UK: Iran Sanctions: Arash Shipping v Groupama Transport (2011)

The Court of Appeal recently ruled on the effect of an Iranian sanctions clause entitling insurers to cancel an insurance, but declined to rule on the effect of EU sanctions legislation where the ruling was not necessary and the enforcement of that legislation fell under the jurisdiction of the criminal, rather than civil, courts.

Facts

The case concerned the hull and machinery insurance of the fleet of National Iranian Tanker Company. The assured was a Cypriot company, Arash Shipping Enterprises Company Limited (Arash), who accepted for the purposes of the proceedings that it was controlled by an Iranian entity. The policy, led by Groupama Transport (GT), incepted prior to the coming into force of Council Regulation (EU) 961/2010 (the Regulation) on 27 October 2010, imposing economic sanctions on Iran. The Regulation is directly applicable in all EU Member States, but requires Member States to lay down penalties for breach. In the UK, criminal penalties have been prescribed, including imprisonment of up to two years and/or a fine.¹

By article 26(1) of the Regulation, it is prohibited to provide insurance to an Iranian person, entity or body. The case centred around article 26(4), which provides that the Regulation "... prohibits the extension or renewal of insurance and re-insurance agreements concluded before the entry into force of this Regulation, but ... does not prohibit compliance with agreements concluded before that date".

GT and Arash agreed that the insurance contract could run its course until expiry. However, the policy contained a review clause providing that, if after ten months of the policy period, the credit balance of the insurance was 50 per cent or better, underwriters would extend the period of the insurance for a further 12 months on an unaltered basis. It was common ground between the parties that this criterion had been met, and that Arash was contractually entitled to a 12-month extension to the policy period. It was also agreed that the renewal would be automatic. The key issue in dispute was whether this automatic extension was prohibited by article 26.

GT wished to comply with the review clause insofar as it could without breaching the Regulation. Arash consulted the Asset Freezing Unit of HM Treasury, the body responsible in the UK for the enforcement of the Regulation, which informed Arash that it considered that extension of the policy in accordance with the review clause would be prohibited. The European Commission was also consulted, but did not provide a written response until the day before the Court of Appeal hearing, and then in potentially ambiguous terms.

The policy contained an Iran Sanctions Clause allowing insurers to cancel the policy "... where the Assured has exposed or may, in the opinion of the Insurer, expose the Insurer to the risk of being or becoming subject to any sanction, prohibition or adverse action in any form whatsoever against Iran by the State of the Ship(s) flag, or by the United Kingdom and/or the United States of America and/or the European Union and/or the United Nations".

GT and, independently, various other insurers subscribing to the policy relied on the Iran Sanctions Clause to cancel their participation in the policy with effect from the expiry of the policy period, being 9-10 May 2011.

Commercial Court

Arash applied to the Commercial Court to decide the issue. Arash contended that article 26(4) should be interpreted to allow extensions that are in compliance with agreements concluded before the Regulation came into force, such as that contemplated by the review clause. Arash also requested a finding that the notices of cancellation served by various insurers were invalid.

HM Treasury was invited to participate in the court proceedings and/or to agree to be bound by the Commercial Court's decision, but declined to do so. As a result, if the Commercial Court held that the renewal was not prohibited by article 26 of the Regulation, HM Treasury would have remained free to refer the matter to the criminal prosecuting authorities. A decision of the English civil courts is not binding on the criminal courts as the two systems are separate.

Proceedings were commenced by Arash on 7 April 2011 and, given the impending policy expiry dates, the trial took place on 18 April 2011, with judgment given two days later.

The Court held that renewal (even if automatic) was prohibited by article 26 of the Regulation, and further held that GT's notice of cancellation was valid.

Court of Appeal

Arash appealed to the Court of Appeal and the matter was heard and ruled upon on 6 May 2011, the last working day before the policy period expired.

The Court of Appeal held that GT's notice of cancellation was valid. As a result, they did not consider it was necessary to make a finding on the application of article 26(4). Thus, the Commercial Court's decision that article 26 prevented renewal remained in place. Tomlinson LJ did, however, make clear his own view that the Commercial Court was "plainly correct".

However, the Court of Appeal was cautious about deciding on the effect of legislation creating a criminal offence where a decision was not required in order to determine the rights of the parties to the proceedings. This was particularly the case where the prosecuting authority did not participate in the proceedings and would not be bound by the Court's decision.

The Court referred to the decision of the House of Lords in Imperial Tobacco v Attorney-General (1981), which made clear that the criminal courts are not bound by decisions of the civil courts, and noted that it would not be right for a civil court to make a declaration as to the criminality of future conduct other than in a "very exceptional case". The Court considered that this was not such a case.

Conclusion

In the absence of reassurance from the national prosecuting authority, only a ruling from the Court of Justice of the European Union would have eliminated the risk of criminal proceedings against GT, in the event the Commercial Court or the Court of Appeal formed the view that the insurance had to be renewed. Therefore, if a party considers that fulfilment of a contractual obligation might put them in breach of the Regulation, they should consider whether to avail themselves of any contractual mechanism to protect themselves against this risk, as GT did in this case. Where no such contractual mechanism is available, the performing party may be able to rely on article 29 of the Regulation, which provides that claims brought by Iranians or Iranian entities in connection with contracts – the performance of which would have been affected by the Regulation – shall not be satisfied by courts of EU Member States.

Footnotes

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