Russian activities in Ukraine have prompted the EU to adopt a package of sanctions aimed at various Russians and Russian companies. These sanctions have been enshrined in various pieces of EU legislation and implemented by the EU Member States in their national laws. These sanctions are affecting an oil company which is part-owned by a British oil company ‘BP’, and part-owned by a Russian oil company that belongs to the State of Russia. To begin with, the company is challenging the legality of the UK’s implementing legislation. However, the validity of the EU’s legislation is also at stake. Does the CJEU have jurisdiction to rule on the validity of a Decision adopted pursuant to the EU’s Common Foreign and Security Policy? And if so, then does the drafting of the EU’s legislation satisfy the requirements of legal certainty and foreseeability in circumstances where that legislation forms the basis of criminal penalties?

Background
In March 2014, Russia’s activities in Ukraine prompted the EU to introduce travel restrictions and an asset freeze on people who the EU considered were responsible for acts threatening the territorial integrity of Ukraine (Council Decision 2014/145/CFSP of 17 March 2014).

In July 2014, continued Russian activities in Ukraine led the EU to introduce a sanctions regime. In essence, the EU set about restricting: (a) the dealing in transferable securities and certain money market instruments; (b) dealing in and providing financial assistance in relation to various technologies relating to the oil industry; and (c) the provision of specified services for certain types of oil exploration and production. These sanctions were enshrined in a decision of the EU’s Council of Ministers, which took the form of EU Council Regulation 833/2014.

Furthermore, Article 8 of Regulation 833/2014 required Member States to lay down the rules on “penalties applicable to infringements” of the Regulation and to take all measures necessary to ensure their implementation. It provided that the penalties for violation should be “effective, proportionate and dissuasive”.

In September 2014, the EU broadened the scope of the sanctions. Henceforth, it would ban the supply of specific services necessary for “deep water” and “Arctic” oil exploration and production in waters deeper than 150 metres, plus those for “shale oil projects” in Russia. Reflecting this extension of the sanctions regime, the relevant Regulation was amended by Council Regulation (EU) No. 960/2014.

The EU’s Regulations were implemented in the UK. It introduced several Statutory Instruments (a form of delegated administrative law). One of them involved ‘Export Control Regulations’, which imposed criminal liability on anyone dealing contrary to the prohibitions and restrictions in the EU Regulation.

However, the EU’s sanctions regime and their implementation in English law affects the OJSC Rosneft Oil Company. Although a minority of the shares in this company is owned by BP Russian Investments Ltd (a subsidiary of the British oil company ‘BP’), the majority of its shares is owned by the Russian state’s company, ‘OJSC Rosneftegaz’.

Aggrieved, the OJSC Rosneft Oil Company brought an action for judicial review in the English courts against the relevant departments of state and it challenged the legality of the UK’s implementation of the EU’s Regulations.

At the Queen’s Bench Division of the High Court of England and Wales
The scope of the application for judicial review encompassed three elements. The first was a statutory instrument of the Treasury creating criminal offences in relation to the supply of specific financial services. The second was both a statutory instrument issued by the Secretary of State for Business, Innovation and Skills in respect criminal offences in relation to the supply of oil and related services, and a piece of ‘guidance’ that interpreted the phrase ‘financial assistance’. The third element of the judicial review related to statements made by the Financial Conduct Authority about the application of Article 5(2) of Regulation 833/2014 which concerned newly issued transferable securities in the form of Global Depository Receipts (GDRs) in respect of shares in Rosneft.

Although Rosneft’s challenge in the High Court focussed on the UK’s implementing measures, its challenge also touched upon the legality of the EU measures. In that context, the High Court was informed that Rosneft was already challenging the legality of the EU measures in the EU’s General Court (see further, Case T-715/14, NK Rosneft a.o. v Council; and Case T-69/15, NK Rosneft and Others v Council).

Thus, the first issue which the High Court had to deal with was whether it had sufficient jurisdiction to make a reference to the CJEU. For in situations where the legality of EU national measures is challenged, national courts only have the power to say that there are no grounds to conclude that the measures are invalid. If a national court does have doubts as to the legality of a measure, then a national court has the jurisdiction to refer the question of validity to the CJEU.

The High Court did have doubts as to the legality of the measure. It had heard evidence from a UK civil servant of the doubts surrounding the interpretation of the phrase ‘financing or financial assistance’. Unlike in the UK, some Member States were interpreting the phrase narrowly in order to exclude ‘payment processing services’. The High Court repeated the evidence of the UK civil servant who had indicated that a preliminary reference could ensure ‘consistency of approach across the EU and provide a level playing field for UK businesses’.

Having decided that it should make a preliminary reference to the CJEU, the High Court set about explaining the legal context to its Questions.

Question 1
Question 1 asks whether, in the context of a preliminary reference, the CJEU has jurisdiction to rule on the validity of a Decision adopted pursuant to the Common Foreign and Security Policy of the European Union (“CFSP”).

Rosneft submits that the CJEU does have jurisdiction to hear such a preliminary reference. However, that submission was refuted by the UK.

The High Court seemed to side with Rosneft. It recalled that the principle of access to a court to review the legality of measures of the executive was a fundamental right enshrined inter alia in Article 6 ECHR. In that context, any immunity for the executive from a challenge to such measures ‘should be narrowly construed’.

Furthermore, the High Court recalled the wording of Article 19(1) TEU which states: “The Court of Justice of the European Union shall include the Court of Justice, the General Court and specialised courts. It shall ensure that in the interpretation and application of the Treaties the law is observed”. How could the CJEU ensure the observance of the law if it could not hear the case?

Moreover, there was legal commentary from Lenaerts, Maseils and Gutman which explained that in respect of prima facie immunity from challenge: “… it cannot be wholly excluded that the exceptions set down in the Treaties may afford possibilities for the Court to deliver preliminary rulings on the validity of Union acts adopted on the basis of the provisions relating to the CFSP” (“EU Procedural Law”, by Lenaerts, Maseils and Gutman (Oxford), p. 458, para 10.04).

Question 2
Questions 2(a) and (b) ask whether the Relevant Measures in the EU Regulation and, to the extent that the Court has jurisdiction, the Decision are invalid and then, if they are valid, “whether certain of the prohibitions are formulated with sufficient clarity lawfully to form the basis of criminal penalties”.

In essence, Rosneft submits that the Relevant Measures: breach the Partnership and Co-operation Agreement with Russia; contravene the duty to give reasons, infringe the right to a fair hearing and infringe the right to effective judicial protection; and that the Oil Sector Provisions contravene the principle of equal treatment and constitute a misuse of powers. In addition, Rosneft submits that the Relevant Measures are disproportionate, encroach upon the Union’s legislative competences and breach Rosneft’s fundamental rights, including its right to property. Moreover, it points out that there is legal uncertainty surrounding the Regulation’s use of the words ‘deep water’ and ‘shale’ such that it offends against both the EU principle of legal certainty and legality of criminal offences.

In essence, the UK denies the force of Rosneft’s submissions. First, the Relevant Measures do not breach the Partnership Agreement. Article 99 of the Agreement states that the Agreement does not prevent a party from taking measures which it considers necessary for the protection of its essential security interests, in specified circumstances. Neither GATT nor WTO rules confer rights that allow individuals to invoke them before courts.

Second, the measures are reasoned and any discriminatory treatment is objectively justified by the aim of the Relevant Measures (to “increase the costs of Russia’s actions to undermine Ukraine’s territorial integrity, sovereignty and independence and to promoting a peaceful settlement of the crisis”).

Third, the UK takes the view that the measures which have been adopted do satisfy the ECHR’s requirements in respect of foreseeability and legal certainty.

On reflection, the High Court recognised that the terms ‘deep water’ and ‘shale’ were broad brush and had not been defined in the legislation. However, the High Court doubted whether the ambiguities were sufficient to give rise to legal uncertainty. The parties agreed that there were no universally accepted technical or geological definitions of the terms in question. Thus, it might have been reasonable for the Council to have avoided writing or creating definitions to those terms. In any event, the urgency of the legislation’s drafting might also have meant it would have been impossible to conduct the necessary research to formulate precise definitions.

Question 3
The High Court flags up that Question 3(a) queries whether the expression “financial assistance” includes processing of payments.

Rosneft submits that the term ‘financing and financial assistance’ should be read together and understood to mean the provision of funding and associated service. That is rejected by the UK minister, who submits that the term encompasses the mere processing of payments – such an approach being said to be in accordance with the Commission’s Guidance Note on the implementation of certain provisions of Regulation (EU) No 833/2014.

Question 3(b) concerns the interpretation of Article 5(2) of the Regulation which imposes prohibitions in relation to “transferable securities” and money-making instruments with a maturity exceeding 30 days.

According to the High Court, the dispute turns on the fact that the phrase “transferable securities” includes, “depository receipts in respect of shares”. In this case, the material ‘transferable securities’ are those issued by JP Morgan, Rosneft’s sponsored depository.

In essence, Rosneft interprets the EU legislation to mean that it applies only to shares issued after 12 September 2014. Accordingly, it does not apply to Global Depository Receipts (GDRs) issued after 12 September 2014 in respect of shares issued before 12 September 2014. Rosneft bases its submission on the purpose of the EU’s restriction, namely, to prohibit targeted entities’ from accessing capital markets. They say that it is not and should not be prohibited to issue GDRs in respect of pre-existing shares because such a ban would not achieve the intended result – it only penalises third party shareholders.

That interpretation of the EU Regulation is rejected by the UK’s Financial Conduct Authority which believes that Article 5(2) of the Regulation prohibits JP Morgan from issuing new depository receipts in respect of Rosneft shares whether before or after that date.

The High Court was minded to find for the UK’s Financial Conduct Authority, not only on the basis of the wording of the provision but also in light of the measure’s aims and objectives.

Comment
The Questions referred by the Queen’s Bench Division of the High Court of England and Wales are not yet available on the Curia website.

Update – 11 May 2015
According to the Curia website, the questions asked by the High Court read:

1. Having regard in particular to Article 19(1) TEU, Article 24 TEU, Article 40 TEU, Article 47 EUCFR and Article 275, second paragraph, TFEU does the Court of Justice have jurisdiction to give a preliminary ruling under Article 267 TFEU on the validity of Article 1(2)(b)-(d), Article 1(3), Article 4, Article 4(a), Article 7 and Annexe III of the Decision?

2)(a) Are one or more of the following provisions (“the Relevant Measures”) of the EU Regulation and, to the extent that the Court has jurisdiction, the Decision invalid:
[i)] Article 4 and Article 4a of the Decision;
[ii)] Articles 3, 3a, 4(3)-4(4) and Annex II of the EU Regulation; (together, “the Oil Sector Provisions”);
[iii)] Articles 1(2)(b)-(d) and 1(3) and Annex III of the Decision;
[iv)] Articles 5(2)(b)-(d), 5(3) and Annex VI of the EU Regulation; (together, “the Securities and Lending Provisions”);
[v)] Article 7 of the Decision; and
[vi)] Article 11 of the EU Regulation.

2)(b) In so far as the Relevant Measures are valid, is it contrary to the principles of legal certainty and nulla poena sine lege certa for a Member State to impose criminal penalties, pursuant to Article 8 of the EU Regulation, before the scope of the relevant offence has been sufficiently clarified by the Court of Justice?

[3)] In so far as the relevant prohibitions or restrictions referred to in Question 2(a) are valid:

[3 a] Does the term ”financial assistance” in Article 4(3) of the EU Regulation include the processing of a payment by a bank or other financial institution?

[3 b] Does Article 5 of the EU Regulation prohibit the issuing of, or other dealings with, Global Depositary Receipts (“GDRs”) issued on or after 12 September 2014 under a deposit agreement with one of the entities listed in Annex VI, in respect of shares in one of those entities which were issued before 12 September 2014?

[3 c] If the Court considers that there is a lack of clarity which can appropriately be resolved by the Court providing further guidance, what is the correct interpretation of the terms “shale” and “waters deeper than 150 metres” in Article 4 of the Decision and Article 3 and 3a of the EU Regulation? In particular, if the CJEU considers it necessary and appropriate, can it provide a geological interpretation of the term “shale” to be used in implementing the Regulation, and clarify whether the measurement of “waters deeper than 150 metres” is to be taken from the point of drilling or elsewhere?

Update – 25 January 2016
The Grand Chamber is due to hear this case on 23 February 2016.

Update – 31 May 2016
The Opinion of Advocate General Wathelet is out today.