Star Tankers, Inc. v Citgo Petroleum Corporation (The “DS Promoter”) – SMA No. 4399, 7 Aug 2020
OWNER/CHARTERER – DEMURRAGE – U.S. SANCTIONS AGAINST VENEZUELA – PARTY RESPONSIBLE FOR OFAC LICENSE – OWNER AWARD
Owner submitted four undisputed invoices to the charterer, regarding a voyage from the U.S. to Venezuela. The Charterer refused to attempt payment of the invoices, contending that an OFAC License may be needed in order to allow the transfer of funds due to sanctions against Venezuela. Arbitrators were asked to determine if an OFAC License was needed, and if so, which party was responsible for acquiring the Licence.
[dropcap]S[/dropcap]tar Tankers, Inc., hereafter referred to as “Owner”, submitted invoices for freight, demurrage, Vapor Reducer Rental, ISPS Port Costs, and Jose Terminal Excess Port Costs, to Citgo Petroleum Corporation, hereafter referred to as “Charterer”, regarding the vessel “DS Promoter”. This was concerning the vessel’s voyage carrying petroleum products from Houston, to Jose Terminal, Venezuela.
The invoice for freight was paid without issue, but the four additional invoices were not. When payment for these invoices was not received, the owner pressed for arbitration proceedings to recover the payment due, including interest, arbitrator’s fees, and legal costs.
The Charterer did not dispute the validity of these invoices, and agreed that they were accurate, but contended that they were not able to remit payment due to the sanctions imposed by the United States of America, on Venezuela. The Charterer argued that an OFAC License, or letter, giving specific authorization for payment of these invoices may be needed, in order to comply with the law.
The Charterer argued not that it knew the transfer would be in violation of the law, but that based on their past attempts to transfer funds to other entities, this payment may be blocked by the United States Banking System, resulting in costs and liabilities due to the breach in U.S. law. The law that the Charterer cited, stated that credit could not be extended beyond 90 days, to some Venezuelan government entities. The charterer, being a subsidiary of Petroleos de Venezuela SA, or PdVSA, argued that they were therefore covered under this restriction. The charterer also contended that it was not commercially reasonable for them to make attempts at payment, given the potential that banks would stop any transaction with them going forward. The charter also argued that their actions were reasonable, given that the Charter Party gave them the leeway to act, in order to avoid not being in compliance with U.S. law. They pushed that given their past experience in dealing with this particular U.S. sanction, they were justified in acting in this manner.
The Charterer also argued that under the OFAC guidelines, the creditor was the party that needed to obtain any License, or letter, allowing for the transaction. They pointed to the Frequently Asked Questions section on the OFAC website, wherein, it is stated that:
In circumstances where PdVSA or another segment of the Government of Venezuela fails to pay a debt in full within 90 or 30 days, as applicable, U.S. persons must obtain a specific license from OFAC before accepting payment after the expiration of the applicable period.
The charterer did communicate that they would take commercially reasonable steps to help the owner acquire the licensing/permission from OFAC, but that the responsibility to obtain this was on the shoulders of the owner.
The owner conversely, argued that the responsibility to remit payment for the invoices rested with the Charter, and as such, they are the party to handle any licensing/permissions that were required. The owner did not deny that the U.S. Sanctions were in place for PdVSA and its affiliates, but did reject the contention that the Charter was without a doubt, one of those affiliates, and would undoubtedly have the funds transfer rejected. The owner also argued that the Charter was well aware of the stipulations of the U.S. Sanctions, and knew that had they paid the invoices within 90 days, the U.S. Sanctions in question would not have applied. Thus, the owner contended the charterer acted unreasonably.
Lastly, the owner rejected the idea that they were responsible for the licensing/permissions that were needed by OFAC, and contended that no evidence was presented that suggested the debtor was not authorized to make such requests.
The arbitration panel determined that they would not make a decision on whether an OFAC License was without a doubt needed in this case, or if so, which party was legally responsible. The panel did rule that the Charterer was the more knowledgeable party, regarding U.S. Sanctions, and that they should have been aware that if they did not pay the invoices within 90 days, they may run into the issue of needing an OFAC license. The panel did however acknowledge that it was not unreasonable for the Charterer to refuse to attempt to transfer funds to pay the invoices, without the OFAC license. The arbitrators did not find evidence that demonstrated which party was responsible for acquiring any needed OFAC license, but did rule that it was commercially unreasonable that the Charterer could avoid paying the invoices, given that they knew of the 90 day requirement. Also, the arbitrators decided that the Owner should not be given the sole responsibility for acquiring the OFAC license, given the situation could have been avoided, had the payment been made within the 90 day time span.
The panel ruled that the Charterer breached its contractual duty to pay the invoices in question, and that the Charterer must pay the principal amount in full. Also, the arbitrators ordered the Charterer to pay interest at the prime rate, starting 30 days after the invoice date of each invoice, up until the date of the award, and ruled the Charterer would cover the arbitrator’s fees. Lastly, the panel decided that the Owner would need to get the OFAC license, given that the Charterer refused to do so, but that the Owner would be awarded $5,000.00 for its time, trouble, fees, and expenses, in acquiring the license. The Charterer would thereby be required to corroborate with any commercially reasonable requests by the Owner, so that they could obtain said license from OFAC, and be compelled to remit payment as soon as the license was provided.