Broker Says Sanctions Block $1.3M Russian Bond Payment

Law360, London (April 28, 2022, 5:51 PM BST) -- A bonds broker has told a London court it does not have to pay $1.3 million under a deal for Russian bank bonds because the transactions would breach Western sanctions.

Brokerage company Continental Capital Markets Ltd. said it is not obliged to pay a little more than $1.3 million it agreed to pay for 1.5 million bonds issued by PJSC Sovcombank as it would not be practically or legally possible under Western sanctions, according to its defense registered with the High Court on Monday.

Stifel Nicolaus Europe Ltd.— an international brokerage and investment banking company — had agreed to sell the bonds to Continental after one of Stifel's agents approached Continental.

The two brokerage firms agreed to the sale on Feb. 23, saying the trade would be settled two days later, Continental said in its defense dated April 22.

Stifel told the court that it is still entitled to the money under the terms of the contract because it "remains ready, willing and able to transfer the bonds upon payment," Stifel said in its claim filed March 10.

But the U.S. Treasury hit Sovcombank with sanctions on Feb. 24 after Russia invaded Ukraine, which Continental argued in its defense prevents it from paying because it is illegal to transfer a sanctioned entity's property.

The sanctions prohibit U.S. financial institutions based in America from making transactions in connection with Sovcombank or dealing with its property.

Continental argues that, once the sanctions against Sovcombank were in place, transferring the payment for the bonds meant every party in the transaction, including Euroclear PLC — an international securities depository — risked secondary U.S. sanctions and other financial or criminal penalties.

The broker also argued that the contract was subject to Euroclear's terms and policies, which state that the depository is not obliged to be part of any illegal transaction, and its "force majeure" clause. The clauses are used in contracts to address "act of God" events, unexpected events beyond control that disrupt one side's ability to fulfill the promises it made under the contract.

British and EU sanctions later made it practically and legally impossible for the trade to be completed, so neither brokers' obligations arose and nor were they both discharged, Continental told the court.

The U.K. government froze Sovcombank's British assets on Feb. 28, and the bank was removed from the SWIFT cross-border payment messaging system on March 12. 

Stifel is claiming the $1.3 million as principal debt, $4,176 of interest as well as costs.

Neither side responded to requests for comment on Thursday.

A subsidiary of Venezuela's state-owned oil company was ordered by a U.S. court in July 2021 to repay a defaulted $150 million bond payment, when it argued it could not repay its debt due to sanctions.

Stifel Nicolaus Europe Ltd. is represented by Tom Lowenthal of Blackstone Chambers, instructed by Kieran Rayani, European head of legal at Stifel.

Continental Capital Markets Ltd. is represented by Farhaz Khan QC of 3VB, and Leonora Sagan of Fountain Court Chambers, instructed by Yasseen Gailani of Quinn Emanuel Urquhart & Sullivan UK LLP.

The case is Stifel Nicolaus Europe Ltd. v. Continental Capital Markets Ltd., case number LM-2022-000043, in the London Circuit Commercial Court, Queen's Bench Division of the High Court of Justice of England and Wales.

--Additional reporting by Daniel Wilson, Najiyya Budaly and Caroline Simson. Editing by Joe Millis.

Correction: A previous version of this story misstated the nature of the contract between Continental and Stifel, the Sovcombank corporate entity involved and the name of the High Court unit. The errors have been corrected.

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