British Virgin Islands: Sanctions Against Russia Pose Tricky Questions For The BVI Judiciary

Charles Goldblatt, litigation associate at Conyers in the British Virgin Islands, takes a close look at how local judges are addressing sanctions against Russian entities.

Since Russia's military incursion in Ukraine began in February 2022, the UK has introduced an extensive package of economic sanctions against Russia. By August 2022, over 1,270 people had been designated and, by October 2022, approximately GBP 18 billion of Russian assets had been reported as frozen.

While the sanctions regime is not explicitly confiscatory in nature, it has, at times, come close to trespassing beyond its scope. This is particularly evident in the context of legal proceedings which involve sanctioned Russian parties. The sanctions regime, and the asset-freezing provisions in particular, have severely impaired the ability of sanctioned Russian parties to enforce and protect their legal rights by restricting their ability to pay for legal advice, satisfy obligations which may arise during the course of proceedings (including court fees and amounts payable under court orders) and recover such sums awarded in their favour, without a licence.

There has been a clear – and, at times, stark – difference between the approach of the English judiciary and that of the British Virgin Islands (BVI) in relation to the practical difficulties caused by the sanctions regimes in the context of litigation involving sanctioned Russian parties. In this article, BVI litigation associate Charles Goldblatt considers recent decisions from both jurisdictions where the judiciary has sought to navigate issues caused by the imposition of sanctions in civil proceedings.

STATUTORY FRAMEWORK

The UK sanctions regime comprises the Sanctions and Anti-Money Laundering Act (2018), which provides for sanctions regulations to be made, and the Russia (Sanctions) (EU Exit) Regulations (2019), which impose the sanctions. The regulations are extended to the BVI and other British Overseas Territories by the Russia (Sanctions) (Overseas Territories) Order (2020) with certain modifications, but in effect the Overseas Territories Order applies the UK sanctions regime in the BVI and to BVI persons and entities.

RECENT DECISIONS

In one of the earliest BVI decisions following the introduction of sanctions (JSC VTB Bank v Sergey Taruta and another), Justice Adrian Jack considered an application by Ogier, the legal representative of JSC VTB Bank (VTB) to come off the record pursuant to Rule 63.6 of the Eastern Caribbean Supreme Court Civil Procedure Rules (ECSC CPR).

In support of its application, Ogier contended that continuing to act for VTB would damage its reputation (representing a sanctioned person being contrary to Ogier's core values) and would likely breach various criminal offences created by the sanctions legislation.

Justice Jack, acknowledging the substantial difficulties VTB would face finding alternative representation, made a number of preliminary observations on these grounds before adjourning the application:

First, that a practitioner's desire to come off record because of matters concerning an existing client's character or reputation may not be good grounds for granting that relief.

Second, that even where a practitioner's terms of business provide for termination of a retainer, the Court has the power to refuse an application to come off record. As officers of the Court, practitioners owe an overriding duty to ensure access to justice and the rule of law.

Third, that potential reputational damage arising from continued representation of designated persons was not relevant to the determination of an application to come off record. Reputational damage would be limited if the Court refused such an application and continued representation was not by choice.

And fourth, that practitioners owe a duty to act in the client's best interests. If a licence can be obtained which will legitimate continuing to act, then the legal practitioner has a duty to apply for the licence.

At a further hearing of Ogier's application, Justice Jack refused to permit the firm to come off record on the basis that legal practitioners' duties as officers of the Court outweighed other considerations such as payment of fees in accordance with standard terms and conditions and reputational damage. The availability of a licensing regime negated any concerns about Ogier's ability to act for VTB without breaching the sanctions legislation. Legal practitioners acting on an existing retainer had a duty to apply for a licence.

Further, while there was no express cab rank-rule in the BVI that would require Ogier to take on VTB as a new client, once Ogier did take on VTB as a client, it was (unless disinstructed) obliged to continue to represent VTB to the best of its skill and ability unless and until the Court permitted it to come off record.

Justice Jack ruled: "VTB may be a pariah ... That does not afford a ground for its legal representatives to withdraw from representing them. Quite the contrary. It is precisely when VTB are stigmatised as a pariah that VTB need the best endeavours of their legal representatives to advise them and to advocate in Court on their behalf. However uncomfortable it may be for Ogier, this is ... a vital safeguard for ensuring the rule of law in this territory. Even pariahs have rights."

In one of the first decisions from the English Commercial Court (Maroil Trading Inc and other v Cally Shipholdings Inc and others), and in a significant departure from the approach of Justice Jack in VTB, Justice David Foxton considered (and granted) an application by the defendants to adjourn a trial, which was fixed for nine weeks from 3 October 2022, as a result of the designation of the defendants' ultimate parent company on 24 March 2022.

The defendants' legal representatives had applied to come off the record on the basis of outstanding fees. Justice Foxton held that it was appropriate to grant that application. The Judge also held there was "no realistic prospect of the defendants being able to participate in a fair trial in October". Proceeding to trial would result in an obvious inequality of arms and cause "the most serious unfairness and prejudice".

In another early English case (Navigator Equities Ltd v Deripaska), Mrs Justice Cockerill adopted the same approach when a defendant's counsel team resigned a short time before trial due to its inability to receive payment for its services. The Judge held there was "no possibility of a fair trial in the current circumstances" and granted an adjournment of the trial so that a new legal team could be instructed.

In June 2022, Justice Jack handed down another decision (AO Alfa-Bank v Kipford Ventures Ltd) on an application by Appleby, the legal representative of AO Alfa-Bank, to come off the record and an application by Alfa-Bank to vacate hearings which were listed later that month.

Alfa-Bank was sanctioned by the UK Government on 24 March 2022. Appleby had applied for a licence to receive payment for legal fees from Alfa-Bank on 1 April but, by the date of the hearing, the licence had not yet received approval from the secretary of state. Justice Jack had previously adjourned Appleby's application to come off record and re-listed the June hearing to October (presumably to allow time for the BVI government (GVI) to grant the necessary licence).

In his judgment, Justice Jack sought to address a concern from members of the legal profession that working in the expectation of receiving payment once a licence was granted would constitute extending "credit" to a sanctioned entity during the period between doing the work and receiving the licence, which would be a criminal offence under the legislation. Justice Jack held that the provision of legal services and billing in the usual way did not amount to the giving of credit within the meaning of the legislation, whether or not the client subsequently paid for those services.

On 28 July 2022, GVI granted the licence sought by Appleby. However, by September, Alfa-Bank had made a further application to adjourn the June hearing on the basis that (notwithstanding the licence) Appleby's bankers indicated they would not receive funds from Alfa-Bank. Further, Alfa-Bank's leading counsel had made a mirror application for a licence from the Office of Financial Sanctions Implementation (OFSI), which had not yet been granted.

In a stern judgment, Justice Jack raised (apparently of his own motion) the question of OFSI's liability for wasted costs under Rule 64.10 of the ECSC CPR as a result of its delay in granting a licence for leading counsel. As for Appleby's bankers, Justice Jack had a Notice to Show Cause served on the bank on the basis that it was potentially "interfering with the due administration of justice in this territory and guilty of contempt of court".

The judge reluctantly held that the merits of the underlying application (a freezing injunction) could not be fairly determined without Alfa-Bank having an opportunity to answer the factual case and there was no reasonable prospect of it doing so by October.

In unrelated English Commercial Court proceedings concerning the commodities branch of VTB, Justice Foxton considered a number of applications which the Judge described as "a study in procedural complexity".

In March 2022, VTB's legal advisors, PCC Byrne (PCCB), applied for a licence which would enable VTB to pay past and future legal fees. By June, PCCB had come off record as a result of no licence being granted. By November, the Judge was faced with an application by the CEO of VTB for permission to represent VTB at hearings, an application against VTB for security for costs, and an application by VTB to adjourn the security application.

Adopting the approach he had taken in Maroil Trading, Justice Foxton held that neither PCBB nor counsel could be criticised for their unwillingness to undertake the hearing without remuneration (as at the date of the hearing, OFSI was yet to process PCBB's licence application). Deciding to adjourn the case, the Judge held that he was "satisfied on the material before me that VTB is not presently in a position to pay for legal representation in this jurisdiction, as a result of sanctions".

On the application for security for costs, Justice Foxton considered whether such an order would be appropriate (and permitted) in the circumstances. Referencing OFSI's general guidance, the judge found that the legal fees exception did extend to an anticipated liability for costs and that payments into court for security for costs were permitted. The judge also commented that meeting the other side's costs in litigation appeared to be a licensable activity. On the basis that VTB could apply for a licence in anticipation of a future costs liability, the Judge would not have granted security for costs (were it otherwise appropriate to do so).

In January 2023, Justice Cockerill handed down the most comprehensive decision on sanctions to date (PJSC National Bank Trust & anor v Boris Mints & ors). The judgment addressed a number of important issues relating to the ability of designated persons to pursue litigation before the English courts. Among other things, the Judge held that: a licence was not required for the Court to enter judgment on a designated person's claim; the ability of a sanctioned claimant to pay adverse costs, satisfy an order for security for costs and pay damages in respect of cross-undertakings in damages, were all licensable activities; and payment of a costs order in favour of a sanctioned party was also a licensable activity.

CONCLUSION

The BVI courts have demonstrated an unwillingness to permit legal representatives to extricate themselves from contentious proceedings on the grounds of non-payment of fees or reputational damage. Conversely, the English courts appear to have had no difficulty granting such applications on the basis of non-payment of fees. Both jurisdictions have demonstrated (perhaps reluctantly) a willingness to adjourn hearings where substantive factual matters require determination.

The general licence granted by OFSI in relation to legal fees has certainly eased the burden in relation to a sanctioned party's own legal fees in English proceedings, but as things stand BVI practitioners must continue to apply for specific licences to act for sanctioned Russian parties. Further, specific licences are still required for most other payment obligations in the context of contentious proceedings and given that both licensing authorities are evidently overwhelmed by applications, parties face months (if not years) of delay to obtain licences to make or receive such payments.

It is at least reassuring to see that members of the judiciary, both in England and the BVI, have been at the forefront of ensuring that government policy does not trespass beyond its scope and violate fundamental right of access to justice and the rule of law.

Originally published by CDR Magazine

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