Reed Smith loses costs action against sanctioned Dubai shipowners

REED Smith has lost its security for costs application against two Dubai shipping companies, in a decision that may have important implications for the extraterritorial validity of US sanctions.

In a ruling handed down in the High Court on Thursday, Mr Justice Foxton described the law firm’s argument that Barclays bank would face legal jeopardy when making a payment from a UK- based bank account to discharge a liability arising from a court order as “thin and unpersuasive”.

This judgment provides a precedent for other cases where transactions are paralysed by foreign sanctions threats, or where litigation could be undermined or delayed by compliance concerns, the legal representatives of the successful parties contended.

In July 2022, Virgo Marine and Nixie Marine entered into an agreement to buy a vessel from Marshall Islands- registered company Kibaz Shipping.

Virgo handed the full purchase price of $13.3m over to Reed Smith, in the latter’s capacity as an escrow agent.

But in September that year, Virgo was designated by Ofac, on the grounds of alleged links with Triliance Petrochemicals, an Iranian entity involved in brokering the sale of Iranian petrochemical exports.

Virgo had “received the equivalent of millions of dollars from Triliance since early 2022 to arrange vessels for the storage and transportation of Iranian petrochemicals”, Ofac said.

The London office of Reed Smith, citing the need for sanctions compliance, directed Barclays to freeze £20m ($26.6m) of Virgo’s funds.

Reed Smith thereafter reconsidered the issue and asked Barclays to release the money. But Barclays refused to do so, again citing the need for sanctions compliance. The money remains frozen in a Reed Smith client account.

Virgo and Nixie commenced a claim against Reed Smith in negligence, breach of contract and breach of trust, seeking repayment of the purchase price.

Reed Smith in turn sued Barclays for the bank’s refusal to release the sum despite its request that they do so.

It also sought security for costs from the claimants. Virgo and Nixie countered that the sum already held by Barclays was sufficient in this respect and could be redesignated if the eventual decision goes against them.

At the hearing on May 1, Virgo and Nixie were represented by Jacob Turner of Fountain Court, instructed by Zaiwalla & Co. Jawdat Khurshid KC of 7KBW, instructed by Clyde

& Co, acted for its rival law firm.

In the wider litigation, Barclays will be represented by Herbert Smith Freehills. But the bank was not a party to Reed Smith’s costs application.

Mr Justice Foxton rejected Reed Smith’s position and said the evidence it provided constituted “limited material” that was “far from compelling”.

Forcing the claimants to put up costs would not be just in the circumstances, and he accordingly rejected Reed Smith’s bid.

Zaiwalla & Co managing partner Leigh Crestohl said the case brought commercial banking terms into conflict with the force and authority of an order of the English court.

“The judge made clear that in order to rely on possible jeopardy in a foreign jurisdiction, a party will need to bring cogent evidence of the realities of that risk of foreign legal jeopardy.

“Otherwise, the default position is that the English Court will expect its orders to be obeyed by financial institutions holding accounts in this jurisdiction.”

The underlying case is set to proceed, with a trial anticipated in late 2026.

Reed Smith declined to comment.

Lloyd's List Daily Briefing 16 May 2025

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