Introduction
It is a well-established principle in Hong Kong that foreign proceedings instituted in breach of an arbitration agreement will ordinarily be restrained by the grant of an injunction, unless there are strong reasons shown to the contrary. What constitutes strong reasons depends on all the facts and circumstances of the particular case.
In Bank A v Bank B [2024] HKCFI 2529, the Hong Kong Court of First Instance (CFI) considered an application for an anti-suit injunction against a Russian bank which commenced court proceedings in Russia in breach of an arbitration agreement providing for Hong Kong arbitration. The bank challenged the CFI’s jurisdiction by invoking the foreign affairs provision under the Basic Law, Hong Kong’s “mini-constitution”, in light of sanctions imposed by the European Union. Alternatively, it argued that there were strong reasons against the grant of the injunction and related relief.
The CFI dismissed the jurisdictional challenge and granted the anti-suit injunction and related relief.
Background
Bank A, the Plaintiff (P), is a licensed bank headquartered in Germany. Bank B, the Defendant (D), is a Russian bank who owns 99.39% of P. Its majority shareholder is the Russian Government.
P was put under voluntary and solvent liquidation and the supervision of the German Federal Financial Supervisory Authority (“BaFin“). Due to the war between Russia and Ukraine, BaFin issued an order on 24 February 2022 prohibiting P from making payments or transferring assets to D. On 28 February, BaFin further prohibited P from accepting new deposits, granting new loans, or making payments to any Russian banks, with a view to wind down P’s banking business and eventually implementing a solvent winding up of P.
On 8 April 2022, D was named as a sanctioned entity and added to Annex I of Council Regulation (EU) No 269/2014 concerning restrictive measures in respect of actions undermining or threatening the territorial integrity, sovereignty, and independence of Ukraine (“EU Sanction”).
On the same day, the Parties entered into a Termination and Settlement Agreement. They agreed to terminate all outstanding transactions covered by an ISDA Master Agreement and that their rights, obligations and liabilities with respect to these transactions would be discharged by P paying D a sum of approx. EUR 112 million by 8 April 2022. The TSA, including its arbitration clause, was governed by English law and provided for HKIAC arbitration in Hong Kong (“Arbitration Agreement“).
In June 2023, D demanded P to pay the settlement sum. P refused, saying that the EU Sanction prohibited it from paying, and reminded D of the Arbitration Agreement.
On 4 September 2023, D commenced court proceedings in Russia to recover the settlement sum. D relied on Article 248.1 of Russia’s Arbitrazh Procedure Code. This provision was introduced by Federal Law 171-FZ dated 8 June 2020, commonly known as the Lugovoy Law. It allows Russian courts to disregard foreign arbitration agreements and exclusive forum clauses, and to exercise exclusive jurisdiction over disputes arising out of the imposition of sanctions on Russian individuals or entities. On 14 September, D obtained interim measures from the Russian court, freezing the securities in P’s account with D and prohibiting P from transferring them to anyone other than D.
On 19 October 2023, P commenced court proceedings in Hong Kong, seeking anti-suit and anti-enforcement injunctions against D in relation to the Russian Proceedings, and a declaration that the Russian Proceedings were instituted in breach of the Arbitration Agreement. On 27 October, the CFI granted interim injunctions. It ordered D to take all necessary steps to seek a stay of and otherwise not to take any further steps in the Russian Proceedings. It also ordered D not to commence or pursue any proceedings relating to the Parties’ dispute other than in accordance with the Arbitration Agreement.
However, by 26 October 2023, D had already commenced a second set of Russian proceedings for further relief to restrain P from commencing or continuing any arbitration relating to the TSA, and from commencing proceedings in Hong Kong to prohibit D from claiming in Russia. Notwithstanding the anti-suit injunction issued by the CFI, D proceeded and obtained from the Russian court further interim orders to this effect in early November 2023. Around the same time, P commenced HKIAC arbitration proceedings against D under the TSA (“HK Arbitration”).
In December 2023, the Russian court entered final judgments in favour of D in both proceedings. First, it allowed D’s recovery of the full settlement sum. Second, it granted D final injunctions restraining P from commencing or continuing any arbitration relating to the TSA, and from commencing proceedings in Hong Kong to prohibit D from claiming in Russia.
Against this background, the CFI had to decide whether to grant P’s applications for:
- A final anti-suit injunction to restrain D from commencing or pursuing any proceedings relating to matters covered by the Arbitration Agreement otherwise than by arbitration until the final determination of the pending HKIAC arbitration.
- An anti-suit injunction in relation to both Russian Proceedings, an anti-enforcement injunction in relation to the second Russian Proceedings, and declarations that each of these proceedings constituted a breach of the Arbitration Agreement.
- A declaration that D was obliged to bring any challenge to the substantive jurisdiction of the tribunal or to the validity of the Arbitration Agreement before the tribunal in the HK Arbitration or the CFI in exercise of its supervisory jurisdiction.
The Parties’ submissions and the CFI’s findings
D opposed P’s applications. It argued that the CFI had no jurisdiction over D in respect of the subject matter of the proceedings, alternatively that there were strong reasons not to grant the anti-suit injunction and other relief sought.
The CFI concluded that it had jurisdiction
Pursuant to Article 13 of the Basic Law, the Central People’s Government of the PRC is responsible for all foreign affairs relating to Hong Kong. This principle is reflected in Article 19 which provides that the Hong Kong courts have general jurisdiction over all cases in Hong Kong, except for acts of state such as defence and foreign affairs. If any questions of fact concerning acts of state arise in the adjudication of cases, the courts must obtain a certificate from Hong Kong’s Chief Executive on such questions which is binding on the courts. Before issuing the certificate, the CE must obtain a certifying document from the CPG.
D sought to rely on the acts of state exception in challenging the CFI’s jurisdiction over P’s claims. In short, D argued that it sought relief against the effects of international sanctions (including the EU Sanction) and the acts of the German state to implement and enforce the EU Sanction. These were acts of state so that absent a certificate, the CFI had no jurisdiction to deal with P’s claim.
The CFI rejected D’s arguments. It held that Articles 13 and 19 were not relevant to the case as, on the facts, there was no “state” and no act of state involved.
- The Parties are two banks and there was no claim made by or against any state, or any other party. Although Russia owned the majority of D’s shares, there was no claim or evidence that D was a state entity. BaFin was a regulatory authority whose acts could not be equated with the acts of the German state.
- An Article 19 certificate is required only when there is controversy or doubt about questions of fact concerning acts of state, not when “the relevant facts have been authoritatively established and are not in dispute”.[1] No such question of fact existed in this case.
- The relevant question was whether there was a valid and binding arbitration agreement between the Parties, which covered the scope of their dispute and their claims in the Hong Kong proceedings and in the Russian Proceedings, and whether to grant the injunctions sought by P. The CFI was not required to adjudicate on the validity, lawfulness or fairness of the EU Sanction, nor its operation in the EU. Any injunction to be granted was to facilitate the Arbitration Agreement and nothing else.
- An anti-suit injunction was an order in personam. It was not addressed to or binding upon a foreign court and did not call into question the foreign court’s jurisdiction.[2] The fact that the foreign court had jurisdiction had little weight when the entire purpose and expressed intent of each party to an arbitration agreement was for the party not to invoke that undisputed jurisdiction.
Based on these findings, the CFI concluded that it had jurisdiction to decide the matters raised in these proceedings.
The CFI granted the injunctions and other relief
Alternatively to its jurisdictional challenge, D raised various arguments as to why the CFI should not exercise its discretion to grant the anti-suit injunction and other relief:
- There was no dispute for submission to arbitration, as it was common ground that P could not pay D due to the EU Sanction. P denied that this was common ground.
- The determination and disposal of the contractual implications of the EU Sanction on the payment obligations under the TSA would be moot given the EU Sanction would block payment regardless of the HK Arbitration and its outcome. D had serious concerns about the effectiveness of the arbitration process and whether the tribunal could legally make a final award in D’s favour without any tribunal members or the HKIAC breaching sanctions imposed by their respective home jurisdictions.
- It would be contrary to Hong Kong public policy to grant the relief. D would not get a fair hearing with the chosen mode of arbitration in Hong Kong. P would be claiming that the payment obligation is not enforceable and the tribunal, applying English law, would give positive regard to the EU Sanction and find that P’s obligation was unenforceable. This would be evidence of an unfair trial and against the foreign policy/affairs of the PRC. It should thus be against Hong Kong public policy to give effect to the EU Sanction and the “acts of expropriation” by the German state.
The CFI rejected these arguments and granted the relief sought by P.
First, was there a dispute? – A dispute existed unless there was a clear and unequivocal admission of both liability and quantum.[3] The CFI found that P’s referral in its Notice of Arbitration to D’s breach of the Arbitration Agreement as basis for seeking declaratory relief constituted a dispute which fell within the scope of the Arbitration Agreement.
Second, would the HK Arbitration be futile? – The burden was on D to show a sufficiently credible basis that the tribunal could not make an award for payment. However, on the face of the evidence, there were only bare assertions that the tribunal could not make such an award by virtue only of the effect of the sanctions. If the EU Sanction had any effect on the TSA or the HK Arbitration under English law, this was a consequence of the Parties’ own choice which they made when D was added to the list of sanctioned entities. The tribunal had to decide whether it could make an award in D’s favour and if it makes such an award, it is valid and binding on the Parties, even if its performance is impossible. This alone was sufficient to dismiss the claim that the HK Arbitration would be futile.
Third, was there strong cause to refuse relief on the ground of public policy? – The public policy in play was that of upholding the Parties’ agreement to arbitrate in Hong Kong. The CFI found no evidence that D would be deprived of a fair hearing in Hong Kong or that it had been rendered unable to pay its lawyers of choice. The EU Sanction neither applied in Hong Kong nor affected the rights or property of any Chinese entity or entity in Hong Kong. Therefore, there was no basis to conclude that granting the relief would be contrary to Hong Kong public policy.
Having rejected D’s arguments, there was no strong cause or reason for the CFI to refuse the injunctions and relief sought to restrain D from acting in breach of the Arbitration Agreement.
Takeaways
Bank A v Bank B adds to the growing list of cases in Hong Kong and England on anti-suit relief against Russian entities who invoke the Lugovoy Law (see here for a chronology of the jurisdictional battle between Russia and the EU). The CFI’s decision is relevant to parties who have agreed to Hong Kong arbitration for Russia-related disputes as it affirms the following principles:
- The Central People’s Government is responsible for Hong Kong’s foreign affairs. If any questions of fact concerning an act of state arise in the courts’ adjudication of the dispute, the Basic Law requires the courts to obtain a certificate from the Chief Executive. Whether such questions of fact exist where sanctions are involved will depend on the sanctions’ relevance to the dispute.
- The courts have repeatedly rejected arguments that Russian entities will not have access to justice or receive a fair hearing before a court or an arbitral tribunal in Hong Kong.[4]
- The fact that a Russian court has already assumed jurisdiction does not require the courts to refuse the relief, even if the Russian court has already issued an anti-suit injunction in relation to legal proceedings in Hong Kong.
The rise in Russia-related disputes before the Hong Kong courts reflects the growing trend for parties to agree on Hong Kong arbitration for Russia-related disputes, which offers various advantages. Hong Kong is a neutral seat that allows Russian parties to instruct lawyers of their choice. It has a modern arbitration framework and robust and pro-arbitration courts. Russian parties get a fair opportunity to present their case before arbitral tribunals and the courts, and they can enjoy the benefits of arbitral institutions which are well-versed in handling Russia-related disputes (such as the HKIAC which has Russian language capabilities and Rules in Russian).
[1] With reference to the Court of Final Appeal’s judgment in Democratic Republic of Congo v FG Hemisphere Associates LLC (No 1) (2011) 14 HKCFAR 95 at ¶362.
[2] With reference to Ever Judger Holding Co Ltd v Kroman [2015] 2 HKLRD 866 and Giorgio Armani SpA v Elan Clothes [2019] 2 HKLRD 313.
[3] Citing Tommy CP Tze & Co v Li & Fung (Trading) Ltd [2003] 1 HKC 418.
[4] See Bank A v Bank B at ¶95 and Linde GMBH & anor v Ruschemalliance LLC [2023] HKCFI at ¶55. In both cases, these arguments were unsubstantiated.
