O -v- C [2024] EWHC 2838 (Comm)
This dispute illustrates the type of practical problems that are arising frequently where a party to a shipping or other commercial contract is a sanctioned, or potentially sanctioned, entity and its counterparty must decide whether payment to the (potentially) sanctioned entity, or payment otherwise than expressly permitted by a licence from domestic or international sanctions authorities, will or may breach sanctions.
The decision demonstrates that the English Court will not allow a low or fanciful risk of prosecution for breach of sanctions to prevent it from exercising its discretion as it considers appropriate.
The background facts
On 9 February 2023, the Charterers loaded a cargo of naphtha on board the Owners’ vessel in Singapore. Shortly after it was loaded and on the same day, the US Office of Foreign Assets Control (OFAC) designated the Charterers as a sanctioned entity. The vessel’s Owners purported to terminate the charterparty and refused to discharge the cargo to the Charterers. The cargo remains on board the vessel, which is drifting in the South China Sea.
The Charterers commenced arbitration, seeking damages against the Owners for conversion of their cargo. The Owners contended that they were entitled to terminate the charterparty in reliance on sanctions and compliance clauses in the charterparty. The Charterers countered that the Owners were not within reach of US sanctions. These were issues to be decided by the arbitral tribunal.
In the meantime, the Owners commenced an arbitration claim in the English Court, seeking an order under s.44 Arbitration Act 1996 that the cargo be sold and the proceeds of sale paid into a blocked account with a US financial institution.
On 10 March, OFAC issued a licence permitting that to happen without any breach of sanctions. The Charterers did not oppose the sale but wanted the proceeds to be paid into court because if the tribunal found in their favour, OFAC might disagree with that decision and refuse to allow the money in the blocked account to be paid to the Charterers. The Owners objected to a payment into court because they thought this would risk breaching sanctions.
The Commercial Court decision
The evidence
The Court heard expert evidence on US law with regard to sanctions, including OFAC advice on how the sanctions work.
One issue was the scope of “US Person” in this context. The Owners, a Liberian registered company, argued that this included, for certain purposes, foreign entities which are owned or controlled by US Persons. The Owners submitted that this term extends to them because they are a wholly-owned subsidiary of a Marshall Islands company headquartered in New York and listed on the New York Stock Exchange. The Owners further submitted that the nationality of control of both the Owners and the parent company is US, and all the operations, management, officers and personnel of both companies are in New York.
The parties’ experts differed in their views on whether payment of the proceeds of sale into court would breach US sanctions without a specific licence from OFAC permitting this to take place. The Court did not take a conclusive view on this issue because it would ultimately be determined by the tribunal. However, it acknowledged that there was a risk that the payment of the proceeds of sale into court would be regarded as a breach of US sanctions.
Reasons for a sale
There was no dispute that the sale of the cargo was a good idea. Its continued presence on board the vessel was preventing the Owners from making profitable use of the vessel. Furthermore, the vessel’s tank coatings were not designed to hold the cargo for more than 100 days. The cargo was highly flammable and had leaked out of the tanks. There were also no viable alternative storage facilities.
The Charterers alleged that the cargo had been sold to a third party which was asserting rights over the cargo pursuant to the sale contract. That third party had sought to bring a claim against the Owners for unlawful detention of the cargo and had arrested a vessel in South Africa and then again in Malaysia. Both arrests were set aside, and the Malaysian Court had held that the alleged sale contract was a sham and that the arrest was wrongful.
In any event, the third party had been notified of the arbitration claim and had not sought to assert any claim to the cargo before the English Court. Furthermore, the sale of the cargo was in the third party’s interests, if indeed it was beneficially interested, because the sale would preserve the value of the cargo, and the third party could assert any claim it had to the cargo over the proceeds of sale.
The account into which the sale proceeds should be paid
In normal circumstances, where there is a dispute as to who is entitled to the sale proceeds, the funds will be paid into court and subsequently paid out to the party that establishes a claim to the money.
Where there was a possibility that the payment into court might breach sanctions, the applicable principles were as follows:
- The Court has a discretion to order a party to do something that might be in breach of foreign civil or criminal law but will not do so lightly.
- However, the party resisting such an order has to show that there is a real, as opposed to fanciful, risk of prosecution for breaching the foreign criminal law.
- Where the parties’ experts express different views as to the risk of prosecution, it does not automatically follow that there is a real risk.
- If a real risk of prosecution is established, the Court must still weigh the risk of prosecution with the importance of the relief sought by the order. The greater the risk of prosecution, the more weight that must be given to that factor.
- The Court can fashion the order such that it minimises or reduces the concerns under the foreign law and the foreign court is expected to consider whether it is appropriate to prosecute the foreign national.
- However, once the Court has decided to make the order, non-compliance will not be excused because compliance might or would constitute a breach of a foreign law. The Court must be able to enforce its decision.
On the evidence and material before the Court, the Court did not consider that there was a real risk of prosecution. The Owners had done their best to comply with US sanctions and not to breach them. Any payment into court of the sale proceeds was not a voluntary action on the Owners’ part, but was a way of holding the ring until such time as the arbitral tribunal had come to its decision on whether the Owners were subject to US sanctions and obliged to “block” the cargo. Paying the proceeds into court would not damage the objectives of US sanctions because the Charterers would not be able to access them if the tribunal found against them.
The Court thought that, at most, rather than bring a criminal prosecution, OFAC might ask for more information as to the circumstances in which the sale proceeds had been paid into court.
Even if this was wrong, and there was a real risk of prosecution, the importance of the order was that it was made in support of the arbitration and to enable effect to be given to whatever the tribunal decides. If the proceeds are paid into a blocked account, they may not be available to give effect to the decision of the tribunal if OFAC takes a different view on the reach of US sanctions.
The Court, therefore, ordered that the cargo be sold, and the proceeds be paid into court.
Comment
The decision highlights the Court’s pro-active arbitration stance, in this case by making an order for the proceeds from the sale of the cargo to be paid into court pending the arbitral tribunal’s decision on whether, in fact, the Owners are within reach of US sanctions.
The unknown factor is to what extent the Owners would be exposed in complying with the Court’s order. The Court formed the view that there was no real risk of prosecution, albeit seemingly acknowledging there was a risk that the payment of the proceeds of sale into court would be regarded as a breach of US sanctions. A further issue is to what extent that risk exposure is enhanced if the tribunal is to find in favour of the Charterers and the proceeds paid to it, since OFAC could take a different view on the reach of US sanctions. We expect that this decision might leave the Owners in an uncomfortable position.
An alternative might have been for the Owners or their parent company to give a cross-undertaking in damages. Then, if OFAC refused to permit release of the proceeds to the Charterers, the Charterers could apply to the Court for payment of an amount equivalent to the sale proceeds to be made to them pursuant to the undertaking. However, this was a more cumbersome procedure and, in the Court’s view, giving effect to a tribunal’s decision should be simple. Whatever the payment mechanism, however, the same issue would remain for the Owners in terms of their possible exposure as highlighted above.
For further information, please contact:
Siiri Duddington, Partner, Hill Dickinson
siiri.duddington@hilldickinson.com
