Reed Smith, believing it was necessary to comply with US sanctions law, instructed Barclays Bank to freeze Virgo Marine’s funds held in escrow
In a significant ruling, the High Court denied an application by the prominent English solicitors firm, Reed Smith, for £6 million in security for costs from Dubai-based ship owners. The case, which involves allegations of negligence and unlawful actions by Reed Smith, highlights the complex interplay between economic sanctions and ongoing litigation in England, particularly the impact of US sanctions on multinational organisations and financial institutions.
The case, titled Virgo Marine and Nixie Marine Inc. v. Reed Smith LLP and Barclays Bank PLC [2025] EWHC [1157] (Comm.), centres around a failed ship sale transaction. Virgo Marine, a Dubai-based shipping company, was in the process of purchasing a tanker for approximately $13.3 million in late 2022 when it was designated by the US Office of Foreign Assets Control (OFAC) under the US Iran sanctions regime. At the time of the designation, Virgo Marine had already paid the full purchase price to Reed Smith, which was acting as the escrow agent.
Reed Smith, believing it was necessary to comply with US sanctions law, instructed Barclays Bank to freeze Virgo Marine’s funds held in escrow. However, Reed Smith later determined that its London office was not subject to US sanctions and instructed Barclays to release the funds. Barclays, however, refused to comply, citing sanctions and compliance concerns. As a result, Virgo Marine’s funds remain frozen in Reed Smith’s client account.
Virgo Marine and Nixie Marine Inc. subsequently initiated legal action against Reed Smith, alleging negligence, breach of contract, and breach of trust. They are seeking repayment of the balance of the escrow funds. In response, Reed Smith filed a third-party claim against Barclays for the bank’s refusal to release the funds. Reed Smith also applied for over £6 million in security for costs against Virgo and Nixie, to cover the legal expenses of both itself and Barclays up to the trial.
Virgo and Nixie opposed the application, arguing that adequate security was already available through the funds held in Reed Smith’s client account. They suggested that these funds could be re-designated to Reed Smith or paid over to them by court order if their claim was unsuccessful. However, Reed Smith contended that Barclays would not act on such a payment instruction due to sanctions and compliance concerns, thereby rendering the frozen funds unsuitable as security for costs.
Justice Foxton, presiding over the case, rejected Reed Smith’s application for security for costs. He concluded that it would not be just in all the circumstances. Examining the evidence provided regarding Barclays’ position, the judge found no proper basis for the assertion that Barclays would refuse to make a payment to Reed Smith following a court order. He further determined that the evidence suggesting Barclays would face significant legal risks by making a payment from a UK-based bank account to Reed Smith, in compliance with an English court order, was “thin and unpersuasive.”
This judgment adds to a growing body of cases that have considered the impact of economic sanctions on ongoing litigation in England. It underscores the challenges faced by multinational organisations and financial institutions in navigating the complexities of international sanctions regimes. The case highlights the need for careful consideration of the legal and compliance implications of sanctions, particularly when they intersect with domestic legal proceedings.
