The long arm of US jurisdiction in transnational civil litigation

A dispute arose between POS and PDVSA Servicios S.A. (part of the Venezuelan state-owned oil company) in relation to a drilling contract.  The parties commenced UNCITRAL arbitration, seated in Paris, in 2015.  As part of the arbitration proceedings, the parties entered into a tripartite escrow agreement governed by English law (the "escrow agreement"), pursuant to which the Funds were paid into escrow with Clyde acting as the escrow agent.  Following the arbitral tribunal's decision on the merits, it ordered Clyde to pay the balance of the Funds (after escrow fees) to POS.

However, before payment was made, the Funds became subject to two orders preventing disbursement.

First, on 16 July 2020, a Malaysian Court issued a freezing order in respect of the Funds on the basis that they potentially represented the proceeds of the 1MDB scandal.  Crucially, from POS' perspective, this order did allow for specified amounts to be paid out of the Funds to meet POS' legal fees and the claims of its creditors.

Then, in October 2020, the District Court for the Central District of California (the "CDC") authorised an in rem forfeiture warrant (the "warrant") in relation to the Funds, on the basis of alleged criminal activity in California relating to 1MDB.  The warrant directed the FBI and other US law enforcement officers to arrest and seize the Funds.  In contrast to the Malaysian freezing order, the warrant made no allowance for any payment from the Funds in respect of POS' ongoing fees and debts.  In light of the warrant, Clyde declined to make the payments authorised by the Malaysian order.

POS sought an order that the Funds be paid into the English Court and that POS then be paid from the Court the monthly amounts needed to meet its business and legal expenses.^[1]  Clyde resisted this order on the grounds that to pay out the Funds (even into the English Court) would give rise to a real risk of it (and those of its employees involved in any transfer) facing criminal prosecution in the US under USC §2232(b), for undermining the forfeiture jurisdiction of the US Courts over the Funds.

POS based its claim on the fact that the Funds were held by Clyde on trust for POS (which was accepted by Clyde), and asserted that the Court should exercise its discretion, pursuant to its inherent supervisory jurisdiction and case management powers over trusts, to compel Clyde, as trustee, to pay the Funds into Court. 

It was common ground before the Court that the warrant was not itself enforceable in England (see "The US framework, and its effect in the UK").  Clyde's defence raised two related arguments: first, that the escrow agreement itself prevented the Court from compelling Clyde to release the Funds; second, that regardless of the legal status of the warrant in England, the practical reality was that, because of its terms, Clyde faced a real risk of prosecution in the US if it paid the Funds into the English Court, even where it did so pursuant to an English Court order.

The first argument Clyde raised was based on the specific terms of the escrow agreement.  When agreeing to act as escrow agent, Clyde had naturally wanted to limit the potentially very substantial liabilities which might arise from handling a significant sum.  The escrow agreement accordingly provided a number of protections for Clyde, limiting its liability for any harm caused by its conduct of the escrow, and affording it considerable discretion, including not to take any act that it determined might breach any law or render it liable to any person.^[3]  Clyde contended that these protections provided it with a right to refuse to make any payment of the Funds and, further, that by entering into the escrow agreement on these terms POS had waived its right to apply to the Court for the order it sought for transfer of the Funds.

The Court rejected this argument, concluding that the protections in the escrow agreement did not have the effect Clyde claimed.  In reaching this conclusion, the Court relied in part on general principles that are relevant to other escrow agreements.  First, it concluded that if Clyde's arguments were correct then this would essentially leave it without any enforceable obligation under the escrow agreement to pay out the Funds, which was unacceptable.  Second, the Court doubted whether it was even possible to oust the supervisory jurisdiction of the Court over a trust, but held that even if it were possible, very clear words – lacking here – would be necessary.  The important point for parties that might be considering escrow arrangements in similar situations is that it will be difficult, if not impossible, under English law, for the agent to insulate itself from the risk that an application might be made to the Court to require it to disburse funds.  Instead the agent will likely need to rely on being able to convince the Court that such an order would be inappropriate.  We now turn to Clyde's own efforts in this case to do just that. 

Clyde's alternative argument was that even if it had jurisdiction, the Court should decline to order that the Funds be paid into Court, because of the real risk Clyde faced of prosecution in the US were it to release the Funds from the escrow account.

The threshold issue - the real risk of prosecution 

The threshold issue faced by the Court was to ascertain the extent of the US criminal risk faced by Clyde, were it to pay the Funds into Court.

The key question for the Court was not whether Clyde would theoretically risk breaching US law by paying the monies into Court, but whether it would face a real (i.e. more than fanciful, but not necessarily 'high') risk of prosecution.^[4]  The focus on the risk of prosecution placed particular emphasis not just on whether the act would be prohibited by the relevant foreign law, but also on the likely acts of the prosecutor.  Importantly, the Court focused on the practical likelihood of Clyde facing criminal repercussions in the US, and was not distracted by technical arguments as to the implications of the warrant not being enforceable in England.

The Court heard conflicting evidence as to whether there was a real risk of prosecution, in particular under USC §2232(b) (see "The Court's approach to the experts instructed by the parties"); it could not determine the issue finally, but reached a provisional view that there was at least an arguable case that Clyde would be in criminal breach of US law, within the jurisdiction of the US Courts, and that there was a real risk that a prosecution would be brought.^[5]  As the discussion here primarily involved matters of US law we do not address it further (those interested are directed to the judgment itself) except to note that it is striking that this conclusion was reached notwithstanding that Clyde would have paid the Funds (i) into Court, rather than to POS, and (ii) pursuant to an English Court order: whilst the Court considered that this might provide a defence for Clyde before a US Court, it did not mean that the prospect of prosecution was fanciful.^[6]

Notably, the Court was not swayed by the evidence that no prosecution has ever been brought under USC §2232(b).^[8] It was significant here that the DOJ itself had advised Clyde that it would risk prosecution were it to disburse any of the Funds.  This distinguishes the present case from the well-known line of case law regarding the risk of breach of foreign law when giving disclosure in English Court proceedings, in which the Courts had found that there was not a real risk of prosecution because the relevant law against disclosure was not enforced, and had therefore ordered disclosure.^[9] 

The exercise of discretion

In light of its conclusion that Clyde would face a real risk of prosecution in the US should it pay the Funds into Court, the Court turned to perform a balancing exercise as to whether it should nonetheless grant the order sought by POS. 

The Court's starting point was to note two key principles of English trust law: (i) that "a trustee is not obliged to expose himself to a (real and not fanciful) risk of liability"^[10] and (ii) that "a trustee may make a retention out of trust assets sufficient to protect him against prospective or contingent liability which he has incurred in trust…if the risk is more than merely fanciful."^[11]  The Court also considered that the protections in the escrow agreement, although not sufficient to oust the Court's jurisdiction, bolstered the general trust law protections afforded to Clyde.^[12] 

Although the Court went on to consider further factors, it appears that these considerations alone would have been sufficient to defeat the order:

This must be correct.  Had the Court made the order sought, Clyde would have been in the invidious position of facing an election between potential prosecution in the US and potential prosecution in England for contempt of court.  It cannot be right that a Court would force such a prospect on a third party to litigation, in circumstances beyond its control.

The Court also made reference to the fact that POS had not in fact taken all the steps open to it to have the warrant varied by the CDC to allow payments out of the escrow account consistent with the Malaysian order.  It appeared that POS had not taken these steps, which would have involved an application to the CDC, because it wished to preserve arguments that it did not fall subject to the CDC's jurisdiction.  Miles J was sympathetic to this, but considered that POS had not shown that it had exhausted the steps available to it to vary the warrant whilst preserving those jurisdictional arguments.^[14]  In any event, his view was that if POS had to forego arguments as to jurisdiction in order to obtain access to the Funds, then it was clearly right that it should accept this compromise, rather than expecting Clyde to put itself at risk of a DOJ prosecution.^[15]

At the heart of this case was the broad jurisdictional reach of the US's criminal authorities, and the continued central role they play in world commerce.  The 1MDB fraud was committed many thousands of miles from California, but it was nonetheless alleged by the DOJ that funds misappropriated in that scheme were laundered through US bank accounts and later invested in US assets.  From that base, the DOJ was able to credibly threaten to prosecute an English law firm – even though that firm would have been acting pursuant to an order of the English Court – so as to prevent it dealing with monies arising from a French-seated arbitration.^[16]  There was also reference in the judgment to the effect that, even if the Court had been minded to order payment of the Funds into Court, it was unlikely that the Funds would have been released: as a US dollar transaction it would have needed to be processed by a New York bank, which would have been unlikely to execute the payment request in light of the warrant.^[17]

As already noted, the Court was not moved by the failure of the DOJ to domesticate the warrant, and the consequence that it could not be enforced in England.  POS' arguments here were not without force.  It drew the Court's attention to Brannigan v Davison [1997] AC 238, in which the House of Lords emphasised that an English Court could never give primacy to foreign law, as well as to the fact that the domestication regime was intended by Parliament to be the only method by which a foreign penal order could have legal effect in England.  The Court itself described the DOJ as "achieving through the backdoor what it is unwilling to seek through the front."^[18]  The Court's commentary on this issue shows that it was acutely aware of the practical realities of the jurisdictional issues before it, and of the limits of its own power:

This conclusion, and the decision of Miles J more generally, exemplifies the pragmatic approach of the English Courts to navigating such jurisdictional issues, and highlights the focus on the realities of the situation, rather than abstract principles.  This is one of the hallmarks of the English approach in commercial law and demonstrates why the English Courts remain such an attractive proposition for commercial parties.

Postscript: subsequent to this decision, Miles J granted Clyde permission to pay the Funds into Court, following the recall of the warrant, after the CDC ruled that the DOJ had not provided sufficient evidence to show that the Funds "were involved in a money laundering transaction in an adequate way".  The recalling of the warrant removed the risk of prosecution faced by Clyde, clearing the way for the payment.  As part of Miles J's order, POS was allowed to draw down the equivalent of US$442,487 from the Funds for its business expenses, in compliance with the Malaysian freezing order.