IMSML Website Article 21/2024: Unicious Energy Pte Ltd v The Owners and/or Demise Charterers of The Ship or Vessel ‘Alpine Mathilde’ [2023] MLJU 2819, The Continuing Saga of US Sanctions

This case was heard at the High Court of Kuala Lumpur before Ong Chee Kwan J. If the name of the parties sound familiar, it is because this is Round Two of litigation surrounding the cargo of Naphtha subjected to US Sanctions. In the first round, the P was held to have entered into a ‘sham transaction’ with Unicious to try and avoid US sanctions. The P also tried arresting an associated ship of the Alpine Mathilde, the Alpine Mystery, in South Africa. The case was thrown out by the Durban High Court.

The P tried the same thing in Malaysia by arresting the Alpine Mathilde. Ong Chee Kwan J dismissed the P’s case, and his Lordship’s grounds were very much a reflection of the reasons provided by the Durban High Court, ie the P’s case was based on a ‘sham transaction’. The P was also found to have wrongfully arrested the Alpine Mathilde, and even made matters worse by refusing D’s please to release the ship even though alternative security was provided.

Note, if you are interested in reading about the first round of litigation, please go to:

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.

Having received a bloody nose in the first round of litigation, Unicious is back for more, this time, taking advantage of the charterparty. I was honestly surprised to see this case in the LexisNexis database. The evidence establishing shenanigans of the P (a partner of Unicious in the sham sale transaction) in the first round of litigation was rather overwhelming. This time the Unicious was the P and put forward the following case:

[1] The D has breached the terms of the Voyage Charter Party with the P, by refusing to deliver the cargo to the P as instructed;

[2] The P had lawfully arrested the ship as security for an arbitration in London. The D had issued the notice of arbitration to the D pursuant to an arbitration clause under the Voyage Charter Party, prior to filing the writ in rem;

[3] Even though the cargo of Naphtha was ‘Blocked Property’, the D is not prohibited from dealing with the Cargo because the D technically was not a ‘US person’;

[4] In the meantime, the D had obtained a licence from OFAC (ie the body responsible for enforcement of US Sanctions Law) to sell the cargo. The issue is whether sale to a third party would be allowed under this OFAC licence.

Could the D deliver the Blocked Cargo (ie Under Sanctions) to the P under the Terms of the Voyage Charter?

Arguments of the P and D Counsels

Ong Chee Kwan J noted that Dr Arun Kasi (ie legal counsel for the P), based his entire case on the submission that the D is not a ‘US Persons’, see Para [64]. Dr Arun submitted that this meant the D was not prohibited from dealing with the Cargo of Naphtha, and was thus obliged to deliver the cargo to the P under the terms of the voyage charter. The P claimed that it holds the Bills of Lading and is entitled to possession of the Cargo, see Para [64].

In reply, Mr Mathew Kurian argued that whether the D is a ‘non US Person’ is a non-issue.  As the cargo has been designated under US Sanctions Law and was now technically ‘Blocked Property’, the P simply had no cause of cation, see Para [65]. Mr Mathew Kurian also pointed out that the P was wrong to invoke Admiralty Jurisdiction under the Court of Judicature Act 1964 (CJA 1964), Section 24(b). He added that the court only had jurisdiction to arrest a vessel as security for arbitration proceedings under the Arbitration Act 2005 (AA 2005), Section 11(1)(c), see Para [66]. This means that the arrest for arbitration is not as a matter of right, but rather, it is subject to the Court’s discretion. Mr Mathew Kurian pleaded to the Court to exercise its discretion and not to allow the arrest of the Vessel, see Para [67].

The Status of Foreign Law in Malaysia

Foreign Law is a fact, but ‘facts of a peculiar kind … where appropriate, the court was entitled to exercise its own jurisdiction’, see Mamancochet Mining Ltd v Aegis Managing Agency Ltd [2019] Lloyd’s Rep.655 at p 656. This statement of the law was expanded on by the Court of Appeal in MCC Proceeds Inc v Bishopsgate Investment Trust plc and Others [1999] CLC 417, at para [9] to [21]. Evans LJ pointed out that for legislation expressed in English, such as the US, this is a jurisprudence which is known to English judges. An English Court interprets the foreign statute in accordance with English rules.

This approach made matters easier for Ong Chee Kwan J as Malaysian Law borrows heavily from English Commercial Law, see Malaysia's Civil Law Act 1956, Section 5. His Lordship looked at Able Food Sdn Bhd v Open Country Dairy Ltd [2021] 9 MLJ 723 at Para [66] where the High Court held that Malaysian Courts are entitled to interpret statutes of other jurisdictions without the need for experts. The principle in Able Food is reinforced by the view expressed in Atico Overseas Ltd v Procast Funiture Industry Sdn Bhd [2014] 1 MLJ 15, at p 21-22 by the High Court that 'foreign law can be adduced directly by adducing the foreign law ie the Act or Ordinance as raw evidence'.

On the facts of the dispute before Ong Chee Kwan J, foreign law on who falls under the definition of 'US Persons' under US Sanctions Law and Regulations, can be determined by considering the US Code of Federal Regulations (CFR). This can be adduced as raw evidence via affidavits in the litigation, see Para [73].

Does the D Fall Within the Definition of 'US Persons' Under US Sanctions Law?

The definition of 'US Persons' is provided for in the 31 US Code of Federal Regulations, Section 560.314 as follows, see Para [74]:

'[A]ny United States citizen, permanent resident alien, entity organised under the laws of the United States or any jurisdiction with the United States (including foreign branches), or any other person in the United States'.

The P has been designated on the SDN List, see Executive Order 13846, see Para [75]. Pursuant to Iranian Transactions and Sanctions Regulations (ITSR) that apply to parties on the SDN List, Section 215 stipulates that a person / entity that is owned or controlled by a United States person ... is prohibited from knowingly engaging in any transaction, directly or indirectly ... that would be prohibited pursuant to [ITSR] if engaged in by a Unites States person ...', see Para [76].

On the facts of the case before Ong Chee Kwan J, the D is 'owned or controlled' by a 'US Persons', and therefore would be prohibited from dealing with the cargo, see Para [77]. The cargo is blocked property and the D is prohibited from dealing with the P, see Para [78].

In particular, Ong Chee Kwan J held that the D is 'owned or controlled' by a 'US Persons', see Para [80]. Under Section 560.215(b)(1), a person is deemed to be a 'US Persons' if the person, see Para [81]:

[1] Holds 50 percent or greater equity interest by vote or value in the entity;

[2] Holds a majority of seats on the board of directors of the entity;

[3] controls the actions, policies, or personnel decisions of the entity.

The D (Heroic Serena Inc), the Vessel's registered owner, is a Liberian company. The ultimate beneficial owner of the vessel is International Seaways, a Marshall Islands holdings company that was publicly traded on the New York Stock Exchange (trading as INSW). This company had offices at International Seaways Ship Management LLC, at 600 3rd Avenue, 39th Floor, New York, NY10016.

To complicate matters, International Seaways hold the D via four other wholly owned subsidiaries, all of which are registered in the Marshall Islands. For example:

[1] DSS Vessel II, LLC;

[2] Diamond S Shipping III, LLC;

[3] Diamond S Shipping Inc;

[4] International Seaway Operating Corporation.

International Seaways, therefore is the 100 percent the owner of the D. This has been acknowledged in the following documents:

[1] Notice of arbitration dated 2 October 2023, issued by the P's arresting counsel;

[2] Affidavit for arrest in the South African Court, filed by Wesley Jude Rajbansi on 4 July 2023;

[3] The Voyage Charter.

Based on the ownership structure above, Dr Arun Kasi (P's lawyer), argued that as an entity registered in the Marshall Islands, was technically not 'US Persons'. The reference to corporate entities, in the ITSR, Section 560.314, only referred to entities incorporated in the US only, due to the phrase 'entity organised under the laws of the US'. Therefore, the phrase 'person in the US' is a reference to only individuals, not corporate entities. This interpretation was based on Ofisr v BNP Paribas, S.A., 77 F.4th 667 (2023), which found that as BNP Paribas was headquartered in France, the Executive order did not encompass that entity, see Para [88] to [92].

This submission of Dr Arun Kasi was rejected by Ong Chee Kwan J on the basis that the word 'person' can refer to both individuals and entities. In particular, under the ITSR, Section 560.305, the term person means either an individual or an entity. His Lordship added that the term entity means a partnership, association, trust, joint venture, corporation, group, sub-group or other organsition. Therefore, Ong Chee Kwan J held that any entity that has a physical presence 'in the United States' is a 'person in the United States', and thus a 'US Persons' under the ITSR, see Para [93] and [94].

Previously, on 20 January 2020, a company in the same position as the D's parent company, Eagle Shipping International (USA) LLC, settled its fines for violations involving dealing with a party on the SDN List. This was an example cited by Mr Mathew Kurien, counsel for the D. Ong Chee Kwan J agreed with learned counsel for the D as International Seaways, like Eagle Shipping, both had their had their headquarters in the US, see Para [95] and [96].

Ong Chee Kwan J also distinguished the Ofisr v BNP Paribas case cited by Dr Arun Kasi, counsel for the P. His Lordship pointed out that the Ofisr case discussed a very specific criminal statute, the Alien Tort Statute. It is not the same as the US Sanction Law that are relevant to the litigation before Ong Chee Kwan J. Therefore, the US Supreme Court decision in Jesner v Arab Bank, PLC, 138 S. Ct. 1386, 1407 (2018) that the Alien Tort Statute 'does not extend to foreign corporate defendants', was not relevant to this litigation which has the ITSR at its main subject-matter, see Para [99] to [101].

There are also several additional facts which establish the D is a 'US Person'. Ong Chee Kwan J held that the D was also 'controlled' by 'US Persons', and thus fall under ITSR, Section 560.215(b)(1). His Lordship points out that the D is a special purpose vehicle that is 'the registered owning entity of one asset, the Vessel, and that the D relies entirely on International Seaways and its personnel for its operations, see Para [102] to [104]. His Lordship added that 'all but one the 11 directors on International Seaways' board are US Persons because they are US citizens', see Para [105]. His Lordship therefore concluded that the D is not only 'owned by International Seaways, a 'US Persons', but is also directly controlled and operated by officers and directors who are US Persons', see Para [107].

Consequences of the D Being Defined as 'US Persons'

The charter between the P and D contains a 'BIMCO Sanctions Clause for Voyage Charter Parties 2020', and a 'Compliance with Laws and Sanctions Clause'. Therefore, the parties have contractually agreed to the application of US Sanctions Laws and Regulation, in addition to the other charter terms and conditions that are subject to English Law. Ong Chee Kwan J approved two authorities that supported this proposition, ie Mamancochet Mining Ltd v Aegis Managing Agency Ltd [2018] 10 Lloyd's Rep.655 and Lamsea Invetsments Ltd v Cynergy Bank Ltd [2020] EWCA Civ.821 in support of this arrangement, see Para [119].

As the P was designated on the SDN List by OFAC six hours after the Vessel left its load port at Singapore, the cargo of Naphtha became blocked property under US Sanctions Law, see Para [120] to [121]. This means that the P was in breach of the charter party warranty in the Sanctions Clause and was prevented from conducting transaction. If the D were to transact with the P, the D would be subject to criminal penalties under US Sanctions Law, see Para [122] to [124]. There were procedures under the US Sanctions Law to recover the Blocked Cargo. Instead, the demanded that the D return the blocked cargo of Naphtha to the P, in direct violation of US Sanctions Law, see Para [125] to [126].

In the light of the facts above, Ong Chee Kwan J held that the P's writ in rem was nothing more than an afterthought and the arrest of the vessel was a clear abuse of the court process, see Para [136]. His Lordship concluded that the D had not breached the Voyage Charter Party. By contrast, his Lordship held that the P has not only breached the Voyage Charter Party, but also sought to inflict further undue harm and damages on the D. Therefore the P has to indemnify the D under the terms of the Voyage Charter Party to indemnify, defend and hold harmless the D, see Para [137].

The P had conspired with Desert Oasis in a sham transaction to sell the cargo and bypass US Sanctions Law. The P had stated that the Bills of Lading had been passed to Desert Oasis, when in fact such documents were still in possession of the P, see Para [138]. The D has no obligation to deliver the cargo of Naphtha to the P as it was Blocked Cargo, see Para [139].

Does the Court have the Jurisdiction to Arrest the Vessel as Security for the London Arbitration?

The Affidavit for the Warrant of Arrest show that the P sought to arrest the D's vessel via an 'interim measure order' to preserve assets that could be used to satisfy an arbitration award pursuant to the admiralty jurisdiction of the High Court under the Arbitration Act 2005, Section 11(1)(c), see Para [145]. In the light of this fact, Mr Mathew Kurien, counsel for the D submitted that the writ in rem could not have been filed pursuant to the Arbitration Act 2005, but was instead an arrest made under the Court of Judicature Act 1964, Section 24(b) (read together the UK Senior Courts Act 1981, Sections 20 and 21). Mr Mathew Kurien argued that any interim measure order for the purposes of of arbitration proceedings must be made by way of an Originating Summons (OS), see Arbitration Act 2005, Section 50 and Rules of Court 2012, Order 69. An OS was not used by the P in this case, see Para [145] and [146].

If the P's action was brought under the Court of Judicature Act 1964, there was no power under this statute to arrest a vessel in an in rem action as security for the satisfaction of an award that may be obtained by  way of arbitration, see Para [150]. The High Court only has the power to arrest a vessel as security for arbitration under the Arbitration Act 2005, Section 11(1)(c) (as amended at 8 May 2018). Outside this provision in the Arbitration Act 2005, it is trite law a court does not have the jurisdiction to arrest a ship as security for arbitration, see The Cap Bon [1967] 1 Lloyd's Rep.543 per Brandon J at p 546 to 547; Asia Pacific Parcel Tanker Pte Ltd v The Owners of the SHip or Vessel Normar Splendour [1999] 7 CLJ 213.

Mr Mathew Kurien also pointed out that the P did not fall within the Common Law principle in The Rena K [1978] 1 Lloyd's Rep.545. This case authorised the exceptional arrest of a ship as security for arbitration where it could be shown that the shipowner was financially in a position of not being able to meet any award. The court therefore has the discretion to order the arrest of the vessel in these exceptional circumstances. But when an examination is made of the P's case, at no point in time did the P state in its Affidavit leading to the Warrant of Arrest that the D was facing circumstances of financial incapacity, see Para [156].

Mr Mathew Kurien argued that this means that the P does not have the right to arrest the ship as of right under the Court of Judicature Act 1964. Ong Chee Kwan J agreed with the learned counsel and rejected the submissions of counsel for the P, Dr Arun Kasi, see Para [160] to [161]. In doing so, his Lordship in essence adopted the submissions put forward by Mr Mathew Kurien, see Para [162] to [179]. Ong Chee Kwan J held that in Malaysia, the High Court only has the power to arrest a ship as security for arbitration is found in the Arbitration Act 2005, via the Arbitration (Amendment)(No.2) Act 2018 (Act A1569), in force as at 8 May 2018, see Para [180] and [181]. The final nail in the coffin for the P's case came when its counsel, Dr Arun Kasi, 'repeatedly maintained that the P did not make an application under the Arbitration Act 2005, Section 11(1)(c), see Para [187]. There was no arrest as of right via a writ in rem to obtain security for arbitration under the Court of Judicature Act 1964. This was, after all, trite law, but the learned counsel for the P kept insisting on this point, see Para [187] to [188]. Ong Chee Kwan J stressed that the Arbitration Act 2005, does not create a new category of maritime claims under the Court of Judicature Act 1964, see Para [189].

Conclusion

Ong Chee Kwan J concluded that the P did not have a basis to demand that the D deliver the cargo of Naphtha under the terms of the charter party to the P. The Naphtha was blocked cargo and subject to US Sanctions Law, see Para [194]. In addition to facing two wrongful arrests by the P in two different jurisdictions, the D would probably be facing secondary action from OFAC if it dealt with the cargo by discharging it and making delivery to the P, see Para [194]. The P had insisted that the sale of the cargo to Desert Oasis was valid. This means that the title in the goods have passed, and the bills of lading handed over to Desert Oasis. If this is the case, then the P has no legal basis to order the D to hand over the cargo of Naphtha to the P. Hence, this is why the D had expressly sought for a licence from OFAC to deal with the cargo. If this licence was not sought, the D would have been in breach of US Sanctions Law, see [194] to [195].

The proceeds of the sale of Naphtha will not be pocketed by the D. Instead, the proceeds, once received, will be placed in a US bank account in the name of the P. If the P successfully petitioned to be removed from the SDN List, the proceeds will still be there for the P, see Para [230]. The D no intention profit from any dealings with the Blocked Cargo. Instead, the D has suffered at the hands of the P. In particular, due to the prolonged arrest of the ship, there is a risk of degradation of the Vessel's cargo tank, see Para [234]

Note, there is a further hearing to be fixed on the issue of wrongful arrest of the shipowner by the P, see Para [238] to [239]. 

Thank you for reading IMSML Website Article 21/2024

Stay tuned for the next IMSML Website Article 22/2024: LIST OF RECOGNISED INSURANCE SERVICE PROVIDERS OR FINANCIAL SECURITY SERVICE PROVIDERS BY MALAYSIA MARINE DEPARTMENT FOR ISSUANCE OF CERTIFICATE FOR INTERNATIONAL CONVENTION CLC 1992, BCC 2001, AND WRC 2007 

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,  12 March 2024

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