Anti-Suits, Arbitration Agreements and Sanctions against Russia – the View from Hong Kong

The introduction of Article 248 of the Arbitration Procedure Code of the Russian Federation (Russian Arbitration Code) has given Russian parties the option to bring their disputes before the domestic courts, contrary to any agreement to arbitrate.  We have previously written about the Russian Arbitration Code and its impact on arbitration agreements.  We have also commented on the approach taken by the English courts in granting anti-suit injunctions prohibiting Russian court proceedings brought in direct contravention of an arbitration agreement, as reflected in the UK Supreme Court case UniCredit Bank v RusChemAlliance LLC. 

In Bank A v Bank B [2024] HKCFI 2529, the Hong Kong Court of First Instance recently confirmed the position in Hong Kong.  The Court granted a final anti-suit injunction against a Russian defendant bank, prohibiting it from pursuing Russian court proceedings brought contrary to an HKIAC arbitration agreement.  In doing so, the court relied on a number of recently decided English cases, as well as well-established principles of common law. 

Below, we summarise the background to the case, the Hong Kong Court's findings, and what these mean in practice.

Background

The Plaintiff (a German bank) and the Defendant (a Russian bank) entered into an ISDA Master Agreement in 2003.  Following the invasion of Ukraine in 2022, the EU added the Defendant to its list of sanctioned persons.  On the same day, the parties entered into a Termination and Settlement Agreement (TSA) which imposed on the Plaintiff payment obligations amounting to EUR 112.6 million.  The TSA contained an English governing law clause and a dispute resolution clause which referred all disputes to arbitration in Hong Kong, under the HKIAC Rules. 

The Plaintiff subsequently refused the Defendant's demand for payment under the TSA, citing the EU sanction which prohibited such payments.  In response, the Defendant initiated legal proceedings in Russia for recovery of the amounts claimed, and applied for an interim freezing order over the Plaintiff's securities which were held by the Defendant.  The Russian court issued the freezing order.

In October 2023, the Plaintiff applied for and obtained an interim anti-suit injunction in the Hong Kong court which required the Defendant to stay the existing Russian proceedings in the Russian court and prohibited the commencement of new proceedings.  Notwithstanding this, the Defendant initiated a second round of proceedings in Russia and continued to pursue the first set of proceedings. Both sets of proceedings were decided in the Defendant's favour and the Plaintiff was ordered to pay the full amount under the TSA.  

The Russian court also rejected the Plaintiff's jurisdictional challenges on the ground that the Russian court had exclusive jurisdiction by virtue of Article 248 of the Russian Arbitration Code, and granted the Defendant final injunctions to restrain the Plaintiff from commencing or continuing any arbitration relating to the TSA, and from commencing proceedings in Hong Kong to prohibit the Defendant from claiming in Russia.

The Plaintiff sought a final anti-suit injunction and related relief from the Hong Kong court. 

The jurisdiction issues 

The Defendant argued that the Hong Kong courts lacked jurisdiction to grant the anti-suit injunction on the basis of Article 13 and 19 of the Hong Kong Basic Law, which provides that the Hong Kong courts do not have jurisdiction over "acts of state" such as "foreign affairs".  Article 19 further provides that when a case involves a question of fact concerning acts of state, the courts may only hear the case if they first obtain a certificate from the Chief Executive of Hong Kong (who is in turn required to obtain a certificate from the Central People's Government).  In dismissing the Defendant's argument, the Court noted that: 

• There was no "state", or "act of state" involved in the proceedings. Rather, the dispute was between the parties: two commercial banks. Referring to Democratic Republic of the Congo v FG Hemisphere Associates LLC (No 1) (2011) 14 HKCFAR 95, the Court reiterated that the ambit of Article 19(3) is narrow and limited to cases where there is a question of fact concerning acts of state such as defence and foreign affairs. Thus, even if it could be said that the EU sanction amounted to an "act of state", the inclusion of the Defendant on the EU sanctions list and its resultant effect on the parties was clearly established and not in dispute. There was therefore no requirement for an Article 19 certificate.
• The key question for the Court was simply whether there was a valid and binding arbitration agreement between the parties which covered the dispute before the court.
• Importantly, the court reiterated the principle of severability of the arbitration agreement from the underlying contract. Therefore, any illegality of the TSA or alleged impossibility to perform under the contract could not affect the Court's judgment on the validity and operation of the arbitration agreement. Nor would the impossibility of performance of any award obtained in a Hong Kong arbitration affect the validity and enforceability of the arbitration agreement, the arbitration itself or the award obtained.

The Defendant further argued that the granting of the anti-suit injunction would interfere with the jurisdiction of the Russian court conferred by Article 248.  The court dismissed this argument, on the basis that: 

• An anti-suit injunction was an order in personam and would not be addressed to nor binding upon a foreign court.
• Citing the House of Lords decision in Turner v Grovit [2001] UKHL 65, the court noted that "the making of a restraining order does not depend upon denying, or pre-empting the jurisdiction of the foreign court… Restraining orders come into the picture at an earlier stage and involve not a decision upon the jurisdiction of the foreign court but an assessment of the conduct of the relevant party in invoking that jurisdiction".
• The court finally noted that the mere fact that a foreign court has jurisdiction over a matter has little weight, "when the entire purpose and expressed intent of each contracting party to either an exclusive jurisdiction clause or an arbitration agreement is for the party NOT to invoke that undisputed jurisdiction".

The discretion issue

The Defendant sought to raise a number of arguments as to why the court should not exercise its discretion to grant the anti-suit injunction. The court rejected each ground: 

• Existence of a Dispute: The Defendant argued that there was no dispute between the parties as it was common ground that payment of the amount under the TSA could not be made by the Plaintiff as a result of the EU sanction. In rejecting the Defendant's argument, the court observed that at a minimum there was a dispute between the parties over the legitimacy of the Defendant's pursuit of its claim before the Russian court and the jurisdiction of an arbitral tribunal to decide the dispute over payment under the TSA. Therefore, there was an arbitrable dispute between the parties.
• Utility of the Arbitration: The Defendant argued that any arbitration between the parties would be moot, given the prohibitive effect of the EU sanction in blocking payment under the TSA such that there was a real risk it would not be able to obtain the intended benefit of any arbitral award. However, given that the parties had entered into the TSA and by their own choosing agreed to and provided for English law to govern the contract, the court held that "if, under English law, the EU Sanction has effect on the TSA, or on the HK Arbitration in any way, that is a consequence of the parties' choice". Indeed, the Defendant had been added to the list of sanctioned entities on the same day as the TSA was agreed. It was therefore "inconceivable that this could not have been envisaged as a risk" when the TSA was negotiated and concluded.
• Utility of the Anti-Suit Injunction: The court also confirmed its stance in support of anti-suit injunctions where proceedings have been started or continued in deliberate breach of an arbitration agreement. In doing so, the court cited the English law cases of Barclays Bank Plc v VEB.RF [2024] EWHC 225 (Comm) and Airbus Canada Limited Partnership v Joint Stock Company Illyushin Finance Co [2024] EWHC 790 (Comm), affirming the "practical utility" of anti-suit injunctions, which could support the claimants in obtaining enforceable negative declaratory relief in arbitration proceedings, as well as resisting the enforcement of any judgment obtained in the Russian proceedings in other courts.
• No Access to Justice Concerns: There was no evidence that the Defendant would be deprived of a fair trial or that it would be unable to pay for legal representation of its choice in a Hong Kong arbitration.
• Not Contrary to Hong Kong Public Policy: The Defendant argued that granting the anti-suit injunction would indicate support for the EU sanction and would therefore be contrary to Hong Kong public policy. However, it was held that there was no question of the Court giving effect to the EU sanction merely by granting the anti-suit injunction and associated reliefs, or acting contrary to public policy as a result. The relevant public policy in play was that of "upholding the parties' autonomy and their agreement to submit their disputes to arbitration in Hong Kong". Moreover, and in any case, the EU sanction had no effect within the PRC or Hong Kong, and it did not affect the rights or property of any PRC entity or entity in Hong Kong. There was therefore no public policy reason for the court to decline to order the injunction.

What does this mean in practice?

The case should provide some cautious reassurance for parties seeking to arbitrate with a Russian counterparty in Hong Kong, though support for such a position is likely to be found lacking in the Russian courts.

The risks and uncertainties posed by the application of Article 248 of the Russian Arbitration Code remain.  In this case, the Defendant bank's commencement of a second round of proceedings in the Russian court despite the interim anti-suit injunction reflects the continuing limits of anti-suit injunctions granted as regards actions in Russia. 

Recognising this, the English and Hong Kong courts have nevertheless continued to uphold parties' agreements to arbitrate on a principled basis, noting that anti-suit injunctions continue to have utility in third country jurisdictions where Russian defendants may seek to enforce Russian court judgments. 

Authors: Sylvia Tee, Partner; Amy Cable, Senior Expertise Lawyer; Eleanor Zhao, Associate