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The High Court has dismissed a claim brought against a UK derivatives broker following its refusal to return funds to a UAE client who was designated by the US as a specially designated national (SDN) under the Iranian sanctions regime: Beneathco DMCC v R.J. O'Brien Ltd [2025] EWHC 3079 (Comm).
The court found against the sanctioned claimant on the basis that the (largely unwritten) contract between the parties should be construed as imposing only a narrow obligation on the defendant broker to pay its client (and no other party) on demand and in the currency in which the funds were held (which was USD in this case). As the claimant's payment requests specified that payment should be made in another currency and to a third party, the broker therefore had no obligation to make payment.
The court went on to provide, on an obiter basis (and therefore not binding), a detailed analysis of the broker's alternative defence, namely that any obligation to pay would have been suspended under the common law principle in Ralli Bros v Compania Naviera Sotay Aznar [1920] 2 KB 287. As a refresher, the Ralli Bros principle provides a limited exception to the general rule that an English law contract is enforced without regard to foreign illegality. Where contractual performance necessarily requires an act to be done in a place where it is unlawful to carry it out, the obligation is suspended to the extent of that illegality (we recently considered the application of the Ralli Bros principle in the context of LLC EuroChem North-West-2 & Anor v Société Générale S.A. & Ors [2025] EWHC 1938 (Comm) - see our blog post).
The decision is notable as it is the first known case to comment (obiter) on the interplay between the Ralli Bros principle and the UK Blocking Regulation (Retained Council Regulation (EC) No 2271/96 of 22 November 1996 (as amended by The Protecting against the Effects of the Extraterritorial Application of Third Country Legislation (Amendment) (EU Exit) Regulations 2020)). The UK Blocking Regulation seeks to counteract the extraterritorial effect of specified foreign sanctions (currently, US sanctions against Iran and Cuba) by prohibiting UK persons from complying with those proscribed laws. Banks and financial institutions will be comforted that the court viewed the UK Blocking Regulation as only prohibiting compliance with extra-territorial US legislation. Since the inception of the UK Blocking Regulation, it has been the consensus that the UK Blocking Regulation should not be interpreted as prohibiting UK persons from complying with US sanctions within the US, but this is the first time that view has received judicial endorsement in England and Wales. However, some uncertainty will remain on this point, and the interpretation of the UK Blocking Regulation more generally, until there is binding authority.
We consider the decision in more detail below.
Background
Beneathco DMCC (Beneathco), a UAE-registered petroleum trading company, became a client of RJ O'Brien Limited (RJOL) in 2019 and engaged in derivatives trading via RJOL for a two-month period in late 2019 and early 2020. Beneathco's funds were held in an omnibus segregated client account. This meant that its funds were segregated from the assets of RJOL, but mixed with other client assets, and held at a roster of US and UK banks.
On 23 January 2020, the US Office of Foreign Assets Control (OFAC) designated Beneathco as an SDN under Executive Order 13846, imposing secondary sanctions on the basis that Beneathco had materially assisted the Iranian National Oil Company. The following day, at Beneathco's request, its trading positions with RJOL were liquidated, leaving a positive balance of approximately USD 16.5 million (the Balance). The next day, Beneathco instructed RJOL to convert the Balance to Arab Emirates Dirham (AED) and pay it to its UAE bank account (the Original Instruction). RJOL refused, citing the US-imposed sanctions.
Beneathco commenced proceedings in 2024 to secure the return of its funds, seeking specific performance of RJOL's alleged obligation to effect the Original Instruction or, alternatively, damages in the same amount as the Balance and/or a declaration of constructive trust over the funds.
After the commencement of proceedings, Beneathco issued an amended instruction to pay the Balance (plus interest) to a third-party UAE company (the Amended Instruction). RJOL declined, raising due diligence concerns (including that the name of the third party closely resembled that of another SDN) and maintaining that it was not obliged to pay a third party or to convert currency.
In parallel, RJOL's US affiliate made a voluntary self‑disclosure to OFAC in early 2020 concerning the liquidation of Beneathco's positions, resulting in OFAC issuing a formal cautionary letter in 2021. The same affiliate later sought an OFAC licence permitting the affiliate to instruct RJOL to release the Balance. OFAC refused the licence request in 2025 on the basis that it was inconsistent with its current licensing policy.
Decision
The two central issues were:
- whether RJOL had a contractual obligation to comply with either the Original or Amended Instruction; and
- if RJOL did have an obligation to effect payment, whether performance was suspended under the Ralli Bros principle (Ralli Brothers v Compania Naviera Sota y Aznar [1920] 2 KB 287 (CA).
The extent of RJOL's obligation to pay
As a preliminary point, the court considered the nature of the obligation owed by RJOL to Beneathco in respect of the USD 16.5 million. RJOL asserted that it was a trustee of the USD 16.5 million; whereas Beneathco argued that RJOL was a mere creditor, and owed a debt to Beneathco to the value of the USD 16.5 million. In the court's judgment, RJOL was holding the USD 16.5 million on trust for Beneathco, because the funds were held in a mixed pool of client monies, segregated from RJOL's own assets (in accordance with the Financial Conduct Authority's CASS 7 (Client Money Rules)). The court noted that per Lehman Bros International (Europe) Ltd [2012] UKSC 6, CASS creates a statutory trust over client money to support and reinforce the segregation of client money from the firm's own money.
The court then proceeded to consider whether a demand was made by Beneathco, with which RJOL was obliged to comply. In the absence of express terms governing RJOL's payment obligations, both parties sought to imply terms into the contract:
- Beneathco sought an implied term that RJOL "was required to execute [Beneathco's] instructions to pay monies out of [Beneathco's] account(s) with [RJOL] to a bank account, and in a currency of [Beneathco's] nomination, net of any obligations owed by [Beneathco] to [RJOL]".
- RJOL, on the other hand, proposed an implied term that it was "obliged to pay [Beneathco] on demand the monies standing to its account in the currency of that account (US$)", as well as a term providing a carve-out from that obligation if the instruction would require an act to be done that was unlawful where it was to be carried out (ie a contractual version of the Ralli Bros principle).
Applying the test from Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Limited and another [2015] UKSC 72 (see our blog post), the court declined to imply the term proposed by Beneathco. The court found that it was neither obvious nor necessary to give business efficacy to the contract that RJOL should be obliged to execute any instructions by Beneathco to return the funds. Beneathco's contentions that RJOL should make payment in any currency of Beneathco's choosing or to third parties nominated by Beneathco were specifically rejected, with the court pointing to the commercial and regulatory concerns that could arise as factors counting against the implication of such terms.
The court found that the contractual obligation of RJOL, and its obligation as trustee of Beneathco's funds, was to pay Beneathco in USD on demand. As a result, the court held that:
- the Original Instruction (to convert the USD funds into AED and pay them into Beneathco's UAE account) did not fall within RJOL's obligations, which were limited to making payment in USD; and
- the Amended Instruction (to make payment to a third‑party UAE company) likewise fell outside RJOL's obligations, which were limited to making payment to Beneathco itself.
Accordingly, the court held that RJOL was under no obligation to make payment to Beneathco and the claim failed.
The Ralli Bros principle
The court went on to provide, on an obiter basis, a detailed analysis of RJOL's alternative defence, namely that any obligation to pay would have been suspended under the Ralli Bros principle (as outlined in the introduction to this blog post).
RJOL asserted that, as the funds were held in USD, to make payment under either the Original Instruction or the Amended Instruction would involve unlawful action by a US-based correspondent bank, given the sanctions imposed on Beneathco.
It was common ground between the parties that if payment was made via the US banking system, the payment would breach US law. Two questions were therefore central to establishing whether the Ralli Bros principle was engaged:
- Was the use of the US banking system part of contractual performance (as opposed to a mere preparatory step)?
- Was the use of a US correspondent bank "necessary" to effect the relevant USD transfer or conversion?
On the first issue, the court concluded that the use of the US banking system was a required part of contractual performance. In relation to the second issue, the court accepted that, on the balance of probabilities, any USD payment (including a conversion of USD into AED) from RJOL's roster banks in the UK and US to the UAE banks nominated by Beneathco would have been routed through US correspondent banks. The court therefore concluded that the Ralli Bros principle was engaged. If (contrary to the court's primary analysis) RJOL had an obligation to act on Beneathco's instructions, the Ralli Bros principle would have suspended the obligation to pay.
The court also briefly considered whether RJOL could or should have obtained a licence from OFAC permitting the payments requested by Beneathco. Following the decisions of the High Court inBanco San Juan Internacional Inc v Petroleos De Venezuela SA [2020] EWHC 2937 (Comm)(see our blog post) andthe Court of Appeal in Celestial Aviation Services Ltd v Unicredit Bank GmbH, London Branch [2024] EWCA Civ 628(see our blog post), the burden was on RJOL to show reasonable efforts to obtain a licence or that such efforts would have been futile. Although RJOL's US affiliate had sought a licence in 2021, RJOL itself had not done so. However, the court was satisfied that no licence could have been obtained within the compressed timeframe of the Original Instruction (the bank account nominated in the Original Instruction was closed approximately 10 days after this was issued), and that it was highly improbable that a licence would have been forthcoming for the Amended Instruction issued in 2025, given the Trump administration's policy of applying "maximum pressure" to Iran. RJOL's failure to seek a licence from OFAC therefore did not defeat its reliance on Ralli Bros.
UK Blocking Regulation
The UK Blocking Regulation seeks to counteract the extraterritorial effect of specified foreign sanctions (currently, US sanctions against Iran and Cuba) by prohibiting UK persons from complying with those proscribed laws. A breach of this prohibition constitutes a criminal offence. The UK Blocking Regulation also entitles UK persons to recover damages where their economic and/or financial interests are affected by the proscribed laws or any related actions.
Beneathco contended that the UK Blocking Regulation prevented RJOL from relying on the Ralli Bros principle. In short, it said that the source of Beneathco's US designation (namely, Executive Order 13846) was itself made under one of the proscribed laws listed in the UK Blocking Regulation. It would therefore be a criminal offence for RJOL to comply with that designation by not making payment to Beneathco, and the public policy of comity which underpins the Ralli Bros principle must give way to the greater public policy of the court not endorsing criminal conduct by RJOL.
The court commented that the UK Blocking Regulation represented "deep and largely uncharted waters". The court noted that the interpretation of the UK Blocking Regulation "is not straightforward" and that the court had not been shown any UK authorities which considered this.However, the court proceeded to provide an obiter analysis of the interaction between the Ralli Bros principle and the UK Blocking Regulation.
The court interpreted the UK Blocking Regulation as prohibiting compliance only with extra-territorial legislation:
"The Blocking Regulation, ... is designed and intended to prevent compliance with extra-territorial legislation. Here, that means it applies only if US law makes contractual performance unlawful outside the United States."
As a result, the court concluded that it did not conflict with the Ralli Bros principle which, to the contrary, applies "only where contractual performance is unlawful by the law of the territory within which performance is contractually required". The UK Blocking Regulation therefore did not aid Beneathco's position, since:
"The Blocking Regulation does not target, and thus... does not criminalise, [RJOL] not performing its contract by reason of conduct within the United States being unlawful under US law."
The court also noted that Executive Order 13846 is not, and nor is it derived from, one of the proscribed laws listed in the UK Blocking Regulation.
On that basis, the court opined that, even if RJOL had been contractually obliged to make the payments requested by Beneathco, that obligation would have been suspended by the Ralli Bros principle. Further, that conclusion was not affected by the UK Blocking Regulation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
