By 21 December, 2022 0 Comments Read More →

Enforcement of Awards Affected by Sanctions

Recent decades have witnessed an upsurge in the imposition of international sanctions in various regions of the world. Time and again, we hear sanctions impinge on the practice of international commercial arbitration and can significantly interfere with the smooth functioning of arbitral proceedings in various ways. Sanctions also pose unique challenges for award creditors seeking enforcement.

On October 25, 2022, the Court in Canada delivered a decision in the matter of Angophora Holdings Limited v. Ovsyankin, 2022 ABKB 711, providing necessary guidance on enforcement of arbitral awards in cases affected by sanctions. In particular, the Court examined whether the enforcement of an award would violate sanctions legislation by paying out possible liquidation proceeds to a corporation whose joint venture parent is half-owned by a Russian sanctioned bank.

This brief note explores one particular area in which international sanctions and commercial arbitration intersect, and examines whether sanctions bar award creditors from recovery and under what conditions an award debtor can successfully deter enforcement of such awards in Canada.

Underlying Dispute

Gazprombank JSC, a Russian bank, and Intesa Sanpaolo S.p.a., an Italian bank, jointly owned a Luxembourg fund that established a subsidiary – Angophora Holdings Limited (“Angophora”). The underlying dispute relates to allegations by Angophora that Mr Ovsyankin, the applicant in the case at hand, had engaged in corporate wrongdoing that materially reduced the value of one of the companies in the group. Mr Ovsyankin provided a guarantee in favour of Angophora, arising out of a transaction in which Angophora acquired shares in a private company that Mr Ovsyankin also beneficially owned and controlled.

On December 15, 2020, an LCIA tribunal granted an award in favour of Angophora against Mr Ovsyankin (“LCIA Award”). In the following year, the Court of King’s Bench of Alberta granted a Recognition and Enforcement Order (“Order”) recognizing an arbitral award in Canada.

In 2022, the Canadian government designated Gazprombank as a “Sanctioned Person” under the Special Economic Measures Act. Following the designation, Mr Ovsyankin sought a stay of enforcement of the Order and raised the main argument that enforcement would result in the liquidation of assets located in Alberta, Canada, whilst payment of the proceeds to Angophora would contravene the prohibitions imposed by Canadian sanctions legislation. Specifically, the Applicant asserted that Angophora “should be considered to be functionally and practically controlled by Gazprombank” because of Gazprombank’s 50% indirect stake and its involvement in Angophora’s management and operations. Angophora’s property, as a result, should be considered to be “owned, held or controlled by or on behalf of a designated person” and thereby subject to the prohibitions imposed by the Canadian sanctions legislation.

The Court examined under what conditions an award creditor can enforce such an award in Canada, and whether sanctions bar liquidation of assets and payment of the proceeds to the award creditor.

The Court Examined the Effect of Sanctions in the Context of the Enforcement of Award

In the case at bar, the Court of King’s Bench of Alberta applied the tripartite test for a stay of proceedings as set out in RJR-MacDonald Inc. v Canada (Attorney General), which requires the applicant to establish: (1) the existence of a serious issue to be tried (2) the possibility of irreparable harm and  that (3) the balance of inconvenience, taking into account the public interest, favours granting the stay.

The Court ultimately turned down the application to stay enforcement of the Order, although it found a strong prima facie case that Angophora was controlled by, or acting on behalf of a designated person – Gazprombank, the sanctioned Russian bank. The Court held that Mr Ovsyankin had failed to establish the possibility of irreparable harm by the enforcement of the Order, and that the balance of convenience did not justify granting a stay of enforcement.

In its assessment, the Court adopted a facts-based analysis to determine functional control and analyzed formal control structures in the company, including percentage of ownership held by a designated person as one factor.

While Gazprombank could not unilaterally direct the Respondent, the Court noted, it could, as an equal partner with Intesa Sanpaolo S.p.a., block unilateral actions. Further, the ownership structure (i.e. 50% stake) sufficiently indicated, on its face, the control of Respondent by Gazprombank.

The Available Guidance on Control Issue in Foreign Jurisdictions

Rather than tackling this issue on its own, and given the lack of guidance in the Canadian sanctions legislation, the Court also took a note of regulatory guidance on the question of control from other jurisdictions. In simple terms the rules provide that, where any person or company becomes sanctioned, not only their assets risk being frozen but also those of any entity that they own or control, directly or indirectly.

In particular, the Court observed that in the United States an entity owned in the aggregate, directly or indirectly, 50 percent or more by one or more “blocked persons” will come to be seen as a “blocked person” in itself.

In the European Union, the EU Commission has developed a functional approach to the question of control, where the regulator finds control if a sanctioned person has de facto control over an entity. In cases where the sanctioned person has control over an entity, it can be presumed that the control extends to all assets nominally owned by the latter. Otherwise, sanctioned persons could circumvent the asset freeze imposed on them by continuing to have access to funds or economic resources through the non-sanctioned third parties that they control.

In the United Kingdom, control exists if either the sanctioned entity holds, directly or indirectly, more than 50 percent of the shares or voting rights or holds the right to appoint or remove a majority of the board of directors. The third limb or “condition” covers situations when it is reasonable to expect that the person would be able in significant respects to ensure that the affairs of a company are conducted in accordance with their wishes.

Concluding Remarks

Despite finding a strong prima facie case that award creditor was controlled by or acting on behalf of sanctioned party, the Court ultimately held that the Applicant did not establish the second and third requirements for a stay.  As the Court further stated,

“all he could achieve is a further delay in the enforcement of the arbitration award”.

The Court went further to state that sanctions legislation was not meant to allow debtors to hold off their creditors, and that this application constituted “a transparent act of self-interest in the hope of avoiding execution”. The judgment carries great legal importance, representing the rare pronouncement of the Canadian judiciary on the interpretation, application, and operation of Canadian sanctions legislation with regard to the issue of enforcement of arbitral awards.

The Court acknowledged that the sanctions legislation was not intended to be “a tool by which judgement [creditors could] avoid their lawful obligation” and  also voiced concerns that the sanctions legislation may have the effect of impeding a party’s access to the proceeds of the enforcement process if such party is controlled by or acting on behalf of a designated person.

The Court further noted that anyone in Canada who will be practically involved in enforcing the Order (ex banks, marshals) should assess risk of violating the sanctions legislation and should determine whether distribution of assets would breach sanctions legislation on a case-by-case basis.

The impact of sanctions continues even after the completion of proceedings and the award has been issued. The case at hand provides a good example of how sanctions could hinder enforcement and pose further hurdles for award creditors, and, arguably, provide additional tools to award debtors.

About the Author:

Rinat Gareev is a US-qualified attorney (admitted in New York), holds civil and common law degrees. In his current role of a Legal Consultant at a New York based law firm, Rinat represents domestic and international entities on a variety of general corporate matters and cross-border transactions, as well as assisting clients in navigating complex compliance issues. Prior to returning to legal consulting, Rinat has gained experience by working and training in leading arbitral institutions in Malaysia, South Korea, Russia, international organizations (UNCITRAL) and law firms. Through Rinat's professional and educational experience, he has developed expertise in trade law, aviation law, arbitration and cross-border dispute resolution. He has published several papers in international and local journals on issues relating to cross-border dispute resolution and also provides expert opinions on various domestic and international law-related issues. Rinat is HKIAC-accredited tribunal secretary.

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