Introduction

Hong Kong has long been recognized as a key hub for international arbitration, and two  cases – Linde GMBH v Ruschemalliance LLC [2023] HKCFI 2409 and Bank A v Bank B [2024] HKCFI 2529 – illustrate its critical role in arbitration involving Russian entities. Both cases, which involved complex disputes over EU sanctions and jurisdiction, showcase Hong Kong’s courts’ unwavering commitment in upholding arbitration agreements. As geopolitical tensions continue to influence cross-border disputes, these decisions highlight Hong Kong’s importance as a neutral forum for resolving such cases, particularly when dealing with sanctioned entities from Russia.

Linde GMBH v Ruschemalliance LLC

Background and dispute

The dispute arose from a contract between Linde GMBH (“Linde”), a German contractor, and Ruschemalliance LLC (the “Russian Company”), for the construction of a gas processing complex in Russia. The contract, governed by English law, included an arbitration clause specifying that any disputes would be resolved through Hong Kong International Arbitration Centre (“HKIAC”) arbitration, seated in Hong Kong.

The complications began when the European Union imposed sanctions on Russia, impacting Linde’s ability to fulfil its contractual obligations. Citing the EU sanctions, Linde suspended its performance under the contract. In response, the Russian Company claimed this constituted a material breach of the contract and terminated it. The Russian Company then initiated legal proceedings in Russia, relying on Article 248.1 of the Russian Arbitrazh Procedural Code of the Russian Federation (“Procedural Code”), which purports to establish exclusive jurisdiction over disputes involving Russian sanctioned entities.

Meanwhile, Linde sought to resolve the dispute through arbitration in accordance with the agreement, commencing proceedings at the HKIAC. Linde also obtained an anti-suit injunction (the “Injunction”) from the Hong Kong Court of First Instance to prevent the Russian Company from continuing the Russian court proceedings. The Russian Company challenged the Injunction, arguing that Article 248.1 granted exclusive jurisdiction to Russian courts due to the sanctions. The Russian Company also contended that the arbitration agreement was unenforceable under Russian law, as sanctions limited its access to justice in Hong Kong.

The Court’s decisions

The Judge rejected the Russian Company’s objections and upheld the Injunction. In the judgment, several key points are made:

1.      Arbitration agreements are to be enforced unless there are strong reasons to the contrary. Since the parties had agreed to arbitrate in Hong Kong, Russian law did not have jurisdiction over the dispute. 

2.      The Russian Company contended that the Russian courts had exclusive jurisdiction under Article 248.1 of the Procedural Code. The Judge disagreed, noting that Article 248.1 applies only if the application of foreign sanctions created access to justice obstacles for a party in the dispute. 

3.      The Russian Company argued that the EU sanctions imposed on Russian entities created obstacles to accessing justice in Hong Kong. Specifically, the Russian Company claimed that sanctions prevented it from securing legal representation and would render any award unenforceable. However, the Court found that these claims were “grossly exaggerated, if not totally based on false premises.” First and foremost, the sanctions have no legal effect in Hong Kong. Secondly, it is patently clear that the Russian Company was able to have access to lawyers in Hong Kong, who have represented them from the time of the initial ex parte application for the HK Injunction until now. Thirdly, the Russian Company had successfully obtained the appointment of the former Chief Justice of Hong Kong, Geoffrey Ma, as its chosen arbitrator. There was no suggestion that the Russian Company had encountered any difficulties with the HKIAC, its representation or the conduct of the arbitration.

4.      Furthermore, the restrictions imposed by the sanctions were reasonably foreseeable at the time when the contract was made, and were in fact part of the bargain struck by the parties as evidenced by the terms of the contract. 

As a result, the Judge was not satisfied that the Russian Court had exclusive jurisdiction over the claims such as to constitute a good reason for the Court not to exercise its discretion to grant the HK Injunction.

 Bank A v Bank B

A year later, in Bank A v Bank B, a similar situation arose, where a sanctioned Russian entity sought to bypass an HKIAC arbitration agreement by commencing proceedings in Russia. The dispute between a German and Russian bank stemmed from a settlement agreement, which contained an HKIAC arbitration clause. After the Russian invasion of Ukraine in 2022, the European Union sanctioned the Russian Bank. When Russian Bank demanded payment under the settlement agreement, the German Bank refused, citing the sanctions as a legal barrier to compliance. The Russian Bank proceeded to seek redress in Russian courts, prompting the German Bank to obtain an anti-suit injunction from the Hong Kong Court.

The Russian Bank raised several defences, claiming that the case involved “acts of state”, which should fall under the exclusive jurisdiction of the Russian courts. The Russian bank also argued that sanctions against it constituted expropriation by the German state, and therefore, the Hong Kong courts lacked jurisdiction over the dispute, as it involved matters of foreign affairs under the Basic Law of Hong Kong.

However, these arguments were rejected by the Hong Kong court, which found that the dispute fell squarely within the scope of the arbitration agreement.

The Court reaffirmed Hong Kong’s role in enforcing arbitration agreements, even in the face of complex public policy issues. Again, there was no evidence that the Russian bank had been or would be deprived of a fair hearing in Hong Kong. Further, as the EU sanctions did not have any legal effect in Hong Kong, the Court held that the Russian Bank’s attempt to circumvent the arbitration agreement by invoking state sovereignty and sanctions law was insufficient to prevent the enforcement of the arbitration clause. The ruling demonstrated Hong Kong’s unwillingness to allow foreign policy or public law arguments to overshadow the parties’ agreement to arbitrate.

Takeaway

These cases highlight a broader trend of Russian entities increasingly relying on local courts to assert jurisdiction over disputes involving sanctions. However, it is clear that sanctions do not automatically invalidate arbitration agreements. Hong Kong courts in both cases rejected the arguments that sanctions prevented access to justice or rendered arbitration agreements unenforceable.

As geopolitical tensions continue to influence cross-border trade and investments, Hong Kong’s role as a forum for arbitration is likely to grow. These two cases are just two examples of how Hong Kong Courts are navigating the complexities of sanctions and international disputes, offering parties a fair and neutral venue to resolve their conflicts.