Court of Appeal: EU sanctions rules prevent arbitration award interest

The 'no claims' clause prevents claims by designated entities under the sanctions regimes "in connection with any contract or transaction the performance of which would have been affected, directly or indirectly, wholly or in part, by the measures imposed by [the Sanctions Regulation]".

The appeal court found in favour of International Military Services Ltd (IMS), which is owned by the UK's Ministry of Defence and Treasury. IMS had contracted with Iran in the 1970s to supply tanks and armoured vehicles. The contracts were cancelled following the Iranian revolution of 1979, by which time Iran had already paid for the goods. In 2001, the International Chamber of Commerce awarded what is now the Ministry of Defence and Support for Armed Forces of the Islamic Republic of Iran (MODSAF) a significant sum in respect of two separate arbitrations.

In June 2008, MODSAF was made a 'designated entity' for the purposes of EU financial sanctions against Iran. Last year, High Court judge Mr Justice Phillips ruled that MODSAF was therefore unable to add interest to the award, which remains outstanding, during the period when it was a designated entity.

It was common ground between the parties that the relevant sanctions regime meant that IMS could not lawfully pay MODSAF anything. The question before the courts related to liability for interest during the period of any designation, not payment.  

The Court of Appeal has now confirmed the High Court's judgment. It ruled that although an arbitral award itself was not a "contract or transaction" to which the 'no claims' clause applies, the interest payment sought was clearly one "in connection with" a contract or transaction, namely the original contracts for the supply of military equipment.

Giving the leading judgment, Lord Justice Newey said that the High Court was "plainly correct" that the no claims clause serves the purpose of "protect[ing] parties against claims being brought against them by virtue of their non-performance of a contract or transaction that was caused by the sanctions".

"Where, as in the present case, sanctions have served to increase the interest component of a claim, it must be the case that article 38 [the no claims clause] bars satisfaction of the clam to that extent and only to that extent… [the clause] should be interpreted as barring MODSAF from enforcing [the award] in so far as it relates to interest since 24 June 2008, on the basis that MODSAF's application is one in connection with the original contracts for the supply of military equipment. That view appears to me to be supported by both the purpose and the language of [the EU Sanctions Regulation]," he said.

The court considered the purpose of the no claims clause and found that, contrary to submissions by MODSAF's lawyers, it "evidently was intended to have confiscatory consequences".

"[That is not] surprising," said Lord Justice Newey. "The imposition of sanctions had implications for both designated persons and their counterparties. [The clause] was designed to ensure that, as regards contracts and similar obligations, the burden was borne by the designated persons rather than the counterparties."

"In the circumstances, I cannot see that the fact that the 2012 Regulation may not be intended to be confiscatory or punitive in other respects makes it disproportionate to interpret [the no claims clause] as barring MODSAF from enforcing [the award] as regards interest in respect of the period since MODSAF became a designated entity. To the contrary, such a construction seems to me entirely consistent with the overall scheme of the Regulation," he said.

In addition, the wording of the regulation was sufficiently clear that MODSAF could not argue on the grounds of legal certainty, he said.

Stacy Keen of Pinsent Masons, the law firm behind Out-Law, said: "It is rare that the courts are asked to interpret EU sanctions, particularly provisions such as the 'no claims clause' that has become almost 'boilerplate' within the relevant regimes". 

"This case should provide comfort to 'counterparties' that are withholding payment on the basis that they cannot lawfully make funds available to a designated person. However, businesses operating in countries where the imposition of sanctions could be a concern should still introduce clauses within their contracts specifically addressing the steps to be taken, or not taken, if the imposition of sanctions impacts the dealings between the parties. Where no such provisions have been included, the scope of the 'no claims clause' will need to be carefully considered," she said.

"It is worth noting that the payment of interest is not restricted in all cases. Interest, or other earnings, can lawfully be added to frozen accounts provided that they are also frozen," she said.