O v C
DMC/Arbn/24/05
England
O v C
English Commercial Court: Sir Nigel Teare (sitting as a Judge of the High Court): [2024] EWHC 2838 (Comm): 8 November 2024
Judgment Available on BAILII @ https://www.bailii.org/ew/cases/EWHC/Comm/2024/2838.html
Luke Parsons KC and Mark Stiggelbout (instructed by Stann Law Limited) for O (Owners)
Oliver Caplin KC and Tom Foxton (instructed by Belgravia Law Limited) for C (Charterers)
ARBITRATION: CHARTERPARTY: US SANCTIONS: CHARTERERS BECAME SUBJECT TO US SANCTIONS AFTER VESSEL LOADED CARGO: OWNERS ULTIMATELY OWNED AND CONTROLLED BY US PERSONS: OWNERS OBTAINED OFAC LICENCE TO SELL CARGO AND DEPOSIT SALE PROCEEDS INTO BLOCKED ACCOUNT HELD BY US FINANCIAL INSTITUTION WITHOUT BREACH OF SANCTIONS: DISPUTE BETWEEN OWNERS AND CHARTERERS UNDER CHARTERPARTY SUBJECT TO LONDON ARBITRATION: PARTIES APPLY TO ENGLISH HIGH COURT UNDER SECTION 44 OF THE ARBITRATION ACT 1996 FOR AN ORDER ALLOWING OWNERS TO PAY CARGO SALE PROCEEDS INTO COURT
Summary
The High Court ordered that Owners should, upon selling the cargo (which was subject to US sanctions) on board the vessel, pay the proceeds of sale into the English court, to await the outcome of the on-going London arbitration. In this arbitration, Charterers claimed the value of the cargo as damages, Owners having terminated the charterparty and refused to deliver the cargo to Charterers’ orders, because of the US sanctions to which Charterers were subjected.
The High Court, in making its order, had considered that the risk of Owners (a Liberian company) and related US persons, based in New York, who ultimately owned and controlled that company, being prosecuted by US authorities, if they complied with the English court order, was ‘fanciful’ (rather than ‘real’).
Case note contributed by Jim Leighton, LLM (Maritime Law), LLB (Hons), BSc (Hons), Solicitor Advocate of England & Wales, IMI Qualified Mediator, LMAA Supporting Member and Deputy Editor of DMC’s CaseNotes
Background
Owners and Charterers agreed a charterparty under which the Vessel loaded a cargo of naphtha in Singapore on 9 February 2023. Later the same day, the US Office of Foreign Assets Control (“OFAC”) added Charterers to the List of Specially Designated Nationals and Blocked Persons (“SDN List”), pursuant to Executive Order 13846. Charterers being added to the SDN List also had the effect of subjecting the cargo, which belonged to them, to US sanctions.
Owners were a Liberian company but were ultimately owned and controlled by US persons based in New York. That created a potential risk of Owners and the US persons being prosecuted by the US authorities if they were to breach US sanctions. Owners purported to terminate the charterparty and applied to OFAC, which, on 10 March 2023, granted a licence that enabled the cargo on board the Vessel to be sold and the proceeds of the sale to be paid into a blocked account held by a US financial institution, without any breach of US sanctions.
However, a third party, B, purported to have purchased the cargo from Charterers and, when the cargo was not delivered as ordered, pursued an associated ship arrest in South Africa and also arrested the Vessel herself in Malaysia. Both arrests were dismissed. Since then, the Vessel had been drifting in the South China Sea, despite the highly flammable cargo being unsuitable for prolonged storage on board the Vessel. This state of affairs had, after 20 months, resulted in the cargo leaking from the cargo tanks into other parts of the Vessel.
Charterers commenced arbitration in London, pursuant to the London arbitration clause in the charterparty, and claimed from Owners damages for the value of the cargo. That claim was based on the premise that Owners’ refusal amounted to a conversion (civil theft) of the cargo. That premise was in turn based on the assertion that Owners were entitled to deliver the cargo without breaching US sanctions, which was an issue that fell within the substantive jurisdiction of the London arbitral tribunal to decide.
On the above basis, and with B having been informed and invited to participate, the parties applied to the High Court under section 44 of the Arbitration Act 1996 for an order to facilitate the sale of the cargo and the handling of the proceeds of sale. Owners submitted that the proceeds should be paid pursuant to the OFAC licence. Charterers submitted that the proceeds should be paid into the English court to await the outcome of the London arbitration.
Judgment
The Judge noted that, ordinarily, where a cargo is sold and there is a dispute as to who is entitled to the proceeds of sale, the Court would order that they be paid into Court,so that they are preserved and are available to be paid to the party who, in due course, establishes its claim to the proceeds. However, the difficulty in the present case arose because there was a risk that if Owners paid the proceeds into the Court, they would be acting in breach of US sanctions.
In exercising his discretion as to whether or not to make an order obliging Owners to pay the sale proceedings into the Court, to await the outcome of the London arbitration, the Judge considered that the approach proposed by Charterers was to be preferred. But, where there was a risk that payment other than in accordance with the OFAC licence might be a breach of US sanctions, which was a matter for the London arbitral tribunal to determine under their substantive jurisdiction, the Court would not lightly make such an order. However, it was relevant to consider whether there was a ‘real’ risk (as opposed to a ‘fanciful’ one) of Owners, and the US persons, being prosecuted by the US authorities for a breach of sanctions.
Having considered the Economic Sanctions Enforcement Guidelines (“ESEG”) for the sanctions administered by OFAC, and the opinion of the parties’ US sanctions law experts, the Judge concluded that there seemed to be a very powerful argument for the US authorities not prosecuting Owners and the US persons.
First, Owners had promptly filed a report with OFAC, the day after Charterers were added to the SDN List, had refused to deliver or deal with the cargo other than in accordance with the OFAC licence that they had sought and obtained, and had argued forcefully before the English Court that the sale proceeds should only be paid into a blocked account as permitted and authorised by OFAC. On that basis, Owners and the US persons appeared to have done all that they could to avoid any breach of US sanctions; they were not seeking to breach but, rather, to comply with US sanctions.
Second, with the ESEG in mind, these factors would suggest that Owners (or those in New York who controlled them) would not be considered to have acted “willfully or recklessly” but, rather, in compliance with an order of the English Court. Further, payment of the sale proceeds into the Court would not damage the objectives of US sanctions. That was because Charterers would not be able to access those proceeds if, after careful review of US sanctions, the London arbitral tribunal considered that Owners were within the reach of US sanctions and were obliged to “block” the cargo.
On the above basis, the Judge concluded that there was no ‘real’ prospect of a prosecution by the US authorities, and so ordered that the proceeds of sale be paid into the Court.
Comment
This judgment provides a useful precedent for what is to be done if a cargo on board a vessel becomes subject to foreign economic sanctions. While the facts could be expected to differ in each case, this judgment provides a framework that may lead to a quicker and more orderly route to the discharge and sale of a cargo affected by sanctions, for the benefit of all parties involved in future disputes.
Payment of the value of the cargo, once sold, into the English court makes sense where the underlying dispute is subject to London arbitration (or English litigation). However, that would not be the case if making such an order would subject one of the parties involved to a substantial risk of criminal prosecution.
In this case, the Judge was comfortable to conclude that Owners and those based in New York did not face a ‘real’ risk of prosecution. Further, even if they did (contrary to his finding), that risk was ‘very low’, which the Judge concluded would also justify making the order, given the greater convenience in paying into the English Court, compared to a “blocked” US bank account.
