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The CoA finds that a bank was contractually entitled to comply with foreign court orders

The Court of Appeal (CoA) has dismissed an appeal in which the Republic of Kazakhstan (RoK) and its national bank argued that their custodian bank, Bank of New York Mellon (BNYM), had acted in breach of contract by freezing their assets in accordance with foreign court orders.

The claim arose out of proceedings which third parties had brought in the Netherlands and Belgium to enforce an arbitral award against the RoK. The Dutch and Belgian courts had granted attachment orders over assets held by the RoK's national bank with BNYM's London branch. The branch had complied with these orders, relying on a force majeure clause in its custody agreement with the national bank which excluded liability for loss arising out of court orders.

The RoK and the national bank sought a declaration from the English court that BNYM was not entitled to freeze their assets, notwithstanding the Dutch and Belgian orders, which they argued were not recognisable in England or under English law and therefore outside the scope of the force majeure clause.

The CoA in its recent decision has upheld the first instance judge's refusal to grant such a declaration, on the grounds that BNYM's compliance with the Dutch and Belgian orders fell within the scope of the force majeure clause. The question whether the result would be any different in the absence of the force majeure clause from the custody agreement was left undecided.

Asset recovery expert Andrew Barns-Graham of Pinsent Masons, the law firm behind Out-Law.com, said the decision underlines the importance of obtaining proper advice in such situations.

“This dispute arose because BNYM had to choose between two evils: potential non-compliance with foreign court orders requiring the freezing of assets on the one hand and potential non-compliance with its contractual obligations to a customer on the other,” Barns-Graham said.

“The facts of the case are in certain respects unusual – for example there are allegations that the arbitral award being enforced was obtained by fraud and the assets frozen are worth 40 times the award value – but the dilemma which BNYM were faced with is one which is bound to arise in other contexts.”

Barns-Graham said cases with an international element could prove especially difficult for financial institutions.

“This is because this may raise issues of foreign law and private international law on which specialist advice will need to be obtained; and also because, although the standard form English freezing injunction provides a degree of protection to third parties who seek to comply with their foreign law obligations in respect of overseas assets, the same cannot always be said of equivalent or similar relief in other countries, such as attachments,” Barns-Graham said.

Barns-Graham said disputes should always be anticipated and contracts drafted according to that expectation.

“From a drafting perspective, the case illustrates how essential it is for banks and other financial institutions to ensure that their force majeure and exclusion clauses are drafted sufficiently widely. Otherwise they run the risk of becoming liable to customers for losses arising out of their rational and good faith attempts to comply with court orders,” Barns-Graham said.

“Even a very tightly drafted clause will be unlikely to exclude completely the possibility of a dispute arising. If that happens, both sides should seek prompt advice from a civil fraud litigator, as serious consequences can follow from getting this wrong,” he said.

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