Phi’s appeal sinks at Supreme Court in watershed ruling

The British Supreme Court has unanimously dismissed the appeal of Dalston Projects in its bid to overturn the detention of Phi in London. It’s a watershed moment, a landmark ruling that upholds the legality and proportionality of the UK government’s sanctions regime, affirming that the 59-metre Royal Huisman’s detention was lawful, even though its ultimate beneficial owner, Sergei Georgievich Naumenko, has not been personally sanctioned.

The judgment cements the government’s authority to detain assets deemed “connected to Russia” under the Russia (Sanctions) (EU Exit) Regulations 2019. The decision also brings Phi’s domestic legal challenge to an end, closing all remaining UK avenues for appeal. The case was heard in conjunction with that of businessman Eugene Shvidler, whose own challenge to his designation under UK sanctions was also dismissed, albeit by a majority rather than unanimously.

Together, the rulings raise renewed concerns about the reach of sanctions law, the treatment of non-designated individuals and the balance between national security powers and individual property rights.

Both appellants argued that the government’s actions interfered with their right to property and private life under the European Convention on Human Rights (ECHR). The court accepted that such interference had occurred but found it to be proportionate, given the broader aim of applying pressure on Russia to help end its war in Ukraine. Naumenko argued that the detention of Phi was excessive, claiming that the yacht’s commercial potential was lost and that it had physically deteriorated to the point where it poses an environmental threat.

However, the court found that this lost income plausibly contributes to the government’s ultimate goals in applying pressure, as by depriving Naumenko of revenue and prestige, it could stir discontent among Russia’s wealthy elite, thereby increasing pressure on the regime. According to the justices, the government needs only to demonstrate a “plausible contribution” by the sanction to its broader aim, rather than proving any direct or measurable political impact.

“The economic link is straightforward. The very considerable income that Mr Naumenko claims that he could earn by chartering out the Phi to other wealthy people is likely to make its way to Russia,” reads the judgement.

“It would be spent there by Mr Naumenko and his family to invest in or buy goods and services from Russian businesses and to maintain his luxury lifestyle. In this way, it would be used to contribute to the Russian economy. Even if that money was not directly repatriated to Russia but used overseas, it nonetheless increases Mr Naumenko’s disposable wealth and the resulting prestige he has within the circle of Russian society in which he moves.”

And although Naumenko is not sanctioned, the court agreed that he meets the definition of a person “connected to Russia,” and therefore fell within the remit of the regulations. That said, they did criticise a public statement by former Transport Secretary Grant Shapps, who said the yacht belonged to a “friend of Putin.” While the court deemed this statement inaccurate and inappropriate, it had no bearing on the legal decision to detain Phi.

The justices also accepted that Phi’s operational deterioration was a concern and had been raised, but noted that the Office of Financial Sanctions Implementation (OFSI), the body that manages sanctions compliance, offers a licensing system to allow essential maintenance or expenditure on sanctioned or detained assets.

“Whilst Mr. Naumenko is impeded in the use of a luxury asset, it's not suggested that this would have any significant effect on how he lives, nor that he cannot absorb the costs involved in maintaining the vessel,” says Justice Lady Rose.

“Nevertheless, their core needs can be met through a licensing system which the government has set up and to which they can be applied. They can apply to be allowed to use their money for certain purposes so they can have enough money released to them to enable them to live modestly, even if their luxury lifestyle and private school education may have been disrupted."

Lady Rose concludes that sanctions “often have to be severe and open-ended if they are to be effective.” On that basis, the Supreme Court dismissed the appeals.

A pertinent, though unresolved, issue raised in Phi’s appeal was whether its detention could constitute the tort of conversion, ie unlawful interference with property. The justices declined to rule on this question, increasing the likelihood of future claims for damages dramatically.

Notably, Lord Leggat dissented in part of Shvidler’s appeal, arguing the courts should not wholly defer to ministers when fundamental human rights are at stake, describing some measures as “oppressive” and warning against abdicating judicial oversight in the name of foreign policy.

Both rulings set a strong precedent that the UK judiciary is prepared to back wide-reaching government sanctions measures, even when those affected are neither charged with wrongdoing nor directly sanctioned.

Naumenko’s legal team has previously indicated to SuperyachtNews that if unsuccessful in UK courts, they would pursue the case at the European Court of Human Rights in Strasbourg. That now remains his only judicial option. For Phi, still moored and deteriorating amongst Canary Wharf construction sites in South Dock and for Captain Guy Booth and crew, the path forward looks to be narrowing.

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