PetroSaudi Oil Services (Venezuela) Ltd v Clyde & Company LLP

Hearing date: 5 February 2021

Written submissions: 16 and 22 February 2021

Introduction

This case is about some US$325m (“the Funds”) held on trust by the Defendant firm (“Clyde”) for the Claimant (“POS”) in a dollar bank account in London. The Funds came under the control of Clyde as escrow agent in the course of an international arbitration between POS (a Bajan company) and PDVSA Servicios SA (“PDVSA”) (a Venezuelan company). Clyde acted for POS as solicitors in the arbitration. They agreed to hold specified amounts as escrow agents (subject to information barriers separating those acting for POS and those acting as escrow agents) under the terms of a tri-partite agreement subject to the orders of the arbitral tribunal (“the escrow agreement”). The tribunal made a final award in favour of POS on 17 July 2020 for an amount greater than the monies then held in escrow and ordered Clyde to pay the net amounts after payment of escrow fees (i.e. the Funds) to POS.

PDVSA then brought a claim in the English Court seeking to stop Clyde paying the Funds to POS pending a challenge to the final award in the French Courts. PDVSA obtained an interim injunction from Zacaroli J after an ex parte hearing, but Sir Alastair Norris discharged it after a full hearing. It is common ground between the parties to this application that the Funds are therefore payable to POS. Clyde wish if possible to pay POS and bring the escrow account arrangements to an end.

That is not however the end of the story. There have been two sets of proceedings abroad in which it has been alleged that the Funds represent the proceeds of the well-known “1MDB” fraud. 1MDB was a wealth fund owned by the Malaysian state. The Malaysian government has alleged that huge amounts were looted from 1MDB and that the proceeds of the fraud were laundered. The scandal has spawned numerous proceedings around the world.

On 16 July 2020 the Malaysian Court made an order at the suit of the Malaysian public prosecutor that the Funds be frozen, on the alleged basis that they represented the proceeds of the 1MDB fraud (something which POS strenuously denies). The order has never been served on Clyde or domesticated in the UK under the relevant legislative regime (which I shall describe more fully below).

But in any event, as a result of a variation made on 19 August 2020, the Malaysian order provided for specified amounts to be paid by Clyde to the solicitors for POS to cover the claims of its creditors (c.$442,000 a month) and legal fees incurred by it in the defence of various proceedings ($600,000 a month). The same provisos had also been included in the terms of the interim order obtained by PDVSA in the English proceedings (as varied by Trower J on 11 August 2020).

Those provisos would have allowed POS to meet its continuing obligations to its creditors and lawyers. But again things were not so simple. In September 2020 the US Government, acting by the Department of Justice (“the DOJ”), commenced an in rem Complaint in the District Court for the Central District of California (“the CDC”) claiming that the Funds were liable to forfeiture under a Federal civil forfeiture statute (18 USC §981(a)(1)(A) and (C)). The US Government alleged that the Funds constituted the proceeds of fraud. On 21 September 2020 the DOJ made an unsuccessful ex parte application to the CDC for the issue of an arrest warrant in rem against the Funds. That application was renewed and on 14 October 2020, Judge Fischer, a judge of the CDC, being satisfied to the standard of probable cause, authorised the issue of an in rem forfeiture warrant by the US Government (“the Warrant”). The res was described as “[a]ll funds held in escrow by Clyde & Co in the United Kingdom as damages or restitution in [POS] v PDVSA UNCITRAL Arbitration” (or, in other words, the Funds). The Warrant requires and directs US law enforcement officers to arrest and seize the Funds.

The Warrant was served on Clyde in London. As explained in much more detail below, the DOJ contends that this gives the CDC forfeiture jurisdiction over the Funds and it has threatened Clyde with prosecution if it transfers the Funds to POS.

Clyde took advice from US lawyers and concluded that parting with the Funds (including the monthly amounts allowed by the Malaysian order) would expose it to a real risk of criminal prosecution or civil liability in the US. It has therefore not made any of the monthly payments since receiving the Warrant. POS pressed for payment. It pointed out that the DOJ had not sought a civil restraining order against Clyde from the CDC and that the Warrant had not been domesticated under the relevant UK legislation. Clyde disagreed and repeated that it would be at risk of prosecution if it made the payments sought.

POS therefore commenced the current claim under CPR Pt. 8 on 17 November 2020. POS primarily sought an order against Clyde for the payment by Clyde to POS's solicitors of its monthly business and legal expenses. However by the time of the hearing before me POS was seeking only the alternative relief set out in the claim form, i.e., an order for payment of the Funds into the English Court with orders for (a) the immediate payment out of Court to its solicitors of (i) $2,212,425 as the unpaid monthly amounts for creditors since October 2020 and (ii) $2,568,833.07 for unpaid legal fees, and (b) a monthly payment of $1,1043,487 out of Court to its solicitors on the first day of the month until further order for creditors and legal fees. It does not, at this stage, seek an order for payment out of Court of the balance of the Funds.

POS brings its claim under the Court's supervisory jurisdiction over trusts. POS says that the Court has a discretion, that it has a pressing need for the release of the monthly amounts, and that Clyde would not face a real risk of prosecution or liability if it complied with the orders of this court.

Clyde accepts that the Court has a supervisory jurisdiction over trusts but says before one reaches the court's discretion there is a prior question whether the application is barred by the terms of the escrow agreement. It says alternatively that the court should not make the orders sought as a matter of discretion. Clyde's overall position is that it would like to bring the escrow arrangement to an end and that it has no wish to obstruct POS from paying its business expenses or legal fees. But, while recognising POS's predicament, Clyde opposes the claimed relief: it says in short that transferring the Funds (including into Court pursuant to a mandatory order of the English Court) would expose it to a real and material risk of criminal prosecution or civil liability in the US.

Factual background

In September 2010, POS and PDVSA entered into a 7-year drilling contract for the extraction of gas from the Mariscal Sucre basin offshore of Venezuela (the “Drilling Contract”). A standby letter of credit was issued in favour of POS to guarantee PDVSA's payments to POS under that contract (the “SBLC”). The Drilling Contract was governed by Venezuelan law with disputes subject to UNCITRAL arbitration. The SBLC was subject to English law and the jurisdiction of the English courts.

PDVSA failed to pay POS's invoices from July 2012. POS demanded payment under the SBLC. PDVSA disputed POS's right to make demands. That led to proceedings in England. In the end, on 25 January 2017, the Court of Appeal decided that the bank should pay under the SBLC. The Supreme Court refused PDVSA permission to appeal.

PDVSA commenced an UNCITRAL arbitration (seated in Paris; subject to French Court supervision) in August 2015. PDVSA alleged various breaches of contract. POS counterclaimed for its unpaid invoices. Clyde acted as solicitors for POS in the arbitration.

In the context of the arbitration an escrow regime was established to preserve assets out of which a final award might be satisfied. The monies in the escrow account under the control of Clyde as escrow agent came from the third party bank as drawings under the SBLC.

By Procedural Order 56, the tribunal directed that the parties should enter into a more formalised escrow arrangement “so as to regularise the terms on which Clyde acts as escrow agent and to provide a reasonable degree of protection and certainty to Clyde and to the Parties.”

By Procedural Order 62, dated 7 June 2019 and entitled “Agreed Terms Governing the Escrow Regime”, the tribunal ordered that “[t]he escrow regime is governed by the agreed terms contained in Annex 1 to this Order.” The parties and Clyde were directed to sign that agreement by 14 June 2019.

It is common ground that the escrow agreement is governed by English law. It included the following clauses:

“[1.3] Clyde will hold and administer any escrow monies in the escrow account in accordance with this Order.

[5.11] Prior to giving any instructions to the bank for the transfer of any part of the balance of the escrow account, Clyde shall be entitled to be satisfied in connection with all applicable laws and regulations, including those relating to...