Posted: 26/11/2024
The Commercial Court has delivered a significant ruling in the case of O v C [2024] EWHC 2838 (Comm), addressing an arbitration claim pursuant to section 44 of the Arbitration Act 1996 concerning the sale of a naphtha cargo affected by US sanctions. The claim was brought with the permission of the arbitral tribunal.
The judgment highlights the court's discretion in balancing the risk of prosecution in a third country against the need to uphold justice and ensure a fair trial (or arbitration), thereby setting a precedent for future cases involving international sanctions.
The case arose after the US Office of Foreign Assets Control (OFAC) added the charterers to its list of specially designated nationals and blocked persons. The charterers were in fact designated on this list by OFAC when the cargo was loaded in Singapore. Considering that the owners were a US-controlled entity, they terminated the charterparty and refused to discharge the cargo.
The charterers commenced arbitration in London, and sought damages against the owners for the conversion of the cargo. The owners’ position was that they were entitled to terminate the charterparty based on its contractual terms, including the sanctions and compliance clauses. The charterers resisted this defence by arguing that the owners were not within the ambit of US sanctions. These issues were under the consideration of the arbitral tribunal.
While the arbitration proceedings were still ongoing, the owners commenced an arbitration claim before the English Commercial Court, pursuant to section 44 of the Arbitration Act. The owners sought court permission to sell the cargo and deposit the proceeds into a blocked account with a US financial institution, in line with an OFAC licence issued on 10 March 2023.
The charterers agreed in principle to the sale of the cargo. However, they wanted the proceeds to be paid into court, and not into the blocked account. The charterers contended that if the tribunal found in their favour, they would run the risk of the OFAC refusing to allow monies in the blocked account to be paid back to the charterers. Contrastingly, the owners objected to monies being paid into court, as they would risk breaching US sanctions.
Central to the submissions before the court, therefore, was the issue of the reach of US sanctions. In this regard, expert evidence on US law with regard to sanctions, including OFAC advice on how sanctions work, was put before the court.
The owners gave evidence from a US sanctions expert that the cargo was ‘blocked property’ pursuant to US sanctions, with which the owners, being controlled by US persons, were not permitted to deal. The expert’s evidence was that it was not possible for the proceeds of sale to be deposited into any account other than a blocked account at a US financial institution without a licence from the OFAC.
Charterers relied upon another US sanction expert’s evidence to the effect that even if the cargo was ‘blocked’ (which was denied) and the owners were prevented from dealing with it, the OFAC would only expect the owners to impose restrictions, which would include the proceeds of the cargo being paid into the English court. However, the expert also admitted that it would not be possible for the owners to sell the cargo and deposit the proceeds anywhere other than into a blocked account in the absence of a licence from the OFAC.
The court did not take a conclusive view on the parties’ different positions, since that would be determined by the tribunal. However, the court did acknowledge the risk that the owners would find themselves in breach of US sanctions if they paid the proceeds of sale into court.
It was not disputed that the sale of the cargo was clearly sensible, in view of the following reasons:
The charterers alleged that they had already sold the cargo to a third party. The third party was asserting its own rights over the cargo pursuant to that alleged sale contract and had arrested the vessel in South Africa and then Malaysia for unlawful detention of the cargo. Both these arrests had been set aside, with the Malaysian High Court observing that the alleged sale contract was ‘a sham’.
The third party had been informed of the arbitration claim but declined to take any action or make an appearance. The court was accordingly of the view that the third party was unlikely to oppose the sale, since one of its purposes was to preserve the cargo’s value, and any claim that the third party had to the cargo may have been asserted against the proceeds of sale. The court was satisfied that it was appropriate to order the sale of the cargo.
In circumstances where cargo is sold and there is a dispute as to who has rights over the proceeds of sale, the court usually orders that these must be paid into court. The crux of the issues in this case arose because of the risk that if the owners paid the proceeds into court, they could be in breach of US sanctions.
In view of the possible application of US sanctions, the court observed the following principles:
The court concluded that the risk of prosecution of the owners was fanciful, rather than real, and therefore ordered that the cargo be sold and the proceeds paid into court. The court came to the conclusion that the owners would have done all they could to comply with US sanctions. Their actions would not be deemed voluntary if they were compelled by order of the court and the purpose of the order was ‘to hold the ring’ pending the result of the arbitration.
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