Cross-Border Arbitration and Sanctions: Key Insights from O v C [2024] EWHC 2838 (Comm)

Case Overview

1. The Dispute:

• The case concerned a cargo of naphtha, loaded by Charterers, who were subsequently designated as Specially Designated Nationals (SDNs) by the U.S. Office of Foreign Assets Control (OFAC).
• The Vessel Owners, a Liberian-incorporated company ultimately owned by a Marshall Islands entity headquartered in New York, USA, and listed on the New York Stock Exchange, terminated the charterparty and refused to discharge the cargo, citing compliance with U.S. sanctions.
• The Charterers initiated arbitration in London, alleging conversion of the cargo and seeking damages.

2. Court Involvement:

• The Owners formally applied to the English High Court under Section 44 of the Arbitration Act 1996, seeking permission to sell the cargo and deposit the proceeds into a blocked account at a U.S. financial institution. The Owners argued that this was consistent with the requirements of the OFAC license issued on 10 March 2023, which they stated permitted such an arrangement without breaching sanctions.
• While the Charterers did not oppose the sale, they objected to the Owners’ proposal to deposit the proceeds into a blocked account at a U.S. financial institution. Instead, they requested that the Court order the proceeds to be paid into the English court, ensuring they would remain accessible and free from the complexities of U.S. sanctions.

3. Court’s Decision:

• The High Court ordered that proceeds from the cargo sale be paid into the English court, rejecting the Owners’ argument to deposit them into a blocked account at a U.S. financial institution.
• The Court reasoned that the risk of prosecution for breaching U.S. sanctions was “fanciful” rather than “real.” It also found that paying the proceeds into a blocked account would create unnecessary complications, potentially undermining the arbitration process.

Key Points of the Judgment

1. Sanctions Compliance and Arbitration:

• The Court emphasised that English courts have discretion to issue orders that might conflict with foreign laws, including U.S. sanctions, provided there is no real or substantial risk of enforcement. In exercising this discretion, the judge adopted the principles highlighted by the Charterers’ counsel, supported by case law such as Akhmedova v Akhmedov [2020] EWHC 2235 (Fam), Bank Mellat v HM Treasury [2019] EWCA Civ 449, Tugushev v Orlov [2021] EWHC 1514 (Comm), and Joshua & Ors v Renault SA & Ors [2024] EWHC 1424 (KB). These principles include:
  • • Respect for foreign laws (comity) balanced against the Court’s duty to provide justice and support arbitration.
    • A requirement that the risk of foreign law enforcement must be real and credible, with the burden on the party invoking it to prove a substantial threat, not a speculative one. It is emphasised that foreign law must be actively and regularly enforced to pose a real risk, rather than existing as a theoretical or rarely applied provision.
    • The importance of balancing any low enforcement risk with the necessity of the Court’s order to preserve fair dispute resolution, as demonstrated in this case by ensuring the proceeds remained accessible to the arbitration tribunal.
    • The ability of the Court to tailor orders to minimise risks of breaching foreign law while achieving the relief sought.
    • The Court concluded that these principles justified ordering the proceeds to be paid into the English court, supporting the arbitration process and ensuring the practical resolution of the dispute without unnecessary sanctions complications.

2. Application of Discretionary Principles:

• The Court applied principles similar to those in interim injunction cases, weighing the seriousness of sanctions risks and the adequacy of alternative remedies.
• It found that the Charterers’ concerns about accessing funds from a blocked U.S. account outweighed the Owners’ fear of sanctions prosecution.

3. Efficient Dispute Resolution:

• The judgment highlights the importance of maintaining simplicity and accessibility in managing arbitration-related proceeds. A blocked U.S. account would add layers of complexity, delay, and uncertainty.

Implications of the Judgement

The following implications arise for parties engaged in international trade and law:

• Parties involved in international trade and shipping must act promptly when sanctions arise, obtaining licenses and seeking guidance from regulatory bodies like OFAC.
• This case demonstrates the value of robust sanctions clauses (e.g., BIMCO Sanctions Clauses) in charterparties.
• English courts reinforce their role as arbitration-friendly jurisdictions, willing to navigate international law complexities to support arbitration proceedings and outcomes.
• While the Court dismissed the risk of U.S. sanctions enforcement as “fanciful”, this highlights the importance of credible expert evidence to assess enforcement risks.
• The decision reaffirms that proceeds in arbitration disputes should remain readily accessible to prevent complexity, delay, and uncertainty for the party who wins the arbitration proceedings.

Final Thoughts

This case exemplifies the delicate balance between respecting international sanctions regimes and supporting effective dispute resolution. The judgment’s pragmatic approach offers a roadmap for handling similar disputes, ensuring fairness while minimising unnecessary risks and procedural hurdles.

The questions and issues raised in this newsletter mirror real-world concerns lawyers face when advising clients on sanctions-related matters. The judgment’s emphasis on careful risk assessment, efficient fund handling, and robust arbitration support reflects the increasing intersection of commercial, arbitration, and sanctions law. For companies and practitioners, this underscores the need to deeply understand both international sanctions regimes and arbitration enforcement mechanisms.

In conclusion, this judgment strengthens English courts’ standing as a reliable forum for navigating the complexities of cross-border trade disputes while maintaining compliance with intricate legal frameworks like U.S. sanctions, particularly in sanctions enforcement.