In O v C (2024)[1], the High Court had to decide whether to order that the proceeds of the sale of a cargo should be paid into Court, despite a concern on the part of the owners of a vessel that doing so could place them in breach of US sanctions. Sir Nigel Teare ordered that any proceeds from the sale should be paid into the Court and not into a US blocked account pursuant to an OFAC licence. CJC Legal Manager Deven Choudhary  provides the details.

Background

A vessel owned by Owners (“O”) carried a cargo of naphtha (“Cargo”) which was loaded by the Charterers (“C”), at Singapore on 9 February 2023.

Shortly after the cargo was loaded onboard the vessel and on the same day, the US office of Foreign Assets Control (“OFAC”) added C to its list of Specially Designated Nationals and Blocked Persons (“SDN List”) pursuant to US Executive Order 13846.

Therefore, O terminated the charterparty and refused to discharge the cargo to C. The vessel remained drifting in the South China Sea with all the cargo on board from that date until (at least) the date of the judgment on 8 November 2024.  The vessel accordingly could not be employed. Further, the vessel’s tank coatings were apparently not designed to hold the cargo for more than 100 days. The cargo had begun to leak into other areas of the ship. 

On 10 March 2023, OFAC issued a license which would have permitted the cargo to be sold without any breach of sanctions, so long as the sale proceeds were paid into a blocked US account. Although there is an ongoing arbitration between O and C, O applied to the Court under s. 44 Arbitration Act 1996 for an order that the cargo be sold and the proceeds paid into a blocked US account accordingly. 

Meanwhile, C alleged that the entire cargo was sold to a buyer (“B”) on 6 April 2023, and B were accordingly the rightful owners of the cargo. B instructed O to discharge and deliver cargo to them on 10 May 2023 and 30 June 2023. On 4 July 2023, B arrested an associated vessel of O in South Africa, claiming unlawful detention of the cargo. However, this arrest was set aside by the Durban High Court on 7 July 2023. Thereafter, on 31 July 2023, B arrested the vessel in Malaysia to seek security from O for its claim against them. This arrest was set aside on 27 October 2023 by the Malaysian High Court, according to whom the alleged contract of sale of cargo between C and B was “a sham”.

C’s position was that C did not actively oppose a sale. However, due to the alleged sale to B, C considered that it would be “inappropriate” to make an order for sale under s. 44. Furthermore, any proceeds from a sale should be paid into the English High Court, rather than a blocked US account, so that the proceeds would be available in future to give effect to any future arbitration award. O opposed a payment into Court, as O feared that this would risk breaching US Sanctions.

The Commercial Court decision

Whether to order a sale

O had given B notice of the application, and invited B to make representations accordingly. No response from B was received. Accordingly, the Court considered it was appropriate to proceed with a sale of the cargo, as (i) B had been given notice of the application, (ii) B had not asserted to the Court that it owned the cargo, (iii) it was improbable that B would oppose the sale as it would preserve the value of the cargo and (iv) any claim B had could be asserted against the proceeds of the sale. Given the need to release the vessel and the lack of storage space, it was appropriate to order a sale.

Sale proceeds

Following expert evidence, the Court proceeded on the basis that there was a real risk that O could find itself in breach of sanctions if the sale proceeds were paid into Court rather than into a blocked account.

The Court also acknowledged that in normal circumstances, where there is a dispute as to who is entitled to the sale proceeds, the funds should be paid into court and subsequently paid out to the party that establishes a claim to the money. The difficulty in the present case was caused by the US sanctions position.

C stated that the appropriate principles the Court should apply were as followed:

1. An English court has a discretion to order a party to do something, which may be contrary to a foreign law;
2. An order will not lightly be made where compliance would require a party to English litigation breaching its own foreign criminal law, so considerations of comity to be given importance;
3. There has to be a real risk of prosecution to the party relying on foreign criminal law rather than a fanciful risk. The risk must be of prosecution, not merely of breaching of foreign law.
4. If the parties’ experts have differing opinions on the risk of prosecution, it does not follow from the disagreement that there is a real risk of prosecution.
5. If risk of prosecution is established, the Court must then conduct a balancing exercise, weighing the risk of prosecution with the importance of the relief sought by the order.
6. The Court to issue an order which reduces or minimises the concerns under the foreign law.
7. Once the Court has made the order, the fact that complying with that order would or might constitute a breach of foreign law does not excuse non-compliance. The Court must be able to enforce its decision.

O did not challenge these principles, but suggested they applied where the Court wished to make an order that would ensure a fair trial – not in the current situation.

Held

The Court held that the principles set out above applied in the context before it. The point of a payment into Cout was to make the proceeds available to a party that established a right to them. This was an aspect of ensuring a fair trial (or, in this case, a fair arbitration)

Applying these principles, the Court held that there was no real prospect of a prospect of a prosecution of O, even if the sale proceeds were paid into Court.

 O had refused to return to Singapore and discharge the cargo. When asked to discharge the cargo to B, O had refused. When seeking an order from the Court, O had argued the proceeds of sale should be paid into a blocked account as authorised by OFAC.

O would not have acted “wilfully or recklessly” (as per OFAC guidelines) in complying with an order to pay the sale proceeds into Court. A payment into Court would also not damage the objectives of the US sanctions regime. The funds would not be made available to C if the arbitration tribunal decided in future that O was subject to the US sanctions regime and obliged to block the cargo. 

O had accordingly done all it could to avoid a US sanctions breach. Further, compliance with an order to pay the sums into Court would not be voluntary but compelled by the Court. The risk of prosecution of O was therefore real, but very low.

The court also clarified that, even if there were a real risk of prosecution, the Court was obliged to balance the risk of prosecution against the importance of the payment into court. The Judge considered that the factors in favour of a payment into the court outweighed the risk of prosecution. A payment into court would enable effect to be given to the result of the arbitration. Were payment made into a blocked US account, that may not be the case because OFAC may take a different view to the reach of the US sanctions regime than the arbitration tribunal and block its release.  

Accordingly, the court ordered for the cargo to be sold and that the sale proceeds to be paid into its bank account.

Commentary

While this case revolves around its particular facts, the judgment gives helpful clarity on the appropriate factors to be taken into consideration when an English Court is considering making an order where compliance may place a party in breach of foreign law. It may well therefore have an impact outside the questions of US sanctions law that gave rise to the application in this case.