TINA I: Should parties be permitted to use sanctions clauses to impose conditions that affect right to security created by way of payment into court.
Introduction
In this case, a dispute arose when the Claimant (an Iranian registered company) who was the registered owner of the “Shahraz” collided with the “Tina I” on 22 November 2020. Both parties accepted that the Claimant and the ‘Shahraz” are on the Specially Designated Nationals and Blocked Persons list administered by the US Office of Foreign Assets Control (“OFAC”). In the present case, the sanctions concern is of a ‘secondary’ type which deters non-US persons from dealing with sanctioned entities globally. Crucially, there were no applicable sanctions against the Claimant and the “Shahraz” in Singapore. The Claimant commenced an action (“the Action”) for the collision but the parties later entered into an agreement on the collision whereby the Defendant agreed to bear 100% liability (the “Agreement”) and quantum was not yet assessed. After the Agreement was filed at the Supreme Court Registry, the parties negotiated a voluntary provision of security for the Action. The quantum of the security was agreed at S$653,476.16 and was to be furnished by way of payment into court. However, the parties have not agreed on the inclusion of the sanctions clause (“Sanctions Clause”) into the Agreement.
The proposed Sanctions Clause prescribes that the payment out of court to the Claimant pursuant to any judgment or order of court can be legitimately refused by the Defendant in two prescribed scenarios: 1) if the payment would in the “Defendant’s reasonable opinion” be prohibited or expose the Defendant or its insurers to the risk of breach or penalties under, among other things, the sanctions laws of the US; and 2) if any bank in the payment chain is unable to process or receive payment. In either scenario, the Defendant shall nevertheless use reasonable endeavours to obtain the necessary permissions or approvals to effect payment to the Claimant. Thus, the issue before the court was whether payment out from court should be subject to the Sanctions Clause.
The Law
The court restated that it has the jurisdiction in an in rem admiralty action to determine the form of a pre-judgment security, the quantum of security, and the terms on which security is to be provided to avoid the arrest of a Defendant’s vessel. This is derived from the court’s inherent jurisdiction to prevent the use of court procedure in an oppressive way and the need for the proposed security to be an adequate substitute for the arrest of a ship.
The court’s decision and reasoning
The court denied the inclusion of the Sanctions Clause into the Agreement for three reasons: 1) Sanctions Clause not supported by evidence; 2) Sanctions Clause inconsistent with the payment into court mechanism; and 3) Sanctions Clause would give Claimant inadequate security.
Reason 1: Sanctions Clause not supported by evidence
The court stressed the need to prove foreign law as a question of fact. As the Defendant sought to submit as evidence the advice on US law regarding the applicable sanctions regime, the Defendant ought to have followed the formalities regarding admitting the US law advice into evidence. In this case, the Defendant exhibited the US law advice it has received from an external lawyer through its own representative’s affidavit. This was not in compliance of the Rules of Court 2021 where a signed expert’s report must be exhibited in an affidavit made by the expert himself [1]. Additionally, the expert report did not contain the expert’s qualifications and a statement of the expert’s overriding duty to the court, both in contravention of the ROC.
Additionally, the US law advice exhibited in the affidavit did not touch on the risk of sanctions if monies are paid into court, instead touching only on the sanction risks of transferring the security through a lawyer’s undertaking. With the procedural and substantive aspects of the US law advice lacking, the Defendant’s reliance on the US law advice precluded the inclusion of the Sanctions Clause into the Agreement.
Reason 2: Sanctions Clause inconsistent with the payment into court mechanism
Under the payment into court mechanism, monies cannot be paid out to parties otherwise than under an order of a Judge sitting in the General Division of the High Court or a Registrar in certain limited situations. This is because the title to the monies paid by a Defendant ceases to be the Defendant’s and they become subject to the outcome of an action and any order that the Judge or the Registrar may make. Therefore, a defendant is not at liberty to take out the security as and when it wishes.
The subjective phrasing of the Sanctions Clause confers a discretion to the Defendant to deny payment of the security to the Claimant based on the Defendant’s own subjective risk assessment. While the Sanctions Clause states that the Defendant is still obliged to use reasonable endeavours to effect payment to the Claimant, this discretion could be abused to escape a bad bargain. However, Assistant Registrar Navin obiter said that he could not foreclose the possibility of future circumstances that may affect payment out. Therefore, until the courts in Singapore revisit this issue, a sanctions clause worded similarly to the one in “Tina I” is incompatible with the payment into court mechanism espoused in the ROC.
Reason 3: Sanctions Clause would give Claimant inadequate security
The Claimant could receive inadequate security by adopting the Sanctions Clause in the Agreement instead of arresting the “Tina I.” In a ship arrest, the Claimant could apply for a judicial sale of the vessel to satisfy its claim. However, through adopting the Sanctions Clause, the Claimant would have issues in enforcing the security as it is dependent on the Defendant’s discretion to block the payment out of court to the Claimant. Thus, the Claimant is in a worse position if it adopts the Sanctions Clause instead of arresting the “Tina I.”
The Defendant’s case
The Defendant cited M/V Pacific Pearl Co Ltd v Osios David Shipping Inc [2022] 2 Lloyd’s Rep 448 (“Pacific Pearl”) as an instance where the court accepted security that included a similarly worded sanctions clause. In Pacific Pearl, the key issue was whether a letter of undertaking (“LOU”) with a sanctions clause constituted satisfactory security. The English High Court answered in the affirmative and this was upheld on appeal.
However, Pacific Pearl and “Tina I” can be distinguished. First, Pacific Pearl concerned an LOU while “Tina I” was concerned with payment into court. Assistant Registrar Navin stressed in “Tina I” that an LOU can have bespoke clauses to allocate risk while doing so to a payment into court mechanism is fundamentally flawed by design. Second, a clause relied on by the parties in Pacific Pearl provided that parties agree to forego better security attainable through ship arrest whereas this was not the case in “Tina I.”
Analysis of the “Tina I” case
As can be seen from the “Tina I” case, the parties tried to allocate risks of sanctions contractually. However, this failed due to, primarily, the drafting of the Sanctions Clause which would undermine the payment into court mechanism. It is now clear that an attempt to restrict the court’s ability to effect payment through the payment into court mechanism is not welcome. As an alternative, parties in a collision could consider using an LOU or a bank guarantee (“BG”) from reputable providers to settle and include a sanctions clause. If parties are not in agreement on the scope and wording of the sanctions clause, the court has jurisdiction to review the LOU or BG terms, as can be seen in the seminal case of Kuvera v JPMorgan [2023] SGCA 28.
In Kuvera, a confirming bank was precluded from denying payment to the beneficiary of a letter of credit (“LC”) on the ground that the LC included a sanctions clause. JPMorgan as the confirming bank had an internal list of vessels and entities that had been determined by JPMorgan itself to have a sanctions nexus and/or concern. JPMorgan as the party relying on the sanctions clause had the burden of proof in proving that the vessel in question was a sanctioned vessel objectively. This burden was not discharged as it relied on JPMorgan’s own internal risk assessments, similar to the subjective determination of risk on the Sanctions Clause in the present case.
As can be seen in Kuvera and Pacific Pearl it is important that a sanctions clause is drafted reasonably to address sanctions concerns but not to the extent that it casts into doubt the standing of the LOU as a suitable alternative security in lieu of arrest. The Court of Appeal in Kuvera took a strict and narrow approach to the interpretation of the sanctions clause and stressed the need for the party relying on a sanctions clause to use objective criteria in invoking the sanctions clause and not to rely on a party’s own assessment of sanctions risks. Therefore, it is advisable for parties in a collision to draft a narrowly worded sanctions clause in an LOU or BG that has clear and objective conditions to invoke it. Additionally, it would be wise for a party seeking to rely on a sanctions clause to use evidence from publicly available sources so that it is easier to demonstrate to a counterparty that an objective assessment was done without using its own subjective assessment.
 | John SzeManaging Partner JTJB Singapore Office |
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[1] Order 12 Rule 5(1), Rules of Court 2021.
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