Between a rock and a hard place: when does an English branch of a foreign bank have to obey a foreign freezing injunction?

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16.02.2018

The High Court has clarified the circumstances in which an English branch of a foreign bank can comply with a freezing injunction of a foreign court, even if doing so causes prejudice to its customer. In this briefing note, Jolyon Connell and Kate Allass review the recent decision in National Bank of Kazakhstan v The Bank of New York Mellon SA/NV, London Branch [2017] and discuss its implications for the English branches of foreign banks.

Background

When a bank in England is served with a freezing injunction, typically it will adopt one of two positions.

If the freezing injunction is issued by the English Court, the bank must obey the injunction or risk both a civil claim (for releasing funds that ought to have been frozen by it) and a criminal sanction (for contempt of Court).
If the freezing injunction is issued by a foreign Court, however, and the bank is an English company (for example, the English subsidiary company of a foreign parent bank), the English bank can, subject to consideration of the possible impact on its foreign branches, in most cases consider itself not bound by the foreign freezing injunction. That is because, ordinarily, the Courts of any country only have the jurisdiction to freeze assets within the same country. Consequently, the holder of a foreign freezing injunction would normally need to obtain an English freezing injunction in order to freeze the assets held in a bank in England.

But what happens where the bank in England is a branch of a foreign bank, but not a separate English company (or LLP)? That English branch does not have separate (English) legal personality. It is instead an extension of its (foreign) parent bank. Such a branch, when served with a foreign (ie non-English) freezing injunction, might find itself facing a tricky dilemma:

if the branch obeys the foreign freezing injunction, it risks a claim against it by its client on the basis that a bank in England need not obey a foreign freezing injunction and so the funds ought not to have been frozen; or
if the branch disobeys the foreign freezing injunction, it may appease its customer but still risk civil and criminal sanctions. Whilst the London branch might be outside the jurisdiction of the foreign court, the bank's head office might be squarely within the foreign court's jurisdiction and therefore liable for breach of the injunction on the basis that it failed to control its English branch.

This was precisely the scenario which the Court considered in the National Bank of Kazakhstan case. In that case, assets belonging to the National Bank of Kazakhstan (NBK) were the subject of a freezing order of the Belgian Courts which was served on the London branch of The Bank of New York Mellon SA/NV (BNYM), a Belgian corporate entity (albeit a Belgian subsidiary of the US bank), which held NBK's assets. The London branch of BNYM complied with the injunction and froze the assets.

NBK alleged that the freezing of its assets caused it to suffer considerable losses, as NBK then defaulted on stock market trades for which the frozen funds had been intended. NBK sued the London branch of BNYM seeking a declaration that the London branch of BNYM was not obliged to comply with a freezing injunction of a foreign (ie non-English) court and, consequently, the funds ought not to have been frozen.

Judgment

The Court upheld BNYM's position and dismissed NBK's claim. In doing so, the Court relied in particular on two clauses of the terms and conditions of the London branch of BNYM:

Clause 5(c) allowed the London branch of BNYM to hold clients' funds outside England; and
Clause 16(i) stated that "[BNYM] shall [not] be liable for and no default shall be caused by any delay or failure on the part of [BNYM] to perform any obligation which, in whole or in part, arises out of or is caused by circumstances beyond its direct and reasonable control including without limitation...any order...imposed by any...judicial...authority".

The Court concluded that the consequence of these terms was that:

Given clause 5(c), NBK must have recognised that some of its funds could be held outside England and, consequently, accepted the risk that those funds could be subject to enforcement of foreign court orders. In addition, and in the light of clause 16(i), the Court held that "it must have been well within the common expectation of the parties that BNYM might be exposed to orders of foreign courts which it was bound to obey...an order of the Belgian court, namely a court in the country where the bank is domiciled, would have been an obvious example".
Furthermore, the language in clause 16(i) is clear and stated that the London branch of BNYM must obey "...any order...imposed by...any judicial authority". The Court considered that the clause was drafted so widely that the bank could certainly treat the order of the Belgian Court as being within its scope. This was especially true given that the headquarters of BNYM SA/NV is domiciled in Belgium and so the bank and its staff would be at obvious risk of civil and criminal sanction in Belgium for failure of the London branch to comply with the Belgian order.

Comment

For all banks (and especially English branches of foreign banks), there are three key lessons arising from the Court's decision in the National Bank of Kazakhstan case:

All freezing injunctions carry significant risks for banks, even when any alleged underlying wrongdoing is only on the part of the bank's customer and not the bank itself. When served with any freezing injunction, a bank should immediately seek professional legal advice to help allay those risks and plot the safest path through treacherous waters.
The position of the London branch of BNYM was greatly assisted by the breadth of the terms and conditions which governed its relationship with NBK. In particular, the bank was able to rely on the fact that clause 16(i) of its T&Cs exempted it from liability for the consequences of complying with any order imposed by any judicial authority. Other banks should ensure that their T&Cs are also wide enough to allow them the widest degree of latitude when faced with similarly difficult positions and conflicting obligations.
Each case turns on its own facts. In this case, the Court placed particular emphasis on the fact that the foreign freezing injunction originated from the country in which the London branch of the foreign bank had its headquarters: ie Belgium. The rationale being that this made the bank particularly susceptible to Belgian criminal and civil liability for non-compliance, which further justified the compliance by the London branch with the Belgian freezing injunction. However, had the foreign freezing injunction originated from a jurisdiction unrelated to the bank, the position would probably have been very different. If the bank had no presence in the jurisdiction in which the freezing order arose, the foreign freezing injunction would still have been "any order of any judicial authority" but it is unlikely that the bank could have considered that the order "caused" it to freeze the assets (in accordance with the wording of clause 16(i) in the case of BNYM) and so compliance with that foreign freezing order would be much harder for the bank to justify and would probably lead to a successful claim against the bank by its client.

If you require further information about anything covered in this briefing note, please contact Kate Allass ([email protected]; 020 3375 7220) or Jolyon Connell ([email protected]; 020 3375 7205) or your usual contact at the firm on 020 3375 7000. Further information can also be found on the Disputes page of our website.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.