Sanctions can affect Singapore parties whether or not they are imposed by Singapore. We have recently had occasion to deal with issues arising out of US sanctions against Venezuela, and European Union and Singapore sanctions against Russia, and have had to consider specific issues relating to the potential liabilities of liquidators and the applicability of exclusive jurisdiction clauses in cases involving Russian parties.
Case 1 – Exclusive Jurisdiction Clauses and Russian Parties
In response to the ongoing war between Russia and Ukraine, on 15 March 2022 and 8 April 2022, the European Union imposed unprecedented sanctions against Russia to prohibit certain trade or financial activities with Russia and Russian state-owned entities (the “EU Sanctions”). These EU Sanctions were in addition to those originally imposed following the Russia’s annexation of Crimea and Sevastopol. On 14 March 2022, certain (more limited) sanctions were imposed by Singapore.
These sanctions have resulted in certain countermeasures by Russia in relation to contracts that are governed by laws and courts of countries that have imposed sanctions against Russia.
The issue arose in the unreported case between a corporate and investment bank from a European country (“the Bank “) and a Moscow-based company (“the Company“).
The case involved a demand guarantee issued by the Bank’s Singapore Branch in favour of the Company for the sum of EUR5.34mn (the “Bank Guarantee”). The Bank Guarantee provided as follows:
“This Guarantee is subject to and governed by the Law of Singapore and the Uniform Rules for Demand Guarantees as published as number 758 by the International Chamber of Commerce. In the event of any conflict, the Uniform Rules for Demand Guarantees published as number 758 by the International Chamber of Commerce will prevail.”
The Uniform Rules for Demand Guarantees number 758 (”URDG 758”) is a set of rules published by the International Chamber of Commerce that are widely adopted for demand guarantees. Article 35(a) of the URDG 758 provides that:
“Unless otherwise provided in the guarantee, any dispute between the guarantor and the beneficiary relating to the guarantee shall be settled exclusively by the competent court of the country of the location of the guarantor’s branch or office that issued the guarantee.”(emphasis added)
As the Bank Guarantee was issued by the Bank’s Singapore Branch, the Singapore Court had exclusive jurisdiction to determine any dispute arising out of the Bank Guarantee under its terms.
On 17 May 2022, the Bank received a payment demand from the Company for the full sum of EUR5.34mn under the Bank Guarantee.
However, due to the operation of EU Sanctions, the Bank was not able to make payment under the Bank Guarantee. The Bank duly informed the Company of this.
In response to this, some time in February 2023, the Company commenced proceedings in the Moscow Arbitration Courts (which is in fact a commercial court unconnected to arbitration proceedings) against the Bank, essentially seeking payment under the Bank Guarantee (the “Russian Proceedings”).
The commencement of the Russian Proceedings was a clear breach of the exclusive jurisdiction clause in the Bank Guarantee but allegedly was in accordance with purportedly overriding Russian legislation, passed as a countermeasure to sanctions. The Company relied on provisions in the Russian Procedure Code and/or Civil Code (in particular para 2-3 of Art 248.1 of the Russian Procedure Code), the effect of which was that Russian parties could bring proceedings in Russia where they were subject to exclusive jurisdiction clauses in favour of states that had imposed sanctions against it.
The Bank commenced proceedings in the Singapore courts seeking an anti-suit injunction restraining the Russian proceedings on the basis that they had been brought in breach of the exclusive jurisdiction clause in the Bank Guarantee.
The question that arose was whether in these circumstances the Russian Procedure Code and/or Civil Code provided “strong cause” to refuse an anti-suit injunction (using the test laid down in Vinmar Overseas (Singapore) Pte Ltd v PTT International Trading Pte Ltd  2 SLR 1271).
The Bank submitted that the interim anti-suit injunction ought to be allowed as the Russian Procedure Code and/or Civil Code did not amount to “strong cause” for denying the Bank an anti-suit injunction.
Among other things, it was argued that Russia is a sanctioned state and there is a strong public policy reason not to permit sanctions to be circumvented by the domestic legislation of a sanctioned state. If the position were otherwise, sanctions would be deprived of much of their meaning.
Having heard the Bank’s submissions the General Division of the High Court granted the interim anti-suit injunction.
Financial Institutions that deal with Russian parties should be aware of Russian anti-sanctions legislation that has the potential of undermining exclusive jurisdiction clauses in their contracts.
The issue is particularly acute for financial institutions that may not be able to fulfil prior contractual commitments given the imposition of sanctions. In such circumstances, the options available to the financial institutions are limited. It may have no practicable choice but to simultaneously assert their contractual right to have the matter heard in accordance with the applicable exclusive jurisdiction clause and to participate in the Russian proceedings to protect any assets in that jurisdiction to the extent that that is possible.
While the anti-suit injunction issued by the Singapore Courts cannot prevent the Russian courts from proceeding with the matter, it may be enforced against officers who cause the Company to breach its terms by proceeding in the Russian Courts should they come within the jurisdiction of the Singapore courts.
The anti-suit injunction may also potentially be useful to resist enforcement of any eventual Russian judgment in third jurisdictions.
Case 2 – Liquidators and US sanctions against Venezuela
Singapore does not have any sanction against Venezuela, but the United States does. What happens when a Venezuelan entity may be entitled to payments from a Singapore liquidator but payment by the Singapore liquidator may expose him or her to secondary US sanctions? This issue arose in a recent matter in which we acted for the liquidator of CV Shipping Pte Ltd (“CV Shipping“).
CV Shipping was a joint venture company between Petrochina International (Singapore) Pte Ltd and PDV Marina SA (“PDVM“). PDVM is a company incorporated in Venezuela and is a wholly owned subsidiary of Petroleos de Venezuela (“PdVSA“), which is in turn a Venezuela state-owned entity.
PdVSA was (and still is) subject to extensive US sanctions.
These sanctions provided that all US persons were prohibited from engaging in transactions with PdVSA, including all entities 50% or more directly or indirectly owned by PdVSA (each a “Sanctioned Entity“). As such, PDVM, CV Shipping and its subsidiaries were deemed to be Sanctioned Entities.
Due to operational difficulties arising out of the sanctions programme, CV Shipping effectively lost its substratum and was placed in liquidation in 2020.
The liquidator appointed over CV Shipping (the “Liquidator“) had to deal with the issue of making payment of dividends to PDVM.
The Liquidator received US law advice that secondary sanctions may extend the reach of the US Office of Foreign Assets Control (“OFAC”) to non-US persons for undertaking certain significant transactions with sanctioned persons and jurisdictions.
Practically, this meant that even if a transaction did not have any US nexus, and did not involve any US persons, there was a risk of secondary sanctions being imposed on the Liquidator for materially assisting or providing financial support to a Sanctioned Entity, unless PDVM acquired the necessary licence from OFAC.
PDVM refused to seek an OFAC licence or a Court order authorising payments, and took the position that the Liquidator should simply authorise the release of its dividend entitlement notwithstanding the risk of secondary sanctions being imposed.
Accordingly, the Liquidator sought orders from the Singapore High Court pursuant to section 273(3) of the Companies Act (version in force prior to 30 July 2020) to the effect that:PDVM’s dividend in the liquidation be retained in CV Shipping’s liquidation account until PDVM obtained either of the following:
An authorisation and/or a license, in writing, from OFAC, permitting the release of the dividend payment to PDVM or its authorised representative; or
An order from the Singapore High Court authorising and/or approving the release of the dividend payment to PDVM or its authorised representative.
the Liquidator’s fees and expenses (including solicitors’ fees) incurred in relation to the application (and in dealing with certain garnishee applications made by PDVM’s creditors in respect of its dividend entitlement) be paid from PDVM’s dividend entitlement.
In an unreported decision, the Singapore High Court granted an order that PDVM’s dividend should be retained until it had obtained either an OFAC licence/authorisation or a Singapore High Court order authorising/permitting the payment to PDVM. The Court accepted that there was a real risk, however small it may be, of the Liquidator being exposed to secondary sanctions for complying with his statutory duty and paying the dividends to PDVM, a Sanctioned Entity, notwithstanding that the payment was made by a non-US person outside the US, through a non-US bank, and was not denominated in USD. This payment could be perceived as facilitation or breach of the US sanctions.
The Court also ordered that the Liquidator’s fees and expenses in seeking the Court’s directions and dealing with the garnishee applications should be charged to PDVM out of its declared or future dividends, as they were attributable to PDVM’s unreasonable conduct since the dividend was declared, which rested on its incorrect belief that there was no risk that the Liquidator would be exposed to secondary sanctions Accordingly, these costs were sufficiently distinct and separate from the general costs of the liquidation and should not be borne by the other creditors of CV Shipping.
The case is important because the Court recognised that Liquidators ought not to be compelled to risk the imposition of secondary US sanctions by making payments to Sanctioned Entities, even if sanctions are not also imposed by Singapore, especially if the Sanctioned Entity has failed to seek the recourse available to it to enable it to receive payment without imposing such risk on the Liquidator. In this case, the recourse available to PDVM would have been to seek an OFAC licence or an order of the Singapore Courts.