UK: High Court Orders Russian Claimant To Provide Security For Costs Despite Evidence Of Assets In Switzerland And Cyprus

The High Court has granted an order for security for costs against a Russian claimant, on the basis that there was a real risk that any costs order against it would have to be enforced in Russia, where the court said there was a real risk of substantial obstacles to enforcement – even though there was evidence that the claimant also had assets in Switzerland and Cyprus, where there was no such risk: PJSC Tatneft v Bogolyubov [2019] EWHC 1400 (Comm).

The decision is of interest in illustrating the court's approach to an application for security for costs against a claimant resident in a non-convention country (ie one that is not bound by the various regimes for mutual enforcement of English judgments, namely the recast Brussels Regulation or the Brussels, Lugano or Hague Conventions), but where there is evidence that the claimant has assets in a convention country. The decision suggests that the court will look at whether, despite that evidence, there is a real risk of having to attempt enforcement in a jurisdiction where there is a real risk of non-enforcement. The court may conclude that there is such a risk despite there being no evidence of a lack of probity on the part of the claimant.

Where a claimant is considering an offer of undertakings to prevent an order for security for costs, the decision suggests that this will only be effective if the undertakings "clearly and satisfactorily eliminate the risk" of non-enforcement.

Background

The claimant is an oil company incorporated in Tatarstan, one of the constituent members of the Russian Federation. It brought claims against four Ukrainian individual defendants in respect of their alleged involvement in a dishonest scheme to siphon off funds payable to the claimant for oil shipments.

The defendants applied for security for costs on the basis that the claimant is resident outside the jurisdiction and not resident in a convention country. This is one of the situations in which the court may grant an order for security for costs (under CPR 25.13(2)(a)) and there was no dispute that the condition was satisfied in this case. However, under CPR 25.13(1)(a), the court may only make an order for security for costs if it is "satisfied, having regard to all the circumstances of the case, that it is just to make such an order".

As established by the Court of Appeal decision in Nasser v United Bank of Kuwait [2002] 1 WLR 1868, the court's discretion to award security for costs against a claimant resident in a non-convention country must be exercised in a manner which is not discriminatory for the purposes of Articles 6 and 14 of the European Convention on Human Rights.

In Bestfort Developments LLP v Ras Al Khaimah Investment Authority [2016] EWCA Civ 1099 (considered here) the Court of Appeal held that the relevant test is whether there is a "real risk" of substantial obstacles to enforcement of an English costs order in the jurisdiction in question (or of an additional burden in terms of cost or delay, in which case security will usually be ordered by reference to that extra burden). It is not a balance of probabilities test.

Decision

The High Court (Butcher J) ordered the claimant to provide security for costs.

The main issue for the court to consider was whether the defendants had shown a real risk of substantial obstacles to enforcement due to the claimant's country of residence or the location of its assets (ie whether the Nasser condition was met). That involved two aspects:

1. whether there were substantial obstacles to enforcement in Russia, where the claimant was resident and where the vast majority of its assets were located; and
2. even if there were such obstacles, whether it was nonetheless inappropriate to order security because the claimant had assets in Switzerland and Cyprus that could be enforced against.

If the Nasser condition was met, the court still had to consider whether it was just to make an order for security.

Enforcement of a costs order in Russia

The defendants argued that the court could conclude without any difficulty that there was a real risk of substantial obstacles to enforcement of a costs order in Russia because the English courts had recently held that there was such a risk, in particular in Danilina v Chernukhin [2018] EWHC 39 (Comm) (considered here). The claimant contended that the English court's previous decisions, on different evidence, were not relevant.

In addition, each party relied on expert evidence of Russian law as to whether or not there were substantial obstacles to enforcement of a costs order in Russia, and whether the identity of the parties would lead to a "politically influenced result" in attempting to enforce such an order in favour of the defendants. The judge said that, in approaching this area of dispute, it was important to bear in mind that the test was whether there was a "real risk", which was meant to establish a "simple and clear approach". In circumstances where the experts had not been cross-examined, in most cases the court was unlikely to be able to decide between the experts' views on disputed issues (save where it was plain that one or other expert lacked qualifications or reliability, or there was no room for serious argument). That might itself lead the court to conclude there was a real risk of substantial obstacles to enforcement, because the expert who said there was such a risk might be correct.

The judge concluded that the defendants had shown a real risk in this case. He outlined a number of reasons for his conclusion:

1. Evidence of falling enforcement rates in Russia of decisions involving Ukrainian applicants or from Ukrainian courts, and of judgments of English courts or arbitral tribunals.
2. The fact that there is no relevant mutual enforcement treaty between the UK and Russia.
3. A risk that it may be necessary to establish reciprocity before the Russian courts (ie that the English courts recognise and enforce Russian judgments) on a case by case basis, and a risk that reciprocity might not be found to be established given that the parties had not identified a case in which an English court had enforced a Russian costs-only judgment.
4. A risk that a costs order might not be enforced if it was not accompanied by any final judgment on the merits, eg if the claimant discontinued the action.
5. A risk that a Russian court might refuse to enforce a costs order in favour of the defendants, applying an expansive concept of public policy, in light of the political tensions between Russia and the Ukraine and the fact that some of the defendants were subject to Russian sanctions.
6. A risk that a Russian court might refuse enforcement due to the sanctions imposed against certain of the defendants and, even if a costs order were enforced, any funds credited to the relevant defendants might be indefinitely frozen within Russia so that they could not be used by the defendants.

The judge regarded points 3 to 6 as each representing a real risk of substantial obstacles to enforcement in Russia. Taken together, and in light of points 1 and 2, he regarded the position as clear. He also noted that his conclusion was consistent with the court's finding in Danilina, which provided "additional support" for his conclusion.

Enforcement in Switzerland and Cyprus

The claimant argued that, because it had assets within a convention country, it was inappropriate or unnecessary to order security. The assets the claimant claimed to have were: (i) 99% of the shares in a Swiss-incorporated company (TOAG) worth CHF 453,273,431, which were held in bearer form in a safe deposit box in Switzerland; and (ii) 100% of the shares in a Cypriot company (Tatneft Finance) which had current assets of about US$9 million and non-current assets of about US$170 million.

The court considered that, nonetheless, there was a real risk that such assets would not be available, or not in sufficient amounts, if it became necessary to enforce a costs order against the claimant. The shareholding arrangements within the claimant group were "neither fully transparent, nor fully explained", and the assets relied on might readily cease to be available for legitimate reasons. Moreover, this was very hard-fought litigation and there was no good reason to think that the claimant would not take any available course of conduct to diminish the assets available to the defendants to enforce against.

The court rejected the suggestion that there was any rule that, if a resident of a non-convention country had assets within a convention country, security would not be ordered unless a lack of probity was shown. The court endorsed the approach in Texuna International Ltd v Cairn Energy plc [2004] EWHC 1102 (Comm), in which the court focused on whether there was a real risk of having to attempt enforcement in a jurisdiction where there was a real risk of substantial obstacles, despite there being evidence of assets in a jurisdiction where there were no such obstacles. A lack of probity on the part of the claimant would be highly relevant, but the existence of such a risk could arise from other factors.

Although the claimant offered to provide undertakings, if the court were minded to order security, the court concluded that these did not "clearly and satisfactorily eliminate the risk". Accordingly the Nasser condition was satisfied.

Was it just to order security?
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The judge recognised that satisfaction of the Nasser condition did not of itself mean it was just to make the order, but said it was a strong consideration of favour of doing so. Factors pointing the opposite way included that the claimant was a reputable and solvent organisation with no recording of defaulting on its obligations. The judge concluded:

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