Ministry of Defence & Support for Armed Forces of the Islamic Republic of
Iran v. International Military Services Ltd [2019] EWHC 1994 (Comm) (24
July 2019). A recent decision of the English Commercial Court (the “Court”) is likely
to have significant repercussions for the interpretation of the so-called “no claims”
clauses widely included in EU sanctions legislation. These provisions generally prevent
persons targeted by EU sanctions from bringing claims when contracts or transactions
are affected by EU sanctions restrictions. The Court adopted a broad interpretation of
these provisions, which may further limit redress available in such circumstances.
Background. In 2001, an arbitral tribunal awarded the Ministry of Defence & Support
for Armed Forces of the Islamic Republic of Iran (“MODSAF”) damages plus interest
for a breach of contract by International Military Services Ltd (“IMS”). MODSAF
sought to enforce that award in the UK, but the enforcement action was stayed pending
a challenge to the arbitral award in the Dutch courts. In the meantime, the EU imposed
asset freezes against certain Iranian entities pursuant to Regulation 423/2007 (which
later became Regulation 267/2012). In 2008, those sanctions, which remain in force,
were extended to include MODSAF. As a result, IMS has been prohibited from paying
any amounts under the award to MODSAF. IMS also argued, however, that it was not
liable—at all—to pay interest on the award for the period after the sanctions were
imposed. In particular, IMS argued that two provisions of the applicable sanctions
legislation—Articles 38 and 42 of Regulation 267/2012—preclude liability for any
interest accrued during the sanctions period.
The “No Claims” Clause Prevents MODSAF from Claiming Interest Accrued on the
Arbitral Award for the Period When Sanctions Were in Force. Analogues to Articles
38 and 42 of Regulation 267/2012 exist in most EU sanctions regimes and, prior to this
case, had not been subject to much scrutiny. Article 38 provides that, if the performance
of a contract or transaction is affected by the sanctions measures in question, no claims
shall be satisfied in relation to that contract or transaction. This is known as a “no claims”
clause. Article 42 provides that the freezing of funds, or the refusal to make funds
available to a sanctioned person, if done in good faith on the basis of the sanctions
legislation in question, shall not give rise to any liability unless the actions were taken as
a result of negligence. This is known as a “no liability” clause.
The Court considered the relevant principles governing the interpretation of EU
instruments. Mr. Justice Phillips found that the EU approach to legislative
interpretation was broadly similar to that in England and Wales, but the EU approach
placed greater emphasis on the purpose of the legislation. The judge found that the
arbitral award itself constituted a separate transaction between the parties. As a result,
the claim for interest accrued during the sanctions period was held to be a claim in
respect of a transaction between a sanctioned and a non-sanctioned person. The claim
was, therefore, precluded by the “no claims” clause.
The Court took the view that this position was supported by the purpose of the “no
claims” clause, which was “to prevent civil claims being brought against a party as a result of
the fact that their performance of a contract or transaction was impeded by the operation of
the sanctions.”
Analysis. The effect of the decision was to deprive the sanctioned party of its right to
claim interest on the arbitral award for the duration of the sanctions period. The interest
was not merely frozen whilst the sanctions remained in force, nor was it paid into an
escrow account.
The rationale of the decision appears to be that parties should not be punished for their
inability to perform contractual obligations when those obligations have been affected
by the imposition of sanctions. In particular, the Court held that the purpose of the “no
claims” clause was to “ameliorate the impact of the sanctions regime on private
relationships.” The Court held that this reasoning applied equally to the obligation to pay
interest on an arbitral award, thus treating the interest as a separate, punitive
component of the award itself. In so holding, the judge dismissed MODSAF’s argument
that, on this interpretation, its right to interest was effectively confiscated (and
appropriated by IMS).
Notably, the Court did not consider that interest on an award serves to ensure that the
award itself does not lose value over time, a devaluation that would confer an unfair
benefit on the party liable to pay the award and a corresponding loss on the
counterparty. The non-payment of interest on the award inflicts a substantial financial
loss on the sanctioned entity that arguably goes beyond the scope of what was intended
by the sanctions regime.
The judgment also raises questions regarding what should be done with any interest
that does accrue on an award. As MODSAF argued, the decision appears to contradict
the provisions of the same EU sanctions regime that allow for the payment of interest
into frozen bank accounts by financial institutions, provided that such interest is also
frozen. Notably, the Court took a narrow interpretation of the “accrued interest exception”
(Article 29), and held that, unlike Article 38, it was not concerned with the nature of a
party’s entitlement to interest. By this logic, could a financial institution refuse to pay
interest to a frozen bank account held by a sanctioned individual by arguing that its
contractual relationship with the sanctioned individual was affected by the sanctions
and invoking the “no claims” clause?
Although this case dealt with a claim brought by a sanctioned Iranian entity, the
wording of the “no claims” clause in question could potentially be invoked by a
defendant in respect of claims brought by “any other Iranian person” (including nonsanctioned
Iranian persons—see Article 38(1)(b)). Similarly, the “no claims” clause in
the EU’s main Russia sanctions regime—Article 11 of Regulation 833/2014—can be
invoked in respect of claims brought by “any other Russian person” (including nonsanctioned
Russian persons). As a result, the Court’s decision could act as a catalyst for
the invocation of “no claims” clauses more broadly, including in respect of claims
brought by non-sanctioned persons. In respect of interest on an arbitral award, however,
the party in question would have to show that its performance of the relevant
transaction (i.e., payment of the award) was impeded by sanctions, which would be
difficult if there is no specific restriction on making funds available to the counterparty.
It would be no surprise, however, to see a variation on this argument raised in the future.