order to get around the effect of the VEB Sanctions."

The Russian bank "plainly hopes to obtain a judgment in Russia which it could not obtain from an LCIA Tribunal applying English law."