Arbitration and Sanctions in O v C: A Balancing Act

In the case of O v C [2024] EWHC 2838 (Comm), the English High Court issued a significant ruling on an application for interim relief under Section 44 of the Arbitration Act 1996 (the Act). The Court ordered that the proceeds of the sale of a cargo of naphtha, which was classified as “blocked property” under US sanctions laws, be paid into Court, rather than into a blocked US account in accordance with the license granted by the US Office of Foreign Assets Control (OFAC). This decision was made despite arguments that payment into Court could be considered a breach of US sanctions.

This judgment is noteworthy for its careful balancing of factors. The Court ultimately determined that the importance of the order for payment into Court, so that the proceeds would be available if the Charterers established their claim in the arbitration, outweighed the minimal risk of the Owners facing prosecution for complying with an English Court order. In its decision, the Court placed significant emphasis on the importance of supporting the arbitration process.

Background

The dispute arose from a charterparty between the Claimants (the Owners) and the Respondents (the Charterers) regarding a vessel carrying a cargo of naphtha (the Charterparty). The cargo remained on the vessel for over 20 months, drifting in the South China Sea, because, shortly after loading, the US OFAC added the Charterers to its List of Specially Designated Nationals and Blocked Persons under US Executive Order 13846 (the US Sanctions). Consequently, the Owners sought to terminate the Charterparty and sell the cargo.

The Charterers commenced arbitration proceedings, seeking damages against the Owners for the conversion of their cargo. The Owners argued in their defence that they were entitled to terminate the Charterparty as a result of the US Sanctions and sought an order under section 44 of the Act that the cargo could be sold and that the proceeds be paid into a blocked account with a US financial institution, in line with a license issued by OFAC. Typically, when a cargo under dispute is sold, the proceeds are paid into Court to preserve them until a party establishes a claim to them. Here, however, the Owners did not wish to pay the proceeds of sale into Court because they said this would risk breaching sanctions.

Applicable principles where the English Court may require a party to do something that may be contrary to foreign law

Although the Owners argued that the applicable principles should mirror the considerations for the grant of an interlocutory injunction, the Court preferred to adopt the more nuanced approach advocated by the Charterers, and endorsed the following principles:

1. An English court can order a party to act contrary to foreign law, including foreign criminal law, based on judicial discretion (Akhmedova v Akhmedov [2020]).
2. Courts are cautious about making orders that would force a party to breach its own foreign criminal law, considering principles of comity (Bank Mellat v HM Treasury [2019]; Akhmedova)
3. The party invoking foreign criminal law must prove a real risk of prosecution, showing that the law is actively enforced and the threat is genuine (Bank Mellat; Joshua v Renault [2024]; Tugushev v Orlov [2021]).
4. When experts disagree on the risk of prosecution, the court must carefully assess the issue, noting that significant doubt about the law may suggest prosecution is unlikely (Public Institution for Social Security v Al Wazzan [2023]).
5. If a real risk of prosecution is proven, the court balances this risk against the importance of the relief sought. Greater risk of prosecution increases the weight given to this factor (Bank Mellat; Renault; Tugushev).
6. The court can tailor its orders to reduce concerns under foreign law, and considerations of comity may also influence the foreign state’s decision whether to prosecute, ie "comity cuts both ways" (Bank Mellat; Tugushev).
7. Once an order is made, the potential breach of foreign law does not excuse non-compliance, as the court must enforce its decisions (Akhmedova).

The Owners argued that these principles were appropriate where the Court wished to make an order to ensure a fair trial (eg disclosure of relevant documents), but that was not relevant in this case. The Court disagreed, considering that the purpose of the order in this case was to ensure that the proceeds would be available for the party who established their right to those proceeds in the arbitration, which was one aspect of ensuring a fair trial (or a fair arbitration).

Decision

Given the risk that payment into Court could breach US sanctions, the Court's starting point was that such an order would not be made lightly. It first considered whether there was a real (as opposed to fanciful) risk of prosecution. In assessing the context and OFAC guidelines, and based on the expert evidence, the Court found no real prospect of prosecution of the Owners (or the US citizens who controlled the Owners). Relevant factors were that the UK is an allied jurisdiction, the Owners appeared to have done everything possible to comply with US sanctions, the Owners’ actions would not be voluntary but compelled by the Court’s order, and the purpose of the payment into Court was to preserve the proceeds of sale pending arbitration rather than to avoid or frustrate US sanctions. Accordingly, the Court ordered the proceeds of sale to be paid into Court on the basis that there was no real risk of prosecution.

The Court further held that, even if there was a real risk of prosecution, such risk would be very low, and a balancing exercise was necessary, weighing the risk of prosecution against the importance of the Court’s order. One particular concern was that if the proceeds were paid into a blocked US account, it could be more cumbersome to give effect to the decision of the tribunal (in particular because it would be necessary to make an application to OFAC, and OFAC might refuse). While the Owners had offered a cross-undertaking in damages, the Court was not convinced that this eliminated the disadvantage for the Charterers. Accordingly, the Court concluded that payment into Court would be simpler and more effective in facilitating enforcement of the arbitral tribunal’s decision and that it would grant the order: an order under section 44 of the Act was, after all, an order in support of the arbitration.

Comment

This decision illustrates the principles that the English Court will apply in considering whether to order a party to do something that may be contrary to a foreign law in order to ensure a fair trial (or a fair arbitration). Here, the Court was influenced in particular by the evidence that there was no real risk of prosecution. Even if there was such a risk, it would be low and would be outweighed by the importance of the order.

Through this balancing exercise, the Court underscored its commitment to supporting arbitration while balancing the complexities of international sanctions. By ordering the proceeds of sale to be paid into Court, the Court reinforced the principle that judicial intervention should facilitate, not hinder, the arbitration process, including by ensuring that the Court could give effect to the arbitral tribunal's decision as easily as possible.