Hong Kong Court grants order for payment into court amidst risk of secondary sanctions

In Bright Shipping Limited v Changhong Group (HK) Limited [2024] HKCFI 821, the Hong Kong Court ordered a defendant who had failed to satisfy a number of costs orders on the ground of risk of secondary sanctions to pay such costs into court.

Amid rising geopolitical tensions, we have seen sanctions clauses being more frequently invoked by parties to seek to be excused from performing their obligations.  This decision is an example of the Hong Kong Court's pragmatic approach to the difficulties caused by sanctions, while demonstrating its willingness to uphold a party's "undoubted entitlement" to sums due under court orders.

 Background

The underlying dispute arose between a company incorporated in Belize (the "Plaintiff”) and a company incorporated in Hong Kong (the "Defendant”), in relation to SANCHI, a vessel previously owned by the Plaintiff, which was sunk by collision with the Defendant's vessel.

In the course of the proceedings, the Defendant failed to satisfy a number of costs orders, under which it was ordered to make payments to the Plaintiff.  The Plaintiff applied by summons for an order that the Defendant make payment into court of outstanding sums due under those cost orders.

The Defendant did not dispute the sums due under the costs orders, but resisted the Plaintiff's application on the ground of the risk of secondary sanctions by the US Government pursuant to the Iranian Transaction and Sanctions Regulations (the "US Sanctions”).

The Plaintiff is not a sanctioned entity, and SANCHI had already been removed from the US Department of Treasury’s Specially Designated Nationals List (the "SDNL”).  However, according to evidence of the Defendant, the Plaintiff was indirectly owed by the National Iranian Tanker Co ("NITC”).  Additionally, at the time of collision, SANCHI was managed and operated by NITC, and loaded with cargo originating from the National Iranian Oil Co ("NIOC”).  The Defendant argued that since both NITC and NIOC are Iranian companies ultimately owned by the Iranian Government, and both companies are on the SDNL, making payment into Court for sums due to the Defendant's costs orders could result in secondary sanctions being imposed by the US Secretary of Treasury.

Decision

The Court considered that the Defendant's (and its insurer's) concern with the possibility of secondary sanctions was "genuine", accepting that, on the evidence, the Defendant had been trying its best to obtain a licence from the US Government for approval to honour its obligations to the Plaintiff under the cost orders for almost three years.  Nevertheless, the Court held that the Defendant's concern was not "well-found".

The judge began by noting that the cost orders represent a debt owed to the Plaintiff, who was not a sanctioned entity.  He emphasised that it was "trite law that a shareholder, or any other person with a controlling interest in a company, has no interest whether legal or equitable in the assets of that company", and that "[t]here is no reason demonstrated that the US Government would ignore clear principles of law."

The judge then considered whether payment of the cost orders could constitute material assistance or financial support for persons on the SDNL.  He dismissed the Defendant's argument that payment of the cost orders would "reduce the financial obligations or liability of the SANCHI interests".  Applying the English High Court decision in Fortenova Grupa v LLC Shushary Holding [2023] EWHC 1165 (Ch), he held that payment into court "cannot be regarded as payment to any person" as it was "only at the stage where payment out of court is ordered that the payment would be made to a specific entity".  He held that payment into court would serve to alleviate the Defendant’s concern about the risk of secondary sanctions.

The judge also emphasised that it was "inherently unlikely that any sanctions would be imposed upon an entity for compliance with a court order" and held that the Court was entitled to "assume that the US Government will not conduct itself unreasonably".  He therefore concluded that the Defendant did not have "any good reason" to resist the relief requested.

Comments

The Hong Kong Court has adopted a pragmatic approach in this case, as it sought to strike a balance between potential prejudices to the Plaintiff and to the Defendant.

However, it is unclear where the decision leaves the Defendant insofar as compliance with US laws and regulations is concerned – clearly US authorities are not bound by the Hong Kong Court's decisions and observations.

We are seeing more and more cases where parties find themselves between a rock and a hard place due to implications arising from sanctions.  We wrote about a recent example, involving a bank, here.

It is likely that the Hong Kong Court will more frequently have to grapple with sanctions-related issues.  It will be interesting to see how the Hong Kong Court will refine its approach, hopefully with a degree of commerciality.

For more information, please contact Gareth Thomas, Partner, Rachael Shek, Partner, Jojo Fan, Partner, Peter Ng, Senior Associate, or your usual Herbert Smith Freehills contact.