IMSML Website Article 15/2024: Black Swan Petroleum DMCC v The Owners And/Or Demise Charterers Of The Ship Or Vessel ‘Oceania’ Of The Port Of Antwerp, Belgium [2023] MLJU 3048 - The Alleged Wrongful Arrest of a Vessel Used as a Moored Oil Storage Tanker (MOST) at Sungai Linggi and its Alleged Cargo of Sanctioned Iranian Oil

This case was heard before Ong Chee Kwan J at the High Court, Kuala Lumpur. The Defendant (Euronav NV)(hereinafter referred to as D) applied to the court for a declaration that the arrest of the Plaintiff (Black Swan Petroleum DMCC)(hereinafter referred to as P) of the vessel 'Oceania', was wrongful and unlawful. The Oceania was registered at the Port of Antwerp, Belgium. The P's case against the D was predicated on a refusal, failure or neglect to deliver the cargo stored on board the Oceania, to the P. The P contended that there was conversion of the cargo and the D was in breach of its duties under a bailment to redeliver the cargo.

The Orders Sought by the D

As part of its application to the court, the D also sought the following orders from Ong Chee Kwan J:

[1] The warrant of arrest (dated 14 September 2023) and the statement of claim (dated 13 October 2023), either be struck out or set aside;

[2] The Oceania be immediately released from arrest;

[3] Damages resulting from the wrongful arrest, assessed by the Deputy Registrar of the High Court;

[4] Proceedings be stayed until this Application is determined, or a stay pending reference of the matter to arbitration;

[5] Any other orders as the court deems fit to grant in the circumstances of the case.

The P's Opposition to the Orders sought by the D

[1] The D's application for a stay of the proceedings pending arbitration, under the Arbitration Act 2005, Section 10, as well as Rules of Court 2012, Order 12, Rule 10, and Order 70, Rule 2, should not be granted. The P contended that the D had 'taken a step' in the Oceania court proceedings and was therefore precluded from seeking a stay of proceedings.

[2] The P's action for the arrest of the Oceania was made under the Court of Judicature Act 1964, Section 24(b), and the UK Senior Courts Act 1981, Sections 20(1) and 20(2)(g) read with Section 21(4), invoking admiralty jurisdiction. However, the D's application to strike out the case should not be granted as it was instead made under the Rules of Court 2012, Order 18, Rule 19.

[3] The D's claim was unsustainable and/or frivolous or vexatious. This allegation was, however, denied by the D, contending that it was entitled to arrest the ship as a matter of right.

The First Storage Contract

On 20 March 2023, the D entered into a 'Storage Agreement' with Silk Straits Sdn Bhd (SS). Note, that SS was the 'head charterer'. There were two addendums to this contract. The first dated 20 March 2023 (Addendum 1) and the second dated 23 March 2023 (Addendum 2). All of these will be collectively referred to as the SS Agreement, see Para [1]-[8]. The SS Agreement was for the reception, storage, handling and exporting of fuel or crude oil. Hence, the vessel was being used as a 'Moored Oil Storage Tanker' (MOST) at Sungai Linggi, Malaysia, see Para [9].

The SS Agreement contained Clause 16, which was titled 'Sanctions Clause'. This provided for definitions of 'Sanctioning Authority', 'Sanctioned Party', and 'Sanctioned Cargo'. There was a warranty that the operator of the vessel was not a 'Sanctioned Party', see Clause 16(b). Correspondingly, the Client under the SS Agreement also warranted that it was not a 'Sanctioned Party', see Clause 16(c), and that it will not present cargo which they know, or should have known that was 'Sanctioned Cargo', see Clause 16(e). The Sanctions Clause concludes with the Client promising the ship operator that will provide an indemnity for the financial consequences arising from the carriage of Sanctioned Cargo, see 16(f), see Para [10].

On 23 March 2023, the D authorised SS to assign its contractual rights under the SS Agreement. There were two conditions for the assignment. First, all rights under the SS Agreement could be assigned, including the Sanctions Clause. Second, the Client agreed to provide an indemnity for all the additional costs relating to the assignment, see Para [12].

The Second Storage Contract

On 23 March 2023, as Head Charterer, SS entered into a Storage Agreement with the P, which contained the same Sanctions Clause (ie Clause 16 above). This second storage contract will hereafter be referred to as the BSP Agreement, see Para [13].

It was alleged in the P's Arrest Affidavit, Para [8] that:

[1] SS furnished the P a letter from the D, stating that D had granted SS assignment rights under the first storage agreement (dated 20 March 2023).;

[2] This assignment was provided for under the Head Storage Agreement, ie the first storage agreement between D and SS;

[3] The D alleged that to the best of its knowledge, the Head Storage Agreement (ie SS Agreement) contains terms that were back-to-back with the BSP Agreement (ie which was technically the sub-storage agreement).

STS Transfer of the Impugned Cargo from the M.T. Abyss

On 28 March 2023, fuel oil in the amount of 80,325.006 MT was first presented and then transferred for storage on the Oceania via ship-to-ship (STS) transfer from the M.T. Abyss. The Abyss was registered in Vietnam and had the following IMO Number: 9157765, see Para [15].

Later that day, the D received written notice from United Against Nuclear Iran (UANI). This organisation was a not-for-profit, non-partisan advocacy group that seeks to prevent Iran from fulfilling its ambition to obtain nuclear weapons, see Para [16]. The letter explained that the impugned cargo originated from Iran, and not from Basrah, Iraq as originally declared to the D. UANI provided satellite imagery which showed that on 21 February 2023, the Abyss was at Bandar Mahshar, Iran, see Para [17].

Allegations About the Impugned Cargo

On 29 March 2023, the US Department of Homeland Security (USDHS) requested for a call with D's parent company to discuss 'an issue that we have recently become aware of regarding the Oceania', see Para [18]. Note, that this request was made through a 'Special Agent'. The USDHS was the bady tasked with investigating sanctions violations involving Iran, see Para [18].

On 1 April 2023, the D wrote to SS requesting for immediate evidence that the Impugned Cargo had in fact been loaded at Basrah, Iraq, thereby showing that it was not of Iranian origin as alleged by UANI. Reacting to this, SS in turn sent a similar letter of demand to the P, see Para [19].

The P had no idea that the Impugned Cargo originated from Iran. This was the first time that the P's attention was drawn to this fact, see Para [19]. Hence, the P did not present evidence to show that the Impugned Cargo from the Abyss had in fact been loaded in Basrah, Iraq, and was not of Iranian origin, see Para [20].

On 3 April 2023, Karen P. Seifert (KPS), the Acting Deputy Chief to the National Security Section of the US Attorney's Office for the District of Columbia contacted D's parent company via email. KPS requested to speak to the company about the transfer of Impugned Cargo in the contact of a criminal investigation.

G3 Intelligence carried out an investigation on behalf of the D (Codenamed Project Woodson Report). This is a summary of G3's findings at Para [22]:

[1] The Impugned Cargo was said to have been loaded between 21-23 February 2023. There was no credible evidence that the Abyss was docked at any Iranian port between those dates;

[2] Between 18-24 February 2023, the Abyss had switched off or disabled its Automatic Identification System (AIS) transponder, and thus did not transmit its location;

[3] The Impugned Cargo's Bill of Lading was almost certainly forged;

[4] The Abyss was probably engaged in an oil smuggling operation. She had been suspected of being involved in such operations for about 3 times since 2015;

[5] The Impugned Cargo was traceable to the National Iranian Oil Company (NIOC) and the Islamic Revolutionary Guard Corp (IRGC). At all material times, both organisations were blacklisted  by the US Department of Treasury's Office of Foreign Assets Control (OFAC) under its list of Specially Designated Nationals and Blocked Persons.

The D alleged that the P instructed the Impugned Cargo to be loaded on the Abyss. Therefore, the D concluded that the P had full knowledge of the events relating to the Impugned Cargo since February 2023. Hence, when the BSP Agreement was concluded, it was alleged that the P knew that it was in breach of the Sanctions Clause by loading the Impugned Cargo onto the Oceania, see Para [23].

On 26 May 2023, the P wrote to the D. The P demanded delivery of the Impugned Cargo from the D, see Para [24].

Seizure of the Impugned Cargo by the US Department of Justice

The D was advised by legal from the US that the Iran sanctions regime was implemented under US Executive Order (E.O.) 13224 and 13846. There was a secondary sanctions components that is applicable to either US or non-US persons. Hence this could the D could be subject to the EOs if it failed to the US government, see Para [26]. In particular:

[1] D could be designated a sanctioned entity for it participation in the transport and storage of Iranian oil for the benefit of a foreign terrorist organisation facing both civil and criminal penalties for violating the International Emergency Economic Powers Act (IEEPA);

[2] The US Department of Justice (DOJ) could exercise its jurisdiction against the D because it was listed on the New York Stock Exchange, and that it conducted businesses via contract in the US;

[3] The D could be, firstly de-listed from the New York Stock Exchange. Second, be exposed to civil liability. Third, be in breach pf sanctions clauses in contracts with counterparties, financial institutions or insurance providers. Fourth, be unable to obtain or renew financing as well as insurance. Lastly, suffer 'reputational harm' from being designated as a sanctioned entity.

On 3 July 2023, the DOJ issued and served a seizure warrant on the D for the Impugned Cargo. As a result, the D felt obligated to surrender possession of the Impugned Cargo to the DOJ. The D also asserted that the Impugned Cargo was then under the lawful custody and control of the DOJ, ie therefore under US jurisdiction, see Para [27].

The seizure warrant is currently filed under seal and is therefore not accessible to the public, see Para [28]. In its Expert Affidavit, the D explained the following at p 8, para 18, footnote 1 that the Civil Forfeiture was filed  under Rule G (Forfeiture Actions in Rem) of the Federal Rules of Civil Procedure Supplemental Rules for Admiralty and Maritime Claims and Asset Forfeiture Actions. The filing under seal included 'protection of an ongoing criminal investigation', see Fed. R. Civ. P. Supp. R. G., Note to Paragraph (c).

On the basis of the developments above, the D terminated the SS Agreement under Clause 17.2(a), see Para [29].

Facts Confirmed by the DOJ via Notices

On 10 October 2023, the DOJ issued its first notice to confirm the following facts:

[1] The Qods Force of the Islamic Revolutionary Guards Corps (IRGC-QF) was designated by the Department of Treasury in 2007 as providing lethal support to multiple terrorist organisations;

[2] The US Department of State designated IRGC-QF as a 'Foreign Terrorist Organisation in 2019 under EO 13224;

[3] The US Department of Treasury designated the National Iranian Tanker Company (NITC) in 2020, pursuant to counter-terrorism sanctions for its financial support to the IRGC-QF;

[4] The Impugned Cargo is property of NITC which was sold on behalf of the IRGC-QF according to a DOJ investigation;

[5] The US District Court for the District of Columbia issued a seizure warrant for the Impugned Cargo on 3 July 2023. This warrant was served on the D's parent company on 7 July 2023;

[6] In the US District Court of the District of Columbia, a civil action for the Impugned Cargo is being litigated. Any parties having interests in the Impugned Cargo have the opportunity to appear and make a claim.

On 28 November 2023, the DOJ issued its second notice to confirm more facts at Para [31]:

[1] The US asserts extraterritorial jurisdiction over the Impugned Cargo, see § 981(a)(1)(G)(i) of the Federal Rule of Civil Procedure Supplemental Rules for Admiralty and Maritime Claims and Assets Forfeiture Action;

[2] The underlying offence applies extraterritorially as it occurred in or affected foreign commerce, see 18 USC § 2339B(a)(1) (Providing Material Support to a Terrorist Organisation);

[3] Those who fail to comply with the Court's lawfully issued warrant over the Impugned Cargo, such as the D, face a real risk of prosecution and criminal penalties;

[4] The Office of Foreign Assets Control (OFAC) investigates transactions related to IRGC-QF assets . OFAC has the ability to designate individuals and entities that assist a terrorist organisation in disposing its assets;

Note, that appended to this second notice was a copy of Supplemental Rule G9$) of the Supplemental Rules for Admiralty or Maritime Claims and Asset Forfeiture Actions to the Federal Rules of Civil Procedure. This provision contains a requirement to notify potential to file a claim for the Impugned Cargo.

In addition to the two notices above, on 28 November 2023, Cindy Burnham (a Special Agent with the US Federal Bureau of Investigation) who conducted an investigation on behalf of the DOJ, gave the following sworn declaration under the penalty of perjury:

Black Swan Petroleum DMCC (Black Swan), the charterer of the Abyss, presented a series of fraudulent documents to conceal the Iranian origin of the fuel on board the Abyss by falsely representing that the fuel oil originated in Iraq and the facts are consistent with the Cargo being of Iranian origin.

Ong Chee Kwan J's Ruling on the D's Stay Application

The D had made both a stay application, as well as another application to strike out the P's case. Ong Chee Kwan J held that the stay application had to be determined first, because the D's application to strike necessarily involved determining the merits of the P's claim as well as the D's defence. If the court were to hear the striking out and setting aside application first, this means there is an implicit admission by the D of the Court's jurisdiction to determine the dispute between P and D, see Para [34].

A stay application shall be made before a party (in this case, the D) has 'taken any other steps in the (court) proceedings', see Arbitration Act 2005, Section 10(1) as interpreted by the Court of Appeal in Yeo Eng Law v Infinity Vantage Sdn Bhd [2020] 4 MLJ 835 (hereinafter referred to as Infinity Vantage), see Para [37]. A party (ie in this case, the D) was precluded from recourse to a stay application, where it is made concurrently filed with a prayer for striking out, see PP Persero Sdn Bhd v Bimaco Property and Development Sdn Bhd [1999] 6 MLJ 1 (HC). In the Infinity Vantage, the Court of Appeal cited with approval the PP Persero case, see Para [38].

Hence, the D should opt to make an application to stay the court proceedings and refer the matter to arbitration, and nothing else. If the D opts to make an application to strike out the P's writ, this demonstrates a clear intention to abandon the application to stay, in favour of the jurisdiction of the court to proceed to hear the case. This is evidence that the D took a step in the court proceedings, see Para [39] and [40].

If the Infinity Vantage, the Court of Appeal held that if a party making a stay application, also wishes to make an additional application to strike out the case, there must be a clear and unequivocal reservation of the party's right to refer the matter to arbitration. In the Oceania, there was no evidence that the D made this clear and unequivocal reservation to refer the matter to arbitration, see Para [41] and [42].

Was there an Arbitration Agreement between the P and D?

Ong Chee Kwan J chose not to answer this question as his Lordship had decided that the D had already taken a step in the proceedings and submitted to the jurisdiction of the High Court. Anyway, his Lordship explained that the jurisdictional issue of whether there was an arbitration agreement or otherwise between the P and D, should be a matter to be decided by the arbitral tribunal, see Para [47]. 

On the face of the facts revealed by the documents, the P argues that there appeared to be no express contractual relationship between P and D. The D is in a contract with SS via the SS Agreement. By contrast, the P is in a contract with SS via the BSP Agreement. The D's counter argument is that the action against the D is subject to the terms of the BSP Agreement and its LMAA Arbitration clause. The D argued that there was a sub-bailment on terms between the P and the D, see Para [46]. Anyway, this point is moot as Ong Chee Kwan J had no need to make a ruling on this point.

The D's Application to Set Aside and Strike out the P's Case

Ong Chee Kwan J started by ruling that there was no merit in the D's allegation that there was a failure of the P to make full and frank disclosure when obtaining the warrant of arrest for the ship. In Malaysia, there is legal duty to make a full and frank disclosure when applying for a warrant of arrest, see The Ever Concord; Premium Vegetable Oils Sdn Bhd v The Owners and/or Demise Charterers of the HSip or Vessel 'Ever Concord' of the Port of Zanzibar, Tanzania [2021] 9 MLJ 936.

Next, Ong Chee Kwan J explained that in order to set aside or strike out the P's Writ and Statement of Claim, the D would have to show that the P's claim was frivolous and vexatious. If the D failed to meet this threshold, then the case (including the claim in rem) would have to proceed to trial, see The M.V. Ira; Middle East Tankers and Freighters v Owner of the Vessel and Other Interested Party in the Vessel of MV Ira [1996] 4 MLJ 109. The P can commence an action in rem, as of right, if it satisfies the jurisdictional criteria. It matter not whether the P's claim turns out to be a good one or not, see Para [70].

After an examination of all the facts above, Ong Chee Kwan J came to the conclusion that there are numerous triable issues of fact and law which justifies the case going forward, ie not to be set aside or struck out. This is a list of some of the issues identified by his Lordship:

[1] Was the Impugned Cargo in the custody of the DOJ?

[2] Was the D committing conversion of the cargo?

[3] Was the D in breach of its duties under a bailment?

[4] Does the DOJ's seizure warrant have extraterritorial effect in Malaysia?

[5] Is the D legally precluded from delivering the Impugned Cargo to the P?

[6] Was the Impugned Cargo loaded in Iran or Iraq?

[7] If the cargo was loaded in Iran, did the P have full knowledge of this fact?

Note, from the documents, at the earliest, the P probably became aware that the cargo was sanctioned was on 2 April 2023, see Para [76].

[8] Did the P have reasons to believe that the Cargo Documents were fabricated?

Note, the documents indicated that the cargo was or Iraqi origin. When these were transmitted to both SS and the D, neither raised any concerns, see Para [77].

[9] The D's claim that the cargo originated from Iran is based heavily on the Project Woodson Report. The content of the report is disputed and the author of the report ought to be cross-examined, see Para [78].

[10] Even with the D exercising its robust checks could not tell that the documents were forged, should the P have known that the cargo was sanctioned?

[11] The earliest that the P became aware of that the cargo was sanctioned was on 2 April 2024, when it received the UANI letter. But by then, the cargo had already been presented to the D. Does this mean that the P is primarily facie not in breach of the sanctions clause?

[12] As the D is a Belgian entity, is it statutorily prohibited from complying with the DOJ's Seizure Warrant?

Note, that Council Regulation (EC) No.2271/06 (also known as the EU Blocking Statute), Article 5, prohibits compliance by EU operators with any requirement or prohibition based on certain specified foreign laws. Examples of such laws include: (a) Iran Sanctions Act of 1996; (b) Iran Freedom and Counter-Proliferation Act of 2012; (c) Iran Threat Reduction and Syaria Human Rights Act of 2012, see Para [82].

[13] Is the EU Blocking Statute applicable when the SS Agreement is subject to English Law?

As there are numerous issues which have to be determined at trial, the P's case is not frivolous or vexatious. Ong Chee Kwan J therefore held that the D's application to strike out the P's case should be dismissed, see Para [85].

Thank you for reading IMSML Website Article 15/2024

Stay tuned for the next IMSML Website Article 16/2024: Malayan Banking Bhd v Government of Malaysia [2023] MLJU 2015

Signing-off for today,

Dr Irwin Ooi Ui Joo, LL.B(Hons.)(Glamorgan); LL.M (Cardiff); Ph.D (Cardiff); CMILT

Professor of Maritime and Transport Law

Head of the Centre for Advocacy and Dispute Resolution

Faculty of Law

Universiti Teknologi MARA Shah Alam

Selangor, Malaysia

Tuesday,  20 February 2024

Note that I am the corresponding author for the IMSML Website Articles. My official email address is: uijoo310@uitm.edu.my