Oil & Gas: Risk of criminal offence for sale of hydrocarbons in breach of injunction

In Integral Petroleum SA v Petrogat FZE and San Trade GMBH and (1) Mr Klaus Sonnenberg, (2) Ms Mahdieh Sanchouli, (3) Mr Hosseinali Sanchouli and (4) Mr Kanybek Beisenov [2020] EWHC 558 (Comm), the Commercial Court committed two de facto directors for contempt, for breaching an injunction which ordered them to refrain from diverting oil to Iran that was alleged to have been sold to another party. The decision of the Commercial Court is a useful reminder to the oil and gas industry that in certain circumstances the English courts have the power to (i) grant injunctions to prevent the disposal of hydrocarbons in dispute and (ii) commit de facto directors to prison for contempt of court in breaching such injunctions.

Facts

The dispute arose out of a contract for the sale of oil, between Integral Petroleum SA (‘Integral’), as buyer, and Petrogat FZE (‘Petrogat’), as seller, entered into on 16 September 2017 (the ‘Contract’). San Trade GMBH (‘San Trade’) guaranteed Petrogat’s obligations under the Contract. Under the terms of the Contract, Integral was to make partial prepayments of US$1.5m for Medium Sulphur Fuel Oil (‘MSFO’) and US$3m for Low Sulphur Fuel Oil (‘LSFO’). Title to the oil was to pass to Integral once the railway tank cars (‘RTCs’) containing the oil passed the permanent flange at the RTC loading place.

As a result of loading issues in respect of the LSFO cargo, it was agreed that Integral would pay US$1m to the refinery from which the oil was sourced (the ‘Refinery’), until the Refinery delivered MSFO up to that value to Integral. At this point, another US$1m would be paid for MSFO, and this process was repeated until the full MSFO had been delivered to Integral.

There was a dispute between the parties as to whether, in assessing what amount of the prepayment had been utilised, regard was to be had to the price under Petrogat’s contract with the Refinery (as Integral contended (i.e. $1m)) or the price under the Contract (as Petrogat and San Trade (together, the ‘Defendants’) contended (i.e. $1.5m)). That dispute was determined in Integral’s favour by the award of an LCIA arbitration tribunal.

Against this background, by 31 December 2017, the parties were in a dispute as to whether the prepayments were sufficient to cover all of the 138 RTCs which had been loaded by that point. Amid this disagreement, Integral learnt a substantial part of its cargo was being diverted to Iran. Integral wrote to the Defendants urging them to confirm that the cargo would be shipped to Integral and that under no circumstance would it be shipped to Iran. Integral received no response.

Integral applied ex partes ‘on notice’ for injunctive relief, which was granted by Morgan J on 13 January 2018 (the ‘Morgan Injunction’). The Morgan Injunction stated that the Defendants were to “take no steps whatsoever to direct delivery of the cargo to Iran” and further that the Defendants must sign a letter acknowledging that the cargo must not be sent to Iran under any circumstances. The Morgan Injunction, containing the appropriate form of penal notice, was served on the Defendants, Ms and Mr Sanchouli and Mr Sonnenberg and included a letter enclosed at Schedule C for signing. Ms Sanchouli and Mr Sanchouli were de facto directors of the Defendants. Mr Sonnenberg was at all relevant times, the sole director of San Trade. The Schedule C letter was not signed by the deadline prescribed.

In the absence of compliance, on 18 January 2018, Integral served a copy of the injunction on two further individuals, Ms Lobis and Mr Beisenov (the sole director and owner of Petrogat) who were asked to sign the Schedule C letter. Integral received no response. On 24 January 2018, the Defendants served evidence in support of an application to discharge the injunction on various grounds, to which Integral served reply evidence on the day of the hearing.

The second hearing was before His Honour Judge Waksman QC, who adjourned the hearing as a result of the late evidence served by the parties. However, during the hearing counsel for the Defendants informed the Commercial Court that the cargo in question was “almost certainly going to Iran in any event…over the weekend” and as such, the Schedule C letter enclosed with the injunction “would not make any difference”. His Honour Judge Waksman QC continued the injunction pending an adjourned return date (the ‘Waksman Injunction’). However, the Waksman Injunction amended the terms of the letter enclosed at Schedule C to provide that “[t]he cargo must not be sent to Iran in any circumstances and should be preserved in its present location pending a further order from the Court or Arbitral Tribunal in the competent jurisdiction (England and Wales)”. The Schedule C letter enclosed to the Waksman Injunction was again not signed by the Defendants in the prescribed time. It was not signed until 29 January 2018, by which point 37 RTCs had already crossed the border into Iran.

A further hearing was held during which the Defendants served a substantial amount of evidence. At the hearing, Popplewell J found there was a good arguable case that the Defendants were in breach of the injunction in multiple respects, but given the reality that most, if not all, of the cargo was now in Iran, saw no sense in continuing the injunction further.

The contempt application

An application was made to commit Ms and Mr Sanchouli, Mr Sonnenberg and Mr Beisenov (the ‘Third Parties’) for contempt of court. The committal application against the Third Parties was advanced on the basis that they were either de jure or de facto directors of one or other of the Defendants.

Subsequent to the evidence having been completed during the hearing, counsel for Integral confirmed that the contempt applications would not be pursued against Mr Beisenov and Mr Sonnenberg.

Decision

In reaching its decision the Commercial Court considered in depth the principles applicable when committing a director for a breach of a court order made against a company. The driving principle holds that the director must know of the court order and be responsible for its breach. On this basis, both Ms Sanchouli and Mr Sanchouli were found to have breached the Morgan Injunction and the Waksman Injunction.

Ms Sanchouli was found to have:

- breached the terms of the Morgan Injunction by failing to sign the Schedule C letter by the prescribed time. Whilst Ms Sanchouli contended that she did not have enough time to sign the Schedule C letter, the Commercial Court disagreed finding that she had taken a “deliberate and conscious decision” not to sign;

- breached the terms of the Morgan Injunction by taking steps to direct the cargo via Iran. The Commercial Court found that Ms Sanchouli had made directions resulting in the diversion of 38 RTCs, after the Morgan Injunction had been issued; and

- breached the terms of the Waksman Injunction, for the failure to sign the Schedule C letter in the prescribed time. The Commercial Court rejected Ms Sanchouli’s argument that she was unable to sign the letter due to her being in Iran for her sister’s wedding, noting that the failure to sign the Schedule C letter until 29 January 2018 was strategic in order to delay the signing until it was too late to stop the cargo being diverted to Iran.

Mr Sanchouli was found to have:

- breached the terms of the Morgan Injunction by taking steps in relation to directing the cargo to Iran. This was by virtue of the fact that he was instrumental in key-decision making and strategy decisions with his daughter, Ms Sanchouli, and therefore played an integral role in taking steps to direct the cargo to Iran; and

- breached the terms of the Waksman Injunction as he also failed to sign the Schedule C letter, which the Commercial Court held he appeared to have knowledge of, restating again that the decision not to sign the letter until 29 January 2018 was to play for time whilst more RTCs passed the point of no return.

The Commercial Court was therefore satisfied that both Ms and Mr Sanchouli were in contempt of court on more than one ground each, and therefore committal was appropriate.

Comment

As demonstrated in VTB Commodities Trading DAC v JSC Antipinsky Refinery [2020] EWHC 72 (Comm) (for our analysis on hydrocarbon sales – risk of loss of pre-payment and without delivery of goods, please read our article here) the Commercial Court is often not willing to order specific performance of hydrocarbons sales which have been pre-paid by the buyer. As a result, the buyer is often left ranking equal with all other unsecured creditors in asserting a debt claim for return of sums paid and/or any damages awarded by an arbitral tribunal.

However, there remain circumstances in which the English courts will intervene. That intervention is not restricted to assets or commodities situated in the United Kingdom. The English courts have powers to support arbitral awards or process wherever the underlying assets in dispute are situated. In circumstances were the English courts do grant orders or injunctive relief, particularly when backed with a penal order, directors and de facto directors should be aware of their duty to comply. A failure might amount to a criminal office, which may result in committal for sentencing (even to prison).

With the sharp drop in oil prices and the impact of COVID-19 resulting in extremely challenging times for the oil and gas industry, the decision in this case acts as an important reminder of the Commercial Court’s powers to grant injunctions to prevent the disposal of hydrocarbons in dispute and commit de facto directors to prison for breach of a court order, even if they believe themselves to be on the correct side of a commercial dispute.

Judge: Mr Justice Foxton