Out-Law News | 22 Oct 2018 | 10:06 am | 4 min. read
The case could mark the start of a long line of cases involving the US Iranian secondary sanctions and the EU's Blocking Regulation, according to sanctions expert Stacy Keen of Pinsent Masons, the law firm behind Out-Law.com. Judgment in the case was expedited so that it could be handed down before the reinstatement of the second wave of secondary sanctions on 4 November 2018, from which date payment of the claim will be prohibited as a matter of US law.
The judge in this case, Mr Justice Teare, had to rule on the proper interpretation of an exclusion clause which operated "to the extent that...payment of [the] claim ... would expose [the] insurer to any sanction, prohibition or restriction under...trade or economic sanctions, law or regulations". He ruled that this was different from, and did not extend to, exposure to "the risk of a sanction or prohibition".
"Before a sanction can lawfully be applied there must be conduct which is prohibited," the judge said. "Further, when there is prohibited conduct the agency charged with the application of sanctions may or may not decide to penalise the prohibited conduct with a sanction. That suggests that it is necessary for the insurer to show that the payment of the claim in question would be conduct which was prohibited by the applicable laws or regulations."
"The argument advanced by [the insurer] was that it was sufficient to show that there was a risk that the agency in question might conclude that there was prohibited conduct (when in law there was not or may not be) and so impose a sanction. If that had been the intention of the parties I would have expected them to have made such intention clear, perhaps by referring in terms to 'exposure to the risk of being sanctioned', or to 'conduct which the relevant authority might consider to be prohibited'," he said.
The judge also dismissed an additional argument on whether the trigger of the sanctions clause would extinguish the insurers' liability to pay the claim entirely. He found that, rather, liability was suspended until such time as the sanctions were no longer in force.
"This may lead to a situation where claimants in similar circumstances raise proceedings – to avoid the effect of the claim being time barred – and then halt those proceedings and do nothing until such further time when the sanctions clause would permit the payment to be made," said Stacy Keen. "It will be interesting to see whether or not insurers seek to amend standard sanctions clauses so that liability is explicitly extinguished when the clause is triggered."
The claimant in this case, Mamancochet Mining Ltd, was the assigned beneficiary of a marine cargo insurance policy governed by English law. The policy provided for compensation for the theft of two cargoes of steel billets carried from Russia to Iran in August 2012, worth a combined $3.8 billion. The goods were stolen from a bonded storage facility in Iran at some point between 22 September and 7 October 2012. The insurance claim was submitted in March 2013
It was common ground between the parties that in 2012, when the cargo was shipped to Iran and insured, the insured business was not subject to the then current sanctions against Iran as they were subsidiaries of US persons, rather than US persons themselves. From October 2012, the sanctions were extended to entities owned or controlled by a US person. At the point that the claim was submitted, in March 2013, payment of the claim would have been prohibited and would have exposed the insurers to a sanction.
In January 2016, following the conclusion of the Joint Comprehensive Plan of Action (JCPOA) on Iran, some sanctions were lifted. At this point, payment of the claim was once again permitted, provided that it was not denominated in US dollars. On 8 May 2018, US president Donald Trump announced his decision to end US participation in the JCPOA subject to winding down provisions, which end on 4 November 2018.
The insurers have never denied that there was a valid claim in principle under the policy, only that compliance with US sanctions required them to refuse payment. The court has now confirmed that payment of the claim before 11.59pm eastern standard time on 4 November 2018 will not expose the insurers to a sanction within the meaning of the sanctions clause, and that Mamancochet is entitled to payment of its claim.
The court was also asked to consider the application of the EU Blocking Regulation, which is intended to provide protection to EU persons against the effect of certain US secondary sanctions, should the insurers be permitted to rely on the sanctions clause in order to resist payment. While the judge ultimately decided against "expressing a concluded view" on the point, he said that he saw "considerable force" in the insurers' submission that the Blocking Regulation was not engaged in this sort of case.
"Although the court did not go so far as to say that the Blocking Regulation was not engaged - simply that there was strength in the argument that it was not - this could have been an opportunity for the UK courts to demonstrate, or at least indicate, that the Blocking Regulation has teeth," said Stacy Keen.
"The insurers' 'short answer' focused on the operation of the contract terms: simply that there was no liability to make payment because the sanctions clause applied. However, had the sanctions clause applied, it would have done so as a result of the imposition of sanctions caught by the Blocking Regulation, which prohibits EU persons from complying 'actively or by deliberate omission, with any requirement or prohibition ... based on or resulting, directly or indirectly, from the laws specified in the Annex or from actions based thereon or resulting therefrom'. It will be interesting to see if, and how, case law in this area develops," she said.