Interim relief: High Court orders asset sale and payment into court despite US sanctions risk

Key Takeaways

1. Interim English court orders can offer an effective means of managing sanctions-related disputes. In this case, the English court directed the sale of assets purported to be blocked property under US sanctions, and provided guidance on the appropriate handling of the sale proceeds. This provided a practical mechanism to manage the assets and preserve their value in the context of protracted legal proceedings.
2. English courts may be persuaded to make such orders even when compliance could potentially expose a party to the risk of breaching foreign, in this case US, sanctions laws, for example where the Court (i) concludes that the order fulfils a broader objective (such as preserving the value of assets and upholding the integrity of legal proceedings, and (ii) determines that the risk of prosecution or penalties for breaches of foreign sanctions laws is minimal.
3. The case also highlights the critical importance of including robust sanctions and compliance clauses in commercial agreements, in order that there is a clear and established legal framework for resolving such disputes, and therefore minimising the risk of legal proceedings and the related costs and time delays.

Facts of the Case

On 9 February 2023, charterers (“C”) loaded a shipment of naphtha onto a vessel in Singapore. That same day, the US Office of Foreign Assets Control (“OFAC”) designated C as a Specially Designated National (“SDN”) pursuant to US Executive Order 13846 (relating to the Iran sanctions programme).

In response, the vessel’s owners (“O”) invoked a sanctions clause (the “Sanctions Clause”) to terminate the charterparty and refused to discharge the cargo. This led to the vessel remaining stranded in the South China Sea for over 20 months, with the cargo on board, causing significant operational and financial strain.

C initiated arbitration proceedings, alleging that O’s refusal to discharge the cargo amounted to conversion and seeking damages. In response, O argued that their actions were justified under the Sanctions Clause, albeit C argued that O is not within the jurisdiction of US sanctions.

On 10 March 2023, following an application by O, OFAC issued a licence permitting the sale of the cargo, on the condition that the proceeds were paid into a blocked account with a US financial institution. In view of the ongoing arbitration, O applied to the English court under section 44 of the Arbitration Act 1996 for an order permitting the sale on such terms. C did not oppose this application, save that it argued that the proceeds should be paid into the English court, to ensure the funds would remain accessible if the arbitration were resolved in their favour.

Both parties relied on contrasting expert evidence on US sanctions law. O’s expert opined that the cargo was blocked property under US sanctions laws, and that, as a US controlled person, O could not lawfully pay the proceeds into any account other than a blocked account at a US financial institution pursuant to the OFAC licence.

In contrast, C’s expert opined that the cargo was not blocked property and could be dealt with. However, he argued that even if it were blocked property, OFAC would only expect O to impose restrictions “akin to blocking”, which could include payment into the English court. 

The court did not opine on these differing expert opinions and noted that these will be matters for the arbitral tribunal to consider. 

The Decision

Sir Nigel Teare (sitting in retirement) applied the American Cyanamid principles to O’s application, ordering the cargo to be sold and the proceeds paid into the English court. His decision was underpinned by several key considerations:

• Evidence showed that the cargo was degrading, posed safety risks, and rendered the vessel inoperable for commercial use. The sale was necessary to preserve the cargo's value and enable the vessel to return to profitable use.
• The Judge found that although there was a theoretical risk that O’s payment into court could breach US sanctions (there being an issue as to whether O was a US controlled person), the risk of OFAC prosecution or penalties was very low, with “no real prospect of a prosecution”. The Judge stressed that the court would not order proceeds to be paid into court if there was a real, rather than merely fanciful, risk of prosecution or penalty.
• However, O’s consistent efforts to comply with US sanctions and the fact that payment into court would be made under the compulsion of an English court order were key factors in minimising any such risk. Additionally, since the payment would not be made to breach sanctions, O could not be said to have acted wilfully or recklessly.
• Payment into the English court was determined to be the most effective mechanism for preserving the proceeds and ensuring their availability to implement the arbitration’s outcome (consistent with the court’s role in supporting the arbitration process). By contrast, payment into a blocked account at a US financial institution could hinder enforcement and introduce burdensome licensing hurdles.

The judgment shows a delicate balance between respecting international sanctions frameworks, managing commercial assets (both vessel and cargo) effectively to preserve parties’ rights and interests, and supporting the integrity of the arbitration process, including the enforcement of arbitral awards. What the judgment did not consider is whether O could be at risk of being in breach of US sanctions if the arbitral tribunal finds in favour of C and determines the funds should be paid to C (if C remains an SDN). That will be a matter for the arbitral tribunal.