Breaching sanctions vs breaching contract

Virgo Marine & another -v- Reed Smith LLP (MT Kibaz) [2025] EWHC 1157 (Comm)

This case highlights that a wide range of commercial, contractual and procedural issues continue to come before the English courts as a result of international sanctions regimes. In particular, such disputes are commonly occurring where a party is reluctant to make payment under a contract because it is concerned that this will breach sanctions. However, if it declines to pay, it may face legal proceedings as a result of the non-payment.

The decision deals with an application of security for costs, rather than the substantive dispute. However, it usefully illustrates the dilemma faced by a law firm that holds escrow funds in its client account (in this case pursuant to a memorandum of agreement for the sale and purchase of a vessel) and by the bank with whom the account is held, when the buyer of the vessel is subsequently designated by US authorities as a sanctioned entity.

The background facts

The dispute arose out of a memorandum of agreement (MOA) dated 14 July 2022 for the sale and purchase of an oil tanker. The MOA was on SALEFORM 2012 terms. A UK-registered law firm (RSUK) acted for the seller. Payment was to be made in USD.

The parties to the MOA entered into an escrow agreement which provided for payment of a deposit of 15% of the purchase price, and the balance to follow upon completion of the transaction. These sums were to be paid into RSUK’s USD client account with Barclays Bank. Barclays was named as a third party in these proceedings.

The escrow agreement

The escrow agreement expressly set out, and limited, the duties, rights and responsibilities of RSUK in respect of the escrow funds. Among other things, under clause 11, RSUK would only be liable for any error of judgment, mistake of fact or act or omission if it was guilty of gross negligence, fraud or reckless disregard of its contractual obligations. Clause 15 provided that RSUK would not be liable for the actions or omissions of any bank or financial institution or regulatory or governmental authority.

Pursuant to clause 5, the deposit was to be released on the joint instructions of the parties to the MOA and the balance to be released pursuant to an instruction from the buyer or as ordered by a competent court or pursuant to a final arbitration award.

RSUK USD client account

The terms of RSUK’s customer agreement with Barclays comprised Core terms and Country terms (UK). Clause 4.1 of the Core Terms stated that Barclays was not obliged to make any payment from the account that might, in its opinion, damage its reputation or break a law, regulation or sanction. By clause 4.6, RSUK agreed not to give an instruction that would cause Barclays to breach a law, regulation or sanction.

Events

In July 2022, the buyer, (Virgo) a Dubai-based company, paid the deposit into the account. By 5 September 2022, it had paid the balance. Both payments came from a UAE bank account in its name. Subsequently, Virgo alleged that it had novated its rights under the MOA to another party, Nixie, on 22 September 2022. RSUK disputed this, contending its only legal relationship was with the original buyer.

On 29 September 2022, Virgo was designated by OFAC (US Office of Foreign Assets Control) as a sanctioned entity under US Executive Order 13846 (Executive Order). On 30 September, RSUK notified Barclays that Virgo had been added to the US sanctions list and asked Barclays to block all amounts received from Virgo.

On 1 October 2022, Kibaz (through RSUK) notified Virgo that the MOA was being terminated for repudiatory breach by reason of Virgo’s designation as a sanctioned entity. The vessel was subsequently sold to another buyer.

On 15 November 2022, RSUK took the position in correspondence that it considered itself to be subject to the Executive Order because it was a US person for the purposes of the relevant provisions. In March 2023, however, it informed Barclays that it no longer considered itself to be a US person for the purposes of the Executive Order. It then informed the buyer’s solicitors that it was prepared to instruct Barclays to return the balance funds to the buyer, subject to receiving certain information and documents.

In August 2023, RSUK instructed Barclays to repay the balance to Virgo. There remained a dispute as to who was entitled to the deposit and that dispute was being dealt with in arbitration. Barclays declined to follow RSUK’s instruction because it considered that this might cause US persons to violate US sanctions.

The proceedings

Virgo and Nixie commenced proceedings against RSUK under the escrow agreement for having given Barclays the initial instruction to freeze the account and in failing to pay the balance to them. 

RSUK denied any liability and argued that even if they had been in breach of duty, Barclays’ refusal to honour RSUK’s instruction was an intervening cause. RSUK also argued that the claimants had failed to provide the information required by Barclays to make the payment and were, therefore, themselves at fault.

RSUK brought an additional claim against Barclays for breach of contract because Barclays had not complied with RSUK’s instruction to pay the balance to the claimants and seeking specific performance and damages.

Barclays relied on the terms of its customer banking contract with RSUK, include clause 4.1. It also contended that it was not obliged to process a payment where the relevant information sought had not been provided.

That case will be heard at a 12-day trial in due course. 

Application for security for costs

In the meantime, RSUK applied for security for costs on the basis that the claimants were bodies corporate and there was reason to believe they would be unable to pay RSUK’s costs if ordered to do so. 

The Court noted that both claimants were foreign companies incorporated in jurisdictions which did not require the publication of accounts and neither had responded to the requests that they provide details of their assets and financial positions. Nor would an order for security for costs (in the amount of £6 million) stifle the claim.

The Court thought that the jurisdiction to order security for costs had been made out. The real issue on the application was whether, given there was the balance of USD11 million in a bank account in this jurisdiction, RSUK could nonetheless show that there was reason to believe that the claimants would be unable to meet any costs order made against them in favour of RSUK. If RSUK could demonstrate this, then the Court still had to consider whether it would be just and convenient to make the order for security.

The Commercial Court decision

The claimants had confirmed that if there was a costs order against them, they would not object to funds being transferred out of the RSUK USD client account to RSUK’s office account. Further, on the evidence, it was unlikely that Barclays would resist making a payment from the balance to RSUK for the purposes of satisfying a court costs order. Nor indeed would Barclays be able to resist such a payment in the face of a court order requiring transfer of the relevant part of the balance for this purpose.

The Court was not persuaded that Barclays would face real legal jeopardy (from US authorities) in making a payment from an English bank account to RSUK to discharge a liability to RSUK arising by reason of an English court order. The Court, therefore, declined to order security for costs.

Comment

The decision on the substantive dispute will be a significant and interesting one for all those whose commercial transactions are potentially impacted by sanctions. It will be of particular interest to law firms acting as escrow agents and to banks holding such funds.