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On 12 February 2015 the General Court handed down its judgment in Akhras, a key sanctions case.

Akhras concerned a challenge to Mr Akhras’ listing pursuant to the EU’s restrictive measures against Syria. Mr Akhras was originally listed in 2011 and subsequently relisted in 2012 and 2013 for being a “[p]rominent businessman benefiting from and supporting the regime” in Syria.

The General Court held that:

• The applicant’s request that the Court declare that the challenged instruments do not apply to him was rejected. Such applications involved a finding or a declaration on the part of the Court. An application seeking a declaratory judgment was to be rejected for lack of jurisdiction. “It is clear from settled case-law that the Court, in the context of a review of legality based on Article 263 TFEU, does not have jurisdiction to give declaratory judgments (see, to that effect, the order of 25 November 2008 in Case C‑500/07 P TEA v Commission, not published in the ECR, paragraph 33, and Case T‑145/06 Omya v Commission[2009] ECR II‑145, paragraph 23)”.
• On the applicant’s challenge to his 2012 listing, the Council had failed to comply with its obligation to state reasons. Simply stating that the applicant was the founder of the Akhras Group did not automatically mean that he was involved in civilian repression, or supported or benefited from the Syrian regime. Moreover, the statement that the applicant provided support for the Syrian regime had not been substantiated with supporting information.
• On the subsequent listing, the lack of individual notification of the contested acts did not, on its own, justify annulment of the acts in question, as lack of such notification had not demonstrably resulted in an interference with the applicant’s rights of defence.
• The reasons for the applicant’s subsequent listing offered by the Council were sufficient. “They set out the significant roles played by the applicant in the Syrian business world, his links with the person principally responsible for the repression in Syria and the type of support which the applicant is alleged to have provided to the regime”. Moreover, the Council had been entitled to rely on the presumption that a leading businessman such as the applicant provided the Syrian regime with economic support.
• In conclusion, the applicant’s 2012 listing was annulled, but his 2013 listing was upheld.

Case T‑579/11 Tarif Akhras v Council, 12 February 2015

On 10 February 2015 HMRC published a brief on the application of the decision of the Court of Justice of the European Union (CJEU) in Case C-7/13 Skandia America Corp. (USA), filial Sverige v. Skatteverket of 17 September 2014 for VAT group rules in the UK.

Skandia America was US-incorporated with a Swedish branch, which became part of a Swedish VAT group. The Swedish tax authority viewed services provided by Skandia America to its Swedish branch as taxable transactions. Skandia disagreed on the grounds that these were intra-company transactions and consequently not supplies for VAT purposes. The matter was referred to the CJEU. The CJEU stated that under the Swedish grouping provisions only the branch that was physically located in Sweden could belong to a Swedish VAT group, and so it was different from the taxable person of the US head office. The transactions between the US head office and the Swedish branch were therefore liable to VAT.

Under the UK’s VAT grouping provisions, a company must have an establishment in the UK to join a UK VAT group. However, unlike in Sweden, the whole body corporate is part of the VAT group, not just the establishment (branch or head office) in the UK. Services provided between an overseas establishment and a UK establishment of the body are not normally supplies for UK VAT purposes, as they are transactions within the same taxable person.

Consequently, an overseas establishment of a UK-established entity is part of a separate taxable person if the overseas establishment is VAT-grouped in a member state that operates similar “establishment only” grouping provisions to Sweden. Intra-entity services provided to or by such establishments are supplies made to or by another taxable person and must account for VAT accordingly:
If the UK entity is in a UK VAT group, the same applies to supplies between the overseas establishment and other UK VAT group members in UK. Here, the anti-avoidance legislation in ss 43(2A)-(2E) of the VAT Act 1994 does not also apply, as the overseas establishment is not seen as part of the UK VAT group.

• services provided by the overseas VAT-grouped establishment to the UK establishment will be treated as supplies made in the UK under place of supply rules, and subject to the reverse charge if taxable;
• services provided by the UK establishment to the overseas VAT-grouped establishment will be treated as supplies made outside the UK under place of supply rules.

Revenue and Customs Brief 2 (2015): VAT grouping rules and the Skandia judgment

It has been widely reported that Lukoil, Russia’s second largest oil company, has commenced arbitration proceedings in the London Court of International Arbitration (LCIA) against China’s Sinopec over an uncompleted $1.2 billion deal.

The parties had entered into a sale-purchase agreement whereby Lukoil would sell to Sinopec 50% of a company involved in various Kazakh hydrocarbon production projects, Caspian Investment Resources Ltd. It is reported that Lukoil considers Sinopec in breach of contract over the uncompleted deal.

On 23 January 2015, in consideration of the State Immunity Act 1978 (“SIA”) the Commercial Court (Hamblen J) set aside two without notice orders allowing service of an arbitration claim form on the defendant.

The claimants and the defendant were parties to ongoing LCIA arbitration proceedings in London, pursuant to a contractual arbitration clause. The tribunal had ordered the defendants to pay US$100 million to the claimants within 30 days of the date of the order, otherwise the order would be peremptory. As the defendants did not pay, the tribunal permitted the claimants to apply for enforcement of the order under s. 42 of the Arbitration Act 1996 (“the 1996 Act”). The claimants’s solicitors (Freshfields) wrote to the defendant’s solicitors (WilmerHale) asking for confirmation that they were authorised to accept service on behalf of the defendant. WilmerHale responded saying Freshfields’ request was premature. In anticipation of permission being granted by the tribunal the claimants issued an application notice for an order for permission to serve the arbitration claim form on WilmerHale. That application was granted. This first order was sent to WilmerHale following the tribunal’s grant of permission the same day. It was accompanied by the arbitration claim form requesting the court to order the defendant to comply with the tribunal’s peremptory order and an affidavit from Freshfields in support of that application. On the same day the claimants issued their without notice application for the second order.

There followed correspondence between WilmerHale and Freshfields in which the applicability of the SIA and the failure to disclose this to the court was raised and debated. (It was agreed that the defendant was a constituent territory of a federal state for the purposes of s. 14(5) SIA). WilmerHale sent copies of that correspondence to the court but it does not appear to have been placed before Flaux J before he made the order. Freshfields did not forward that correspondence to the court until after the order was made, although on that same day it had written to the Commercial Court Listing Office contending that s. 12 SIA did not apply. The defendant subsequently issued the present application and filed an acknowledgment of service, indicating its intention to dispute the court’s jurisdiction pursuant to CPR r. 11(2).

The issues before the court were as follows:

• Whether s. 12(1) SIA did not apply because the claimants were not “instituting proceedings”. Hamblen J held that the claimants had made an arbitration claim in the form of “an application to the court under the 1996 Act” in accordance with section 42 of the 1996 Act and thereby “started” their claim in accordance with the requirements of CPR 62.2 and 62.3. The purpose of the arbitration claim was to persuade the court to make an order in accordance with s. 42 of the 1996 Act, requiring the defendant to comply with the tribunal’s order. The arbitration claim form envisaged that the claimants would be instituting proceedings. Whilst those proceedings were, under the 1996 Act, “in relation to arbitral proceedings”, they were nevertheless separate proceedings.
• Whether the defendant had agreed to alternative service (on WilmerHale) for the purposes of s. 12(6) SIA. The authorisation from WilmerHale was clearly stated to apply to “this arbitration”. Court proceedings were not arbitration proceedings. The fact that those court proceedings may be in relation to and in support of the arbitration proceedings did not remove that clear distinction. WilmerHale (in response to a specific request) had declined to confirm that they were authorised to accept service by the method contemplated by the claimants. In conclusion, there was no or no operative agreement as to the manner of service under s. 12(6) SIA.
• Whether the defendant had waived its right to rely on s. 12 SIA by acknowledging service. Under CPR r. 11.2 a defendant who wished to dispute the court’s jurisdiction was required to file an acknowledgment of service. To challenge jurisdiction on the grounds of invalid service in reliance on s. 12(1) SIA the defendant had to acknowledge service. The claimants were effectively arguing that by invoking its rights under s. 12(1) SIA by the means required under the court’s rules the defendant lost those rights. “That would be an absurd and unjust result which is most unlikely to have been intended by Parliament. That is made all the more clear by the fact that it was not a result which followed at the time that the SIA was enacted… The obviously sensible construction of s.12(3) given the changes in civil procedure since 1978 is to hold that a State “appears” in proceedings when it files an acknowledgment of service and does not issue an application to dispute the Court’s jurisdiction within the requisite period”. On the basis of NML Capital Ltd v Argentina [2011] 2 AC 495 (Lord Clarke at 142-144) the SIA “should be given an updated meaning to allow for procedural changes since it was enacted. In the present case that means construing “appears” in s.12(3) in the manner set out above”. Dickinson on State Immunity (Oxford University Press, 2004) suggested that filing an acknowledgment of service even to dispute jurisdiction would constitute an “appearance” and would preclude a state from reliance on s. 12(1). “However, in that passage there is no analysis or consideration of any of the contrary arguments set out above and I respectfully disagree… In my judgment the Claimant’s “Catch 22” construction of s. 12(3) cannot be correct. It should be construed in the manner set out above. That is consistent with the statutory purpose of s.12, namely, confer an important procedural right on state entities, which can be foregone either: (i) by doing the functional equivalent of entering an unconditional appearance under the old rules of procedure, or (ii) by an agreement to an alternative method of service. It is also in accordance with the fundamental feature of the scheme of CPR Part 11, namely, that a “defendant who files an acknowledgment of service does not, by doing so, lose any right that he may have to dispute the court’s jurisdiction”: CPR 11(3)”.
• Whether the orders should be set aside for failure to make full and frank disclosure. It was not necessary to decide this issue, but Hamblen J held that he would have set the orders aside to mark the court’s disapproval of the “serious non-disclosure” made by the claimants.

PCL & Ors v The Y Regional Government of X [2015] EWHC 68 (Comm), 23 January 2015

It has recently been reported that the EU is working on a list of new entities and Russian and pro-Moscow Ukrainian individuals who will be affected by sanctions. The names have not yet been made available.

From the Council’s Register of Documents it is evident that the following exist, though their contents have not yet been made public:

• Proposal of the High Representative of the Union for Foreign Affairs and Security Policy to the Council for a Council Decision amending Council Decision 2014/145/CFSP concerning restrictive measures in respect of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine; and
• Proposal of the High Representative of the Union for Foreign Affairs and Security Policy to the Council for a Council implementing Regulation implementing Regulation (EU) No 269/2014 concerning restrictive measures in respect of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine.

On 26 January 2015 Henderson J handed down his judgment on various computation issues in the Prudential test case in the CFC & Dividend GLO. Following judgment on liability in October 2013, HMRC had raised a number of computation arguments seeking to reduce the value of Prudential’s claim which led to a further hearing in October 2014. Many of these defences were conceded by HMRC at the beginning of that hearing. In all other respects Henderson J’s judgment of last week found in favour of the taxpayer’s method of computation. These concern how to compute the credit which, to be compatible with EU law, should have been available to set against tax on dividend income and ACT where the dividends were from portfolio investments in both EU and non-EU companies and how those credits should be applied.

Henderson J also held that Prudential was entitled to recover compound interest on claims brought in years in which HMRC has on-going enquiries (open years), and not just claims in respect of closed periods. HMRC had conceded this point during the course of the hearing.

The Prudential Assurance Company Limited v HMRC [2015] EWHC 118 (Ch), 26 January 2015

On 29 and 30 January 2015 the EU published updates to its sanctions regimes for Ukraine and Tunisia respectively.

In respect of Ukraine, the update consists of a clarification of the designation criteria for the asset-freezing measures aimed at individuals alleged to be responsible for the misappropriation of Ukrainian State funds. The Council has published the updated Council Regulation (EU) 2015/138 and Council Decision (CFSP) 2015/143. These instruments state that persons identified as responsible for the misappropriation of Ukrainian State funds include persons subject to investigation by the Ukrainian authorities:

• for the misappropriation of Ukrainian public funds or assets or being an accomplice thereto; or
• for abuse of office as a public office-holder in order to procure an unjustified advantage for him- or herself or
• for a third party and thereby causing a loss to Ukrainian public funds or assets, or being an accomplice thereto.

In respect of Tunisia, the asset-freezing measures currently in force have been extended until 31 January 2016, and the statements of reasons for three of the listed individuals have been amended. The updated instruments are Council Implementing Regulation (EU) 2015/147 and Council Decision (CFSP) 2015/157. The new reasons for listing the three persons in question (Moncef Trabelsi, Mohamed Trabelsi and Faouzi Ben Ali, all now deceased) are as follows:

Person (deceased) whose activities are subject to judicial investigations by the Tunisian authorities for complicity in the misappropriation of public monies by a public office-holder, complicity in the misuse of office by a public office-holder to procure an unjustified advantage for a third party and to cause a loss to the administration, and complicity in exerting wrongful influence over a public office-holder with a view to obtaining directly or indirectly an advantage for another person.

The Court of Justice of the European Union (“CJEU”) delivered its judgment today in Case C-172/13 Commission v UK. You will recall that the Commission referred the UK to the CJEU, claiming that the 2006 amendments to the UK’s group relief legislation had failed to implement properly the judgment in Case C-446/03 Marks and Spencer. The Commission argued that the amended legislation, in fact, precluded UK resident companies from obtaining relief for the losses of an overseas subsidiary. Further, the Commission argued that because the amended legislation required the “no possibilities test” (created by the CJEU’s judgment in Marks and Spencer) to be determined at the end of the accounting period in which the losses arose, it was virtually impossible for the test to be satisfied.

In her Opinion in October last year, Advocate General Kokott recommended that the “no possibilities test” be abandoned on the basis that ascertaining whether losses might be available for surrender in future periods created too many procedural difficulties. Accordingly, AG Kokott’s view was that the UK’s amendments to its rules on group relief went beyond that required by EU law, as they allowed for the possibility of cross-border relief in certain cases.

Today the CJEU, whilst not following AG Kokott’s suggestion that the “no possibilities test” is overruled, dismissed the action as the Commission was unable to prove its case. This means that the UK’s group relief legislation at issue has been found to be compliant with EU law.

The Commission’s argument that the UK legislation required the loss making subsidiary to be liquidated before the end of the accounting period in which the losses arose was rejected. The Court considered that the legislation did not impose such a requirement, accepting the UK’s example that relief may be obtained where, immediately after the end of the relevant accounting period, the subsidiary ceases trading and sells or disposes of all its income producing assets. Further commentary was provided on the “no possibilities test” by the CJEU. They indicated that for losses of a non-resident subsidiary to be classed as definitive (and to meet the “no possibilities test”) the subsidiary must not have any income. This was clarified as meaning that if the subsidiary is in receipt of even minimal income, it is possible that losses may be utilised in the future in the overseas Member State.

The second complaint of the Commission was that the UK legislation at issue precluded cross-border group relief for the period before 1 April 2006. This argument failed on the grounds that the Commission did not establish the necessary evidence to prove their case, and was not discussed in detail.

Case C-172/13 Commission v UK, 3 February 2015

On 22 January 2015 the Commercial Court (Popplewell J) rejected a request to overturn an arbitral tribunal’s decision that it did not have jurisdiction to hear the defendant’s claims.

The case concerned an agreement for consultancy services which provided for ICC arbitration. Following a contractual dispute the parties entered into a further, settlement agreement conferring exclusive jurisdiction on the courts of England and Wales. A dispute also arose over the settlement agreement. The claimant brought proceedings both in the English courts and in arbitration. The defendant made counterclaims in arbitration, which were dismissed by the tribunal for lack of jurisdiction.

Popplewell J held that:

• The appeal under s. 67 of the Arbitration Act 1996 was rejected. The section provided that upon a party’s challenge of an arbitral award as to the tribunal’s substantive jurisdiction the court could confirm, vary or set aside the award.
• In Fiona Trust & Holdings v Privalov & others [2008] 1 Lloyd’s Rep 254, the House of Lords (Lord Hoffmann) held that it was to be presumed that rational businessmen parties to a contract intended all questions arising out of their legal relationship to be determined in the same forum. The presumption was a strong one, and required clear words to the contrary to be displaced. This was what Hoffmann LJ had called the “presumption in favour of one-stop adjudication” in Harbour Assurance Co (U.K.) Ltd v Kansa General International Assurance Co [1993] QB 701. The presumption applied to both jurisdiction clauses and arbitration clauses (Continental Bank N.A. v Aeakos Compania Naviera S.A. [1994] 1 WLR 588).
• Where there was more than one agreement between the same parties, and they contained conflicting dispute resolution provisions, the presumption of one stop adjudication dictated that the parties would not be taken to have intended that a particular kind of dispute would fall within the scope of each of two inconsistent jurisdiction agreements. They would fall to be construed on the basis that they were mutually exclusive in the scope of their application, rather than overlapping, if the language and surrounding circumstances so allowed (Deutsche Bank AG v Sebastian Holdings Inc (No 2) [2011] 2 All ER (Comm) 245 and UBS AG v HSH Nordbank [2009] 1 CLC 934).
• The presumption in favour of one-stop adjudication may have particular potency where there was an agreement entered into for the purpose of terminating an earlier agreement between the same parties or settling disputes which had arisen under such an agreement. Rational businessmen would intend that disputes under the underlying and the settlement agreements be resolved in a single forum. If the settlement agreement contained a dispute resolution provision incompatible with that in the earlier agreement, the parties were likely to have intended that the settlement agreement clause should govern all aspects of outstanding disputes and supersede the clause in the earlier agreement. This was because:
  • The settlement agreement clause came second in time and had been agreed by the parties in the light of the specific circumstances giving rise to the disputes being settled and the circumstances leading to the termination of the earlier agreement.
  • The settlement agreement clause was the operative clause governing issues concerning the validity or effect of the settlement agreement and therefore the only clause capable of applying to disputes which arose out of or related to the settlement agreement.
  • In considering any dispute about the scope or efficacy of a settlement agreement, the tribunal was likely to have to consider the background, of which an important element would often be the circumstances in which the dispute arose and the rights of the parties under the earlier contract. There would often be a risk of inconsistent findings if the tribunal addressing the validity or efficacy of the settlement jurisdiction was not seised of disputes arising out of the earlier contract, and the latter fell to be determined by a different tribunal.
• The case should be distinguished from DDT Trucks of North America Ltd v DDT Holdings Ltd [2007] 2 Lloyd’s Rep 213, which was not a case where there was a new dispute resolution clause in the terminating agreement, or any risk of fragmentation of issues. “Where the terminating agreement contains a new dispute resolution provision which differs from that in the agreement which it terminates, different considerations arise. It is then necessary to determine which dispute resolution clause applies and it is likely that the parties should wish the earlier dispute resolution provision, in the form of an arbitration agreement, to be superseded for the reasons I have endeavoured to identify. Whether that is so will depend upon the proper construction of the clause in the terminating agreement in all the surrounding circumstances, but I would not accept that it could only have that effect by making express reference to termination of the arbitration agreement and DDT Trucks is not authority for any such proposition”.
• In conclusion, the tribunal had correctly decided that it had no jurisdiction in relation to the defendant’s claims.

Monde Petroleum SA v Westernzagros Ltd [2015] EWHC 67 (Comm), 22 January 2015

On 27 January 2015 the EU published updates to its sanctions regimes for Syria and the Ivory Coast.

In respect of Syria, the Council of the EU has re-listed Aiman Jaber, Khaled Kaddour, Mohammed Hamcho and the company Hamcho International under new statements of reasons, following annulment of the sanctions against them by the General Court in November 2014 (Cases T-653/11, T-654/11 and T-43/12). The Council has published the updated Council Implementing Decision (CFSP) 2015/117 and Council Implementing Regulation (EU) 2015/108, as well as a notice pursuant to Regulation (EC) No 45/2001 informing the listed entities that the controller for data protection purposes is the Council of the EU.

In respect of the Ivory Coast, the EU has published the Council Implementing Regulation (EU) 2015/109 and Council Implementing Decision (CFSP) 2015/118. This implements the decision of the UN Sanctions Committee of 20 November 2014 to delete Alcide Djédjé from the Ivory Coast sanctions list.