Repaying a debt which may contravene the UK sanction regime against Russia
Russia’s invasion of the Ukraine has led to the UK and other countries imposing various sanctions on Russia including. A list of sanctioned individuals and entities which can be accessed here. However, the sanctions regime is much broader and covers dealing with “involved persons” connected to Russia under The Russia (Sanctions) (EU Exit) Regulations 2019 and the Russia (Sanctions) (EU Exit) (Amendment) Regulations 2022 (the “Regulations”).
If you are caught in a situation whereby you have been asked to repay a legitimate debt owing under a loan or contract etc and you have genuine concerns that repayment may contravene the UK sanctions regime imposed on Russia, you should first consider whether such action would be considered a criminal act.
Check the terms of your contract
You may be able to take advantage of a force majeure clause if your contract contains one. A force majeure clause provides for a party to the contract to be excused from performance of their obligations under the contract should a specified event occur which is beyond the party’s control.
Should your contract contain such a clause which specifically covers the events in Ukraine or otherwise, is more general in nature, then you may be able to avoid your obligations in circumstances where your inability to perform, caused by the imposition of sanctions and/or the war, are inevitably beyond your control.
Illegality and frustration of your contract
In the absence of a force majeure clause, the doctrine of frustration or the defence of illegality may be available to you.
A contract is frustrated whenever the law recognises that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken in the contract.
An English law-governed contract is discharged if its performance becomes illegal under English law provided that the illegality clearly prohibits performance. If performance is illegal in any specific case, the Court itself may of its own volition and without the defendant pleading the defence of illegality, refuse a remedy to the counter-party suing in respect of any non-performance since this is a public policy issue.
Have you been served with a Statutory Demand?
It is an abuse of the insolvency process for creditors to seek to recover the sums owing under loan agreement, service contract etc using a Statutory Demand where it involves sanctioned individuals and/or entities.
If you are served with a Statutory Demand for repayment of a legitimate and undisputed debt and the demand document records a sanctioned banking institution as a method of payment, you will have the option to seek to set aside the Statutory Demand on substantive grounds, namely that payment is illegal due to compliance with UK Sanctions on Russia. Moreover, the potential frustration of a contract is not something which can be genuinely dealt with through the statutory demand procedure. If there is an evident dispute between the parties involving force-majeure, illegality or frustration, such disputes should appropriately be dealt with in the usual course through the issue of a Part 7 Claim.
Can you repay debt into Court?
If you find yourself in a situation whereby, you have been served with a Statutory Demand or claims for repayment of a debt and you have a genuine concern that the creditor could be considered an “involved person” of a sanctioned individual and/or entity, as opposed to repaying the debt and potentially exposing yourself to criminal liability, you could instead seek to pay the debt into the Court Funds Office until the matter has been determined. By exercising this potential option, you will also be able to rely upon the defence of "tender before claim", however this defence is only available for a quantifiable debt (i.e. debt owing under loan or invoice etc).
Can you benefit from any statutory protection in the UK?
Section 44 of the Sanctions and Anti-Money Laundering Act 2018 provides that where someone does (or does not do) something “in the reasonable belief that it is in compliance with” UK sanctions, that person “is not liable to any civil proceedings” to which that person would otherwise have been liable for doing or not doing that thing. This provision is like so-called “no claims” and/or “no liability” provisions that you find in EU and UK sanctions. In the words of the UK Government’s explanatory notes, “It aims to protect people from any adverse results generated by compliance (for example, a breach of a contract to supply goods that are prohibited from export by sanctions).”
In practice this provision is likely to offer significant protection against liability for non-performance (even if it turns out, for example, a contract was not frustrated due to illegality reasons).
Is a UK-based law firm acting for a sanctioned and/or connected entity?
If a UK based firm acting for an individual or an entity associated with Russia, they should have performed necessary due diligence, a sanction risk assessment including informing their bank pursuant to the UK Sanction regime and AML regulations. In most cases they will also need to obtain an OFSI Licence from the Office of Financial Sanctions Implementation to deal with incoming funds from their client on account of professional services and anything further.
In practice, a licence from OFSI is written permission to carry out an act that would otherwise be in breach of financial sanctions prohibitions. A licence will often include specific permissions and conditions. These are the important details that set the parameters of each written permission. While licences outline the permissions for activity that can take place, it’s important to note that they don’t compel any party to take any action. Therefore, if you have been served with a legal letter requesting repayment of a debt or a Statutory Demand and the creditor is a sanctioned individual, entity or is otherwise involved with a sanctioned individual and/or entity, it would be prudent to first make enquiries to why a UK based law firm can legally act for the sanctioned person, as even payments made into a law firm’s client account for settlement of a debt, could still amount to breach of the UK sanctions regime if they do not have the appropriate licence to act for that individual and/or entity.
If you require advice and/or representation in respect of high value civil proceedings, contact our civil litigation solicitors by sending us an email, completing our online enquiry form or calling on 020 3813 5366
Articles are intended as an introduction to the topic and do not constitute legal advice.