Lessons Learned: Interpreting Sanctions Clauses and the EU Blocking Regulation
A recent decision of the High Court in Mamancochet Mining Limited v Aegis Managing Agency Limited and others provides insightful guidance on two hot sanctions issues for businesses.
The judgment:
- highlights some of the pitfalls in the standard wording of sanctions exclusion clauses and offers guidance on the approach the court will take to construing such clauses; and
- is the first time a court has considered the impact of the EU Blocking Regulation.
Background
The case concerned two shipments of steel from Russia to Iran in 2012. The cargo, consigned to an Iranian national, was stolen. The claimant sought to rely on the terms of a marine cargo insurance policy and claimed under the policy in 2013. The insurers were non-US but were ultimately owned/controlled by US persons. By this point, the US had expanded its sanctions against Iran and the EU had prohibited the export of steel to Iran and the provision of financial assistance to such export.
The insurers refused to pay out the claimant, relying on a market standard sanctions clause in the policy which provided that:
"no (re)insurer shall be deemed to provide cover and no (re)insurer shall be liable to pay any claim…to extent that the provision of such cover, payment of such claim…would expose that (re)insurer to any sanction, prohibition, or restriction under [UN, EU, UK or US trade or economic sanctions]."
It was accepted that when the claim was made in 2013, payment of the claim under the insurance policy would have breached US and EU sanctions. However, the claimant relied on the lifting of sanctions in 2016 under the Joint Comprehensive Plan of Action (JCPOA) in respect of Iran to say that payment of the claim should be made.
Following Trump's decision to pull out of the JCPOA in May 2018, the claim was heard on an expedited basis as it was accepted that once US withdrawal from the JCPOA was complete on 4 November 2018 following the wind down period, any window for payment by the insurers would be closed.
Trigger for sanctions clauses
The insurers argued that the sanctions clause was triggered as there was a sufficient risk that payment of the claim would breach US sanctions and not fall within the wind down period following withdrawal from the JCPOA. They also stated that the fact the parties' attempts to obtain a licence (or an indication that no licence was required) from the UK authorities had failed, demonstrated that there was a sufficient residual risk of exposure to sanctions.
However, the court rejected the interpretation that the sanctions clause would bite whenever the insurers were exposed to the risk of sanctions. Risk was not enough to escape liability, and the court held that the sanctions clause would only prohibit payment was there was an actual exposure to sanctions rather than simply a risk of exposure to sanctions. The insurers would have to show that payment would in fact breach applicable sanctions. As payment before 4 November 2018 would not breach sanctions, the insurer could not escape liability by relying on the sanctions clause. The case emphasises that "clear words" are needed if a sanctions clause is to excuse a party from performance where there is a mere risk of breaching sanctions.
Is liability suspended or extinguished when sanctions clause is triggered?
The court also had to determine whether the wording of the sanctions clause would suspend liability to pay out under the insurance policy or else extinguish the insurer's liability forever. The wording "to the extent that…payment…would expose that (re)insurer" was held to simply suspend liability. Although on the facts of this case there were no current sanctions prohibiting payment, where applicable sanctions would prohibit performance of a contract, those liabilities and obligations would be suspended and then reinstated once sanctions were lifted.
Lessons to be learnt
The case highlights key considerations for businesses in drafting sanctions clauses or reviewing existing contracts with such clauses:
What level of sanctions exposure should excuse you or a counter party from performance? Is an actual breach of sanctions required or is the risk of breaching sanctions sufficient? If the latter, clear drafting will be required to make this effective.
Sanctions clauses should take account of the ambiguities that exist as to the scope or effect of some secondary sanctions regimes. The issue of US secondary sanctions is important here. These sanctions target non-US persons outside the US jurisdiction and threaten that if a non-US person engages in an activity that would breach US primary sanctions, then the US authorities may add that non-US person to the sanctions list or take restrictive measures against them, such as denying access to the US economy. The enforcement of these sanctions is political and therefore it is not clear when such secondary sanctions will or will not bite. Therefore, very precise drafting will be needed if potential exposure to US secondary sanctions is meant to be caught by any sanctions clause. Standard sanctions clauses may not be considered broad enough to encompass US secondary sanctions exposure;
Should a party's obligations be suspended or extinguished when a sanctions clause is triggered? Precise drafting of sanctions clauses is also required to make it clear whether obligations are suspended or permanently extinguished as a result of sanctions being imposed. The preference over extinguishment or suspension will depend upon the parties' respective positions and background. Whilst simply suspending liabilities may ensure a party does not lose out on a significant payment, on the other hand suspending liability can be problematic as the other party would be subject to an uncrystallised liability of potentially indefinite duration which would only resolve itself on the lifting of sanctions.
Given the unpredictable nature of sanctions and the geopolitical factors that govern them, parties may wish to ensure liability is forever extinguished when sanctions are imposed to avoid commercial uncertainty. Alternatively, sanctions could suspend liability initially but then extinguish liability after a certain period of time if the sanctions situation has not changed.
EU Blocking Regulation
The EU Blocking Regulation prohibits EU nationals and companies from taking steps (without specific authorisation) to comply with certain US sanctions, including those against Iran. The claimant had argued that the Blocking Regulation prevented the insurers from relying on the sanctions clause. The court did not need to consider the EU Blocking Regulation in any substance nor make any binding determination in regard to its operation, as the sanctions clause had not been triggered on the facts. However, it did comment that a party who validly invokes a sanctions clause in a contract to refuse performance of its obligations would not be considered to be in breach of the EU Blocking Regulation. Reliance on a sanctions clause would simply be classed as reliance on the terms of a contract and not considered as complying with US sanctions in breach of the EU blocking regulation.
Whilst this comment from the court may be considered positive for those seeking to rely on sanctions exclusion clauses in the context of Iran related transactions, the future interpretation of the EU Blocking Regulation still remains vague and companies should be cautious to rely on the court's comments in this case. Companies still need to steer carefully between the US Iran sanctions and the EU Blocking Regulation until there is greater certainty around the enforcement of the Blocking Regulation.
If you have any questions or concerns about the issues highlighted above or would like to discuss any aspect of sanctions in general please contact us.