A Canadian bank has lost a bid to avoid paying a Russian nickel producer more than €30mn under guarantees it issued just before the invasion of Ukraine, after arguing that doing so would put the bank’s staff at risk of prosecution.
Hong Kong’s High Court found in a June 8 judgment that the bank had failed to prove its staff were at real risk of prosecution under Canada’s sanctions laws if it made the payment, and that its arguments had not cleared the high bar required for a court to set aside an arbitral award the Russian company won last year.
The case is among a handful of disputes that emerged after banks refused or delayed honouring guarantees and standby letters of credit because of sanctions concerns linked to Russian counterparties in the wake of the country’s 2022 invasion of Ukraine.
The Hong Kong judgment does not name the parties involved. But its description of the beneficiary as “a Russian company, said to be the world’s largest producer of high-grade nickel and palladium”, implies it is Moscow-headquartered Nornickel. The company has described itself in a similar way previously, and is the only Russian nickel producer with a claim to be the world’s largest.
The judgment said the company’s president and chief executive was sanctioned by Canadian authorities on April 5, 2022. Nornickel president and chief executive Vladimir Potanin was added to Ottawa’s sanctions list on the same date.
Approached by GTR, a Nornickel spokesperson said: “We don’t have any comment to provide on this case.”
In January 2022, the Canadian lender issued three bank guarantees totalling €30mn to a group of companies that had won a contract to “provide engineering and technical services, supply goods, and execute works” to one of the beneficiary company’s plants in Russia, the judgment said.
But later that year the supplier companies stopped performing the contract and refused to refund advance payments, prompting the Russian firm to ask the bank to release funds under the guarantee.
While the bank agreed that the company’s demand under the guarantee was compliant, it declined to make the payment because it believed doing so would fall foul of Canadian sanctions laws.
The nickel producer itself is not sanctioned in Canada, according to the judgment. However, the bank initially argued that the company was caught by sanctions regulations because four sanctioned individuals collectively own more than 50% of its shares.
The firm launched a London-seated arbitration, according to the judgment. The award is confidential and has not been previously reported.
Citations from the ruling in the Hong Kong judgment show the arbitration tribunal found the lender’s approach of aggregating the four sanctioned people’s holdings of the company – thus deeming the company to be majority-owned by sanctioned individuals – to be incorrect.
The company won the arbitration and applied to enforce the €30mn award in Hong Kong, where the bank has a branch.
In the meantime, the bank said it received two letters from Global Affairs Canada, in which the country’s foreign affairs department and main sanctions regulator deemed the Russian company to be in scope of the sanctions regulations because it is under the “control” of a sanctioned person.
The lender asked the court to set aside the enforcement order, or to stay enforcement until the risk of prosecution had abated.
It would be “contrary to public policy” to enforce the award in Hong Kong, the bank argued, because making the payment would “expose the respondent and any of its staff in Canada or Canadian persons outside Canada involved in facilitating the payment” to the risk of prosecution for “serious criminal offences”.
The lender also offered to provide undertakings to pay the sum as soon as sanctions were lifted and noted the company would be entitled to the interest on the award amount from the end of 2022 onwards.
But Judge Mimmie Chan refused to set aside or stay enforcement, ruling that the parties are bound by the arbitration’s findings, and it is not for the court “to go behind or review the tribunal’s rulings”.
“The respondent carries on banking business in different parts of the world, and being subject to the laws of different jurisdictions, which may well conflict to create contradictory obligations on the respondent, is simply part of the commercial realities and risks of the business which it had undertaken,” Chan wrote.
“It should not be contrary to public policy for this court to uphold an award merely because the respondent would face contradictory obligations arising from commitments it had entered into.”
Chan said one method of paying the award would be for the nickel company to institute garnishee proceedings, also known as third-party debt orders, against the bank in Hong Kong, meaning the bank would not be considered as making the payment voluntarily.
The judge also noted that the bank had “taken all possible steps” not to breach Canadian law, which authorities there would likely consider “as a relevant mitigating factor” when deciding whether to prosecute.
Earlier this year, the UK Supreme Court ruled that sanctions laws take precedence over a bank’s obligations under documentary credit practices, in a decision on standby letters of credit issued by Sberbank and confirmed by UniCredit in connection to leasing contracts with Russian airlines.
