The ruling of the Supreme Court of the Russian Federation № 305-ЭС23-11869 dated 20.11.2023
Case № А40-179021/2022
The Supreme Court of the Russian Federation made a ruling in case No. A40-179021/2022 on the suit of OOO “IS TEX” to JSC “Moscow Industrial Bank”(hereinafter abbreviated as MInBank”) on funds recovery in connection with the cassation appeal of PJSC “Promsvyazbank”.
Facts
On March 1, 2022, OOO “IS TEX” and JSC “MInBank” (Moscow Industrial Bank) concluded a banking service agreement under which the bank was instructed to debit USD 59 400 from IS TEX’s account and transfer it via the intermediary bank – Halyk Savings Bank of Kazakhstan – to the bank account of “IS TEX’s” contractual partner under contract no. IS-2020 dated 21.08.2020, LLC Universal Art Textile, with the– Bank «JSC Tenge Bank» (beneficiary bank).
JSC “MInBank” sent money to the correspondent account of Haly Savings Bank of Kazakhstan within the intermediary bank „The Bank of New York Mellon” (USA) and not directly to “Halyk Savings Bank of Kazakhstan” which was agreed by the parties. The funds were blocked in the intermediary bank due to US sanctions imposed on MInBank.
As a result, OOO “IS TEX” filed a lawsuit since the money was deducted from the bank account but the payment did not go through and the bank did not return the money to the payer.
The court of first instance, with which the appellate and cassation courts agreed, concluded that the bank at its discretion, without coordination with the company, performed the transfer through another intermediary bank, and this resulted in the impossibility of the further disposal of funds and thus, a loss of the Claimant.
Moscow Arbitrazh Court as a court of first instance, Ninth Arbitrazh Court of Appeal, Moscow District Arbitrazh Court recognized the claim and ordered to pay damages in breach of Articles 845, 846, 848 of Civil Code of Russian Federation and the banking service agreement.
However, by objecting the claim, “MInBank” referred to the proof that it executed the payment order by the instructions but blocking of funds was not a consequence of its choice of an intermediary bank.
The Judicial Collegium on Economic Disputes of the Supreme Court ruled that lower courts did not take into consideration the following arguments of „MInBank” stated previously:
First of all, the sole correspondent bank of the Kazakhstani bank “Halyk Savings Bank of Kazakhstan” for receiving international transfers in US dollars is “The Bank of New York Mellon”. The Bank other than using this account could not have made transfers in US dollars. Hence, foreign exchange transactions were made in accordance with international banking practice.
Secondly, “MInBank” executed the company´s payment order on 06.05.2022, two days before the Office of Foreign Assets Control of the US Department of the Treasury (OFAC) froze the assets of “JSC MInBank” due to inclusion in the SDN list. Thus, the money is not lost, but blocked by a foreign bank.
Thirdly, US law provides for the right to return blocked funds by applying to OFAC and obtaining a special unblocking license. The company was aware of such an option which is indicated in the SWIFT message dated 26.07.2022 and on the official website of OFAC (https://ofac.treasury.gov/faqs/9). In consequence, the Supreme Court ruled that the Claimant did not suffer any damages (yet) as long as there still remains the possibility to receive an unblocking license from OFAC.
According to p.1 Art.291, p.2. 1 Art. 291 of Arbitration Procedural Code the Supreme Court eventually overturned the decisions of the lower courts and remanded the case to the first instance court for a new trial due to significant violations of substantive and procedural law.
Comment
In its decision, the Russian Supreme Court made the significant concession that a Claimant should trust in the US legal system by trying to unblock frozen funds with the help of an application to OFAC. As long as this application has not failed, the Russian Supreme Court does not consider blocked funds to be a “loss” in the sense of the law. The bank also raised the argument that blocking of its assets by a foreign state has to be considered as force majeure, but the Russian Supreme Court has not ruled on that aspect.