IMSML Website Article 20/2024: Desert Oasis Petrochemical Trading LLC v Pemilik Dan/Atau Pencarter Demis Kapal Atau Vesel Alpine Mathilde Dari Pelabuhan Hong Kong [2023] MLJU 2494, Sham Transactions to Evade US Sanctions, Associated Ship Arrest in South Africa and Wrongful Arrest of the Ship.

This is another judgment delivered by Ong Chee Kwan J at the High Court of Kuala Lumpur. Since his elevation to the bench, his Lordship has been consistently making decisions which are really insightful and contributing to the body of case law that make up Malaysia’s very own Common Law. For the record, Ong Chee Kwan J used to hold the post of Vice President of IMSML. It great to see Admiralty Law matters in Malaysia being handled by a person with such a solid understanding of Maritime and Shipping Law. Now on to sanctions, sham transactions and wrongful arrest.

A Brief Explanation About Sanctions

Ong Chee Kwan J puts the entire Alpine Mathilde case in context by starting with an explanation about how sanctions operate. He describes sanctions as 'political trade restrictions' that are imposed to maintain / restore international peace and security, or to further a country's foreign policy objective, see Para [1]. The Office of Foreign Assets Control (OFAC) is the body which the United States uses for this purpose. OFAC operates under the auspices of the US Department of Treasury. It imposes sanctions on persons, countries and legal entities on various commercial activities, see Para [1]. Primary sanctions apply to US persons, ie citizens and permanent residents, and includes transactions in US Dollars. Secondary sanctions do not require a 'US Nexus' and apply to non-US persons. It functions to protect national security and foreign policy interest that threaten access to US markets, see Para [2].

The Facts of the Alpine Mathilde Case

A cargo of approximately 36 MT of Naphtha, was loaded onto the ship at Singapore, destined for Japan. The voyage charterer and operator of the vessel was Unicious Energy Pte Ltd (Unicious). Very soon after the Alpine Mathilde left its load port, the cargo it carried was designated by the OFAC on its Specifically Designated National and Blocked Persons (SDN) List. Therefore, from the moment of the designation, the cargo on board the ship was subject to US sanctions, see Para [3].

After this event, Unicious purported to enter an unsigned sales contract (dated 6 April 2024) for the sanctioned cargo with the P (Desert Oasis). It was under this sale contract, that Unicious apparently transfered ownership and title of the cargo to the P. Subsequently, the P demanded delivery of the cargo on board the Alpine Mathilde, apparently using bills of lading (dated 9 February 2023) that were issued prior to the sale contract, to demand delivery of the cargo from the Defendant (Heroic Serena Inc, the register owner of the vessel), see Para [4] and [5]. The P proceeded to arrest the Vessel even though the D shipowner was a US person, Unicious was designated as a SDN, and the cargo was automatically 'blocked property' under US sanctions law, see Para [6].

In response, the D shipowner made an application to set aside the P's writ in rem and the warrant of arrest. This was accompanied by an application for an order that the P pay the D damages for wrongful arrest of the ship, see Para [7].

The Underlying Commercial Sales Contract

On 25 January 2023, Unicious (sellers) entered into a sale contract with Idemitsu (Asia) Pte Ltd, Japan (Idemitsu) for the shipment of Naphtha. Unicious entered into a voyage charter with the D on 21 January 2023, for transportation of the cargo to Japan, see Para [13] and [14].

The Terms of the Voyage Charter

It is pertinent to take note of two relevant clause in the voyage charter. First, it has a BIMCO SAnctions Clause for Voyage Charterparties 2020. Second, it also had a 'Compliance with Laws and Sanctions Clause', see Para [15]. There was no dispute that the 'Sanctioning Authority' under these clauses, the US (through OFAC) had the power to administer the sanctions system, via executive orders of the President of the US, see Para [18]. Therefore, there was no challenge of the designation of the cargo under the SDN List, see Para [19].

Once the cargo has been sanctioned, dealings with respect to it are strictly prohibited, see Para [20]. In the context of the sanctions regime, the Sanctions Clause gave rise to a mutual warranty that Unicious, as well as the D shipowner, would not become a sanctioned party during the currency of the voyage charter, see Para [20]. The party that is not in breach of, would have the right to terminate the charter if the other contracting party becomes a sanctioned party, see Para [21].

Lawyers Acting for Unicious

Messrs Oon and Bazul, a law firm from Singapore, in partnership with TS Oon and Partners (Oon Law) in Malaysia, claimed to be acting on behalf of Unicious. Oon Law asserted that Unicious was the owners of the cargo, and instructed the D to discharge the cargo back at Horizon Terminal Singapore. Oon Law said that it there was no compliance with these instructions by noon Singapore time on 15 February 2023, the vessel would be arrest for security, Para [26].

In response, lawyers acting for the D shipowner asserted that Unicious was in breach of the voyage charter, terminated the charter and placed Unicious on notice for all the damages consequent on such a breach, see Para [27].

On 19 April 2023, Oon Law once again demanded that the D discharge the cargo at Horizon Terminal in Singapore. This time, the deadline was close of business on 21 April 2023, accompanied by the threat of arrest of the Alpine Mathilde or one of its associated vessels, see Para [28].

Ong Chee Kwan J noted that Oon Law's letter of 19 April 2023, 'made no reference to other or stated in any way that Unicious had already, allegedly, entered into the sales contract for the Cargo with the P (Desert Oasis) on 6 April 2023, some 13 days earlier than the letter dated 19 April 2023', see Para [29]. It was also 15 days prior to the purported deadline of 21 April 2023, for the D to discharge the cargo at Horizon Terminal, see Para [29].

Also in response to Oon Law's letter dated 19 April 2023, K&L Gates, a law firm acting as sanctions counsel for the US, reminded Oon Law that Unicious was in breach of the Voyage Charter's warranty not to become an SDN. K&L Gates also reminded that Unicious that the D shipowner had to comply with US laws, in particular, Sanctions Laws. Therefore, the D shipowner could violate sanctions law by delivering the cargo to Unicious (which has the status of a SDN) as demanded, see Para [30].

The Fate of the Bills of Lading

On 12 April 2023, the D's commercial managers (Norden) received an inquiry from the buyer of the cargo, Idemitsu. According to Idemitsu, the original bills of lading still remained with Unicious. Worryingly, Unicious had asked Idemitsu to endorse the bill of lading to a third party. Idemitsu made it clear that it never indorsed the bills of lading, see [31].

The Appearance of the Plaintiff

Although the P entered into a sale contract with Unicious on 6 April 2024, Ong Chee Kwan J observed that 'the P only surfaced in this matter more than a month after that date', see Para [32]. His Lordship pointed out that this occurred when the P emailed the D's commercial managers (Norden) on 10 May 2023, to claim entitlement to the cargo, see Para [32]. In this email, the P claimed that it had purchased the cargo, and that it was prepared to tender the set of original bills of lading, see Para [33].

On 10 May 2023, the D (via its commercial managers, Norden) explained to the P why it could no longer deal with the cargo because of sanction imposed by OFAC. Even if the cargo was sold, the proceeds would be deposited into a blocked account, see Para [34]. After that, there was no communication for some time.

On 30 June 2023, Hong Kong Counsel acting for the P, wrote to the D (via its managers, Norden), claimed that the P was the 'lawful owner' of the cargo. These lawyers also demanded a sum for potential loss in excess of USD32,404,188.12, plus an exorbitant amount of costs, fees and interest, if the D failed to comply and release the cargo, see Para [35]. This was a strange turn of events in the light of the explanation given by US Counsel on Sanctions with regard to the blocked cargo, see Para [36].

The Associated Ship Arrest in South Africa

On 4 July 2023, instead of heeding the advice of US Counsel for Sanctions, the P made an 'associated ship' arrest of the M.T. Alpine Mystery under the South African Court's admiralty arrest procedure, see Para [38]. On 6 July 2023, the P's arrest was immediately challenged by the D, who filed an application for reconsideration of the issuance of the arrest order, see Para [39].

On 7 July 2023, the Durban High Court convened an urgent hearing. The Court concluded that the original order of 4 July 2023 obtained by the P for the arrest of the M.T. Alpine Mystery should be set aside, see Para [40]. The Court ordered the vessel be immediately released, and ordered the P to pay the 'costs occasioned by the application for reconsideration, including the costs consequent upon the employment of senior counsel' for the owners of the associated vessel, see Para [40].

The Action In Rem in Malaysia

Despite the dismissal of the P's associated ship arrest in the Durban High Court, on 31 July 2023, the P arrested the D's ship, the Alpine Mathilde at her PTP anchorage, Johor, see Para [41]. On 31 July 2023, the Vessel's statutory documents were taken by the Sheriff from the ship during the arrest, for safe keeping pending release, see Para [44].

On 2 August 2023, the D entered appearance in accordance with the Malaysian Rules of Court 2012. The D's entry was without prejudice to its right to challenge the admiralty jurisdiction and the validity of the writ, see Para [45].

Despite repeated attempts by the D to contact the P to release the ship in return for alternative security, subject to OFAC approval, lawyers for the P have not responded. Therefore the D's vessel remained under arrest.

In a nutshell, these were the following orders sought by the D before Ong Chee Kwan J, see Para [48]:

[1] The writ in rem and the warrant of arrest be set aside;

[2] The Vessel be released;

[3] Any alternative security paid to the P be returned;

[4] All the Vessel's statutory documents be returned by the Sheriff;

[5] The P damages for wrongful arrest of the ship;

[6] The D's cost to be paid by the P on an indemnity basis;

[7] Any other order which the Court deems fit, just and equitable in the circumstance of the case.

Facts not Challenged or Conceded by the P

First, the P has not challenged the D's expert evidence on US Sanction Laws. The P has also not tendered any contrary expert opinion, see Para [49].

Second, the P is not disputing that Unicious has been lawfully designated by OFAC and put on its SDN List. Thus the P is not chellenging that the Cargo is 'blocked property' and therefore subject to sanctions, see Para [50].

Third, although the P claims to be the lawful owner of the cargo, it has abandoned its reliance as holder of the original bills of lading. The P conceded that the original bills of lading were never endorsed by Idemitsu. Hence the original bills of lading remained 'to the order of Idemitsu', see Para [52].

P alternatively claimed that it had acquired property in the cargo by another method. P said that on 6 April 2023, the unsigned sales contract transferred property in the goods to it, see Para [53]. Hence, the P claimed that it was entitled to delivery and possession of the cargo of Naphtha. The P argued that the D cannot refuse delivery of the cargo even though Naphtha was subjected to sanctions, and the associated ship arrest action was dismissed in South Africa, see Para [54].

The Sales Contract Between Unicious and the P Dated 6 April 2023

Ong Chee Kwan J held that this sales contract was 'was nothing more than a sham', see Para [55]. His Lordship explained that this was an attempt by Unicious to circumvent US Sanctions Laws administered by OFAC. His Lordship agreed with the D that the sales contract was 'pretext for Unicious to recover the cargo or its value by using the P as a proxy', see Para [55]. It was indeed surprising that the P agreed to buy the Cargo even though it knew that it was the subject of US Sanctions as a blocked property, see Para [56].

Ong Chee Kwan J pointed out that there were may features of the sales contract that were suspicious and unconventional, see Para [57]:

[1] There were no signatures on the contract document;

[2] The cargo had to be delivered first, before payment was even due;

[3] The title in the cargo of Naphtha has been passed to the P, without any payment being made. This was unusual in commodity trades such as that involving Naphtha;

[4] There is nothing in the contract that deals with the event of the P not making payment to Unicious;

[5] There is no identified location in the contract for the cargo to be discharged;

[6] The contract is silent on the status of cargo that is sanctioned, ie the Sanctions prevent dealing with the cargo, so there was no way in which the title in the cargo could be transferred to the P;

[7] The contract does not include an obligation for Unicious to hand over to the P the endorsed bills of lading to facilitate taking delivery of the cargo.

Ong Chee Kwan J held that the principle of 'ex turpi causa non pritur actio' is applicable in this case. The transaction was 'not a legitimate transaction and is against public policy'. His Lordship added that the 'P is conspiring with Unicious to perpetrate deception on this Court', see Para [60]. In reality, Ong Chee Kwan J, see Para [61], held that this was a 'sham transaction', see Snook v London and Westports Riding Investments Ltd [1967] 2 QB 786 per Diplock LJ.

A claim that a transaction is a sham does not necessarily mean that there was fraud. Ong Chee Kwan J applied The Able Lieutenant [2002] 6 MLJ 433 and held that a P only has to prove a sham on a balance of probabilities, and not beyond a reasonable doubt. His Lordship agreed with the Able Lieutenant that sham transactions simply meant that the sale was not genuine, eg a sale of convenience, see Para [62]. Ong Chee Kwan J also agreed with Wong Kian Kheong J in Jemix Co Ltd v Jemix Heat Treatment (M) Sdn Bhd [2019] 2 MLRH 276 that the unholy case in the conclusion of a sale shows a lack of bona fide, see Para [63].

Has the P Suffered Any Loss?

In the High Court of Durban, Justice Bedderson held that there was no basis under the Sales Contract for the P to establish a claim for financial loss. The Durban High Court pointed out that the P currently owes no money to Unicious under the Sale Contract. Any failure to perform the contract due to the sanctions, would have been excused under the force majeure clause, see Para [66]. Further, the P also entered into the Sales Contract even though that P knew the cargo was subject to sanctions. This means that P was not obliged to pay Unicious until after delivery of the cargo was made, see Para [66].

The Durban High Court held that the P only became liable for the payment of the purchase price of the cargo of Naphtha, three days after completion of the discharge. Therefore, if the cargo was never delivered, the P would have no liability to pay the purchase price, and therefore suffers no loss, see Para [67].

Even if liability arises under the Sales Contract post-delivery, the Durban High Court held that there was no way to quantify damages, see Para [68]. The Durban High Court also point out that the quality and quantity has not been mutually agreed as per the rates stipulated under Clause 13 and 15 of the Sale Contract, see Para [68]. The P's attempts to set a contract price prior to delivery of the cargo does not have basis is illusory and smacks of mala fide, see Para [69].

Are the Ingredients for Admiralty Jurisdiction of the High Court Satisfied?

The Singapore Court of Appeal case of The Bunga Melati 5 [2012] 4 SLR 546 was quoted with approval by Ong Chee Kwan J. This case lays down the 5 classic steps for a P to come with the admiralty jurisdiction of a court.

Step [1] - The claim has to be within the statutory provisions of the UK Senior Courts Act 1981, Section 20(2);

Step [2] - The claim has to arise in connection with a 'ship';

Step [3] - Identify the person who can be liable for a claim in personam;

Step [4] - Determine who was the relevant person was, when the cause of action arose, ie who was the owner or charterer of the shipowner, or the person in possession of the shipowner;

Step [5] - When the action was brought, determine who was:

(a) the beneficial owner of the offending ship;

(b) the demise charterer of the ship;

The Bunga Melati 5 case is well known not only among shipping lawyers in Singapore, but also in other parts of the Commonwealth. Recently, it was cited with approval in Harms Bergug Transport v Harms Offshore AHT 'Uranus' [2015] 2 Lloyd's Rep.175 (QBD, Admiralty Court) in the UK, and also in Malaysia in Vitol Asia Pte Ltd v Owners of the Ship or Vessel Malik Al Ashtar [2017] 1 CLJ 236, see Para [72].

Applying the principles laid down in The Bunga Melati 5, it can be seen that the P has not establish that it has a claim in personam against the D. The Singapore High Court in The 'AA V' [1999] SGHC 274 stressed that admiralty jurisdiction cannot be invoked 'where there is clear evidence before the court that the D sued is not liable in personam because he is not a party to the contract sued on', see Para [74].

Ong Chee Kwan J held that there was no legitimate basis to demand the cargo. His Lordship continued that even a claim based on conversion was 'simply impossible and non-existent', see Para [75]. His Lordship concluded that the D was not the relevant person who would be liable to the P under an in personam claim under the UK Senior Courts Act 1981, Section 21. The P's writ in rem and warrant of arrest must therefore be set aside, see Para [77].

Was the P Liable for Wrongful Arrest?

In order for the D to claim damages from the P for wrongful arrest of the vessel, the D would have to establish that there was mala fide or crassa negligetia on the part of the P in effecting arrest of the vessel. This is trite law that has been established in cases such as The Evangelismos [1858] 12 Moo PC 352 by the Privy Council, and The Kommunar (No.3) [1997] 1 Lloyd's Rep.22, see Para [80] and [82]. The Privy Council case has been applied in Malaysia by Abdul Malik Ishak J in the High Court in The Dong Nai [199] 4 MLJ 454, see Para [81].

Whenever a party invokes the right to arrest a ship, there are consequences. It is a powerful remedy and can cause tremendous inconvenience, financial distress and severe commercial embarrassment, see Para [83]. In The Vasiliy Golovin [2008] 4 SLR (R) 994, the court explained that when improperly executed, 'maritime arrests can sometimes be as destructive as Anton Piller orders, and even as potentially ruinous as Mareva injunctions, the two nuclear weapons of civil litigation', see Para [83].

Ong Chee Kwan J pointed out the following evidence that would be relevant to a case of wrongful arrest against the P:

[1] The P entered into the unsigned sales contract well after Unicious was designated SDN and the cargo on board the ship became 'Blocked Property', see Para [84];

[2] The Durban High Court saw through the P's sham transaction with Unicious, yet the P proceed with the very same case against the D before the court in Malaysia. It was a blatant attempt to mislead the court in Malaysia, see Para [85];

[3] The P alleged that it was the holder of the original bills of lading, see Para [86]. However, the P intentionally provided an 'illegible copy of the Bill of Lading'. The P then admitted that the Bills of Lading are neither in the P's name, nor have they been endorsed to the P, see Para [87].

Principles Governing Wrongful Arrest

The Privy Council proposed the following test in the Evangelismos: Was the action and arrest so unwarrantably brought, or brought with so little colour, or so little foundation, so as to imply malice (mala fide) or gross negligence (gross negligence) on the P's part? Explaining this test, the Court of Appeal in The Vasiliy Golovin said that the test is ultimately premised on a finding of malice. His Lordship explained that it could be found from direct evidence of the P's state of mind at the time of arrest, or it can be inferred where the claim is so unmeritorious that the arresting party could not have honestly believed that he had an entitlement to arrest the ship, see Para [30]. This is ultimately a question of fact in each case for the court to decide, see Para [38]. If there is absence of reasonable or probable cause at the time of arrest, malice may be inferred, see Para [40].

Ong Chee Kwan J pointed out that the P persisted with the arrest of the ship. This continued even though the D offered to provide alternative security via an international surety, on a strictly without prejudice basis, see Para [91]. His Lordship held that this act of the P was unreasonable and was evidence of mala fide, as the ship could have been released immediately when security as provided, see Para [91]. The P's case was also not helped by the delaying providing the quantum of security and then demand an excessive amount of security for the release of the vessel. The end result was the vessel being detained at the Port of Tanjung Pelepas (PTP), Johor for 2 month, to the detriment of the D, see Para [91]. Ong Chee Kwan J also pointed out that in The Evmar [1989] 2 MLJ 460, a refusal to accept a Protection and Indemnity Club undertaking to release the vessel from arrest is tantamount to malicious negligence.

Conclusion

The P's writ in rem and warrant of arrest were set aside by Ong Chee Kwan J. The Vessel was also released from arrest immediately as the court did not have jurisdiction over the vessel. The sheriff was ordered to return the ship's original documents to the ship. Lastly, his Lordship held that the P had to pay damages for wrongful arrest as well as pay the D's costs.

Thank you for reading IMSML Website Article 20/2024

Stay tuned for the next IMSML Website Article 21/2024: Unicious Energy Pte Ltd v The Owners and/or Demise Charterers of The Ship ior Vessel ‘Alpine Mathilde’ [2023] MLJU 2819

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

Thursday, 7 March 2024

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