Getting Bond(s) Out of Russia: UK Supreme Court Dismisses Appeal and Upholds Anti-suit Injunction

On 18 September 2024, the UK Supreme Court handed down its judgment in UniCredit Bank GmbH v RusChemAlliance LLC [2024] UKSC 30.  The judgment considers several significant issues relevant to international arbitration.  Primarily, though, it reaffirms: (i) the English court’s strong support for arbitration, in general; (ii) the steps it is prepared to take to hold parties to their agreement to arbitrate; and (iii) the current position for determining the governing law of an arbitration agreement, in the absence of an express election by the parties.

Facts

RusChemAlliance LLC (“RCA”), a Russian company, entered into contracts with German companies (together the “Contractor”) for the construction of liquefied natural gas and gas processing plants in Russia.  These contracts, valued at approximately €10 billion, included advance payments guaranteed by bonds issued by UniCredit Bank GmbH (“UniCredit”), a German bank.  The bonds stipulated that they were governed by English law and that all disputes were to be settled by arbitration in Paris pursuant to the Arbitration Rules of the International Chamber of Commerce. So far, so standard.

After RCA had made advanced payments to the Contractor and work had begun, Russia invaded Ukraine, and was met by wide-ranging EU sanctions in response.  As a result, the Contractor claimed it could no longer perform its obligations under the contracts, leading RCA to terminate the contracts and demand the return of advance payments. UniCredit refused to honour the bonds, also relying on the EU sanctions as the reason for non-payment.  RCA then initiated court proceedings in Russia, in breach of its arbitration agreement.  RCA relied on article 248.1 of the Arbitrazh Procedural Code, which Russia introduced in 2020, and which conferred exclusive jurisdiction on Russian Arbitrazh Courts over disputes between Russian and foreign entities arising out of foreign sanctions.

Presumably unoptimistic about its prospects of persuading a Russian Court that it could rely on EU sanctions to explain its refusal to honour the bonds, UniCredit sought relief from the English court, obtaining an interim anti-suit injunction to prevent RCA from continuing the Russian proceedings.  RCA appealed, challenging the jurisdiction of the English court. At this time, in November 2023, the judge in the Russian proceedings stayed proceedings pending the outcome of the Court of Appeal decision. The Court of Appeal upheld the injunction and granted final relief, requiring RCA to discontinue the Russian proceedings.  Despite the ruling of the Court of Appeal, the Russian court resumed proceedings on the case and bought UniCredit Bank JSC (Russia)  in as a co-defendant and proceeded to grant certain measures, including seizing shares in UniCredit’s Russian subsidiaries as well as stocks and funds it owned. This occurred in tandem with the seizures of assets from Deutsche Bank and Commerzbank. 

In the English proceedings, RCA then appealed again, this time to the Supreme Court.  The Court affirmed that the arbitration agreements in the bonds were governed by English law, and that, despite competition from two other jurisdictions, England and Wales was the proper place to bring the claim. Ultimately, it permitted the anti-suit injunction to remain in force.

The Court’s Judgment

Before the Supreme Court, the sole issue was whether the English court has jurisdiction over UniCredit’s application for an injunction.  The outcome depended on the Court’s answer to two questions:

1. Did English law govern the arbitration agreements in the bonds? And, if so,
2. Was England the proper place for UniCredit to bring its application?

In respect of the first question (the “governing law issue”), the Court recognised that, in principle, an arbitration agreement contained in a contract can have a different governing law to that of the underlying contract, a common practice in international contracts.  As there was no express election (also not uncommon), the Court had to determine which law governed the arbitration agreement.

RCA argued that the governing law of the arbitration agreement was French law, France being the seat of the arbitration.  UniCredit argued that English law should govern on the basis that that was the governing law of the underlying bonds (and perhaps motivated by the fact that the Paris Court would not be able to grant an anti-suit injunction to prevent the litigation in the Russian Court).

Handily, the Supreme Court had rather recently considered this very issue in the well-known (among arbitration practitioners) case of Enka Insaat ve Sanayi AS v OOO Insurance Company Chubb [2020] UKSC 38 (“Enka”). There, the Court held that a choice of law in the underlying contract should generally be construed as also applying to the arbitration agreement, even if the parties have selected a different jurisdiction as the seat of the arbitration.

Applying the principle in Enka, the Supreme Court found that the arbitration agreement was governed by English, rather than French, law.

However, the analysis did not end there.  It was not sufficient for the arbitration agreement to be governed by English law for the injunction to remain undisturbed.  The Court made clear that, had the parties elected England as the seat of the arbitration, the English court “would not hesitate to enforce the parties’ bargain by issuing an injunction[.]” But they had not.  Consequently, the Court had to be satisfied that England was the proper place to bring the claim.

In respect of that second question (the “proper place issue”), the Court considered the principle of forum non conveniens, as set out in the Opinion of the House of Lords in Spiliada Maritime Corpn v Cansulex Ltd [1987] 1 AC 460.  The principle holds that the court should not exercise jurisdiction if there is “some other available forum, having competent jurisdiction, which is the appropriate forum for the trial of the action, ie in which the case may be tried more suitably for the interests of all the parties and the ends of justice.”  Here, though, the Supreme Court felt the principle inapposite.  This was because, in theory, more than one court could properly exercise jurisdiction.  Instead, the Court referred to principle in Enka that “[i]t is desirable that parties should be held to their contractual bargain by any court before whom they have been or can properly be brought.”  The fact that the parties had agreed, for the purpose of any arbitration, to submit to the supervisory jurisdiction of the French courts “is not itself a reason why an English court cannot or should not uphold the parties’ bargain by restraining a breach of the arbitration agreement.”

The Court went on to reject RCA’s contention that UniCredit could obtain substantial justice in any arbitration proceedings.  The Court noted that this was somewhat incongruous with the position RCA was taking in the Russian court proceedings that the arbitral agreement was unenforceable.  It also highlighted that, as the French court could not grant an anti-suit injunction, any interim award or order made by the tribunal would have no coercive force.  Instead, it would simply create a contractual obligation.  Of course, the agreement to arbitrate was no less a contractual obligation, and one which RCA was apparently content to overlook.  There was, in the Court’s view “no reason to think that adding a further contractual obligation not to bring [Russian court] proceedings would have any greater effect.”

UniCredit had, therefore, no recourse in either an arbitration against RCA or in French Court proceedings.  On that basis, the Court was prepared to conclude that England and Wales was the proper place in which to bring this claim.

Arbitration Agreement Governing Law Reform in Parliament

As a practical point, parties should consider expressly electing English law to govern their arbitration agreement where appropriate.  Although this may seem to be a technical point on which little turns, in this case it may have saved UniCredit almost €500m in payments under the bonds if RCA had received a favourable judgment in the Russian proceedings. This is important because the English law position is very likely to change soon with the introduction of the Arbitration Bill that was announced in the King’s Speech of 17 July 2024.  We covered key points on the content of the bill in a prior alert.  Among the key reforms proposed is a new provision which would reverse the position set out in first key takeaway above.  Therefore, following the introduction of the Arbitration Bill, where the parties have not made an express election of law governing their agreement to arbitrate, English law would consider the law of the seat to govern, rather than the law of the underlying contract. As such, while currently good law, it would be unwise to rely on the UniCredit judgment as a backdoor to anti-suit injunctions, which may have little practical effect on proceedings in Russia at least.