On 24 July 2019, the judgment of Phillips J. in Ministry of Defence and Support for Armed Forces of the Islamic Republic of Iran v. International Military Services Limited1 was published. Although this decision focused on the issue as to whether under EU regulation 267/2012 interest continues to accrue on payments to sanctioned entities under an arbitral award while such entities are sanctioned, there are potentially wider implications for companies that have payment obligations to sanctioned entities, under contracts, arbitration awards, court judgments or other commitments. This article summarises the key findings in the case, and provides guidance as to the interpretation of the protections typically afforded by EU sanctions to entities dealing with sanctioned persons.
The case will provide welcome reassurance to companies that have refused to make payments to EU sanctioned entities, notwithstanding a court order or judgment against them, that interest will not accrue on those judgment sums while the debtor owed remains sanctioned.
The dispute between the Ministry of Defence and Support for Armed Forces of the Islamic Republic of Iran (MODSAF) and the International Military Services Limited (IMS) (a former arms supplier owned by the UK Ministry of Defence) arose out of two contracts that were concluded in the 1970s. Under these contracts IMS agreed to supply MODSAF with Chieftan tanks and armoured recovery vehicles. Following the Iranian revolution, the contracts were terminated in 1979. The parties commenced two separate ICC (International Chamber of Commerce) arbitrations to determine the balances payable under the terminated contracts.
The ICC tribunal found that IMS was liable to pay MODSAF £140,599,570 plus interest and MODSAF’s arbitration costs for both arbitrations (the Awards). As a result of an appeal by IMS before the Dutch courts, the amount due to MODSAF was reduced to £127,651,823 (the Award Amount).
At the same time as IMS’ application to the Dutch courts, MODSAF made an application to enforce the Awards in the English courts. In response, IMS issued applications to set aside, or adjourn, those proceedings. The court ordered an adjournment, conditional on IMS paying £382,500,000 into court by way of security.
MODSAF issued a further application to dismiss IMS’ applications to set aside the enforcement proceedings and seek a judgment as to the enforceability of the Awards.
However, on 24 June 2008, MODSAF was added to the list of entities subject to sanctions imposed against Iran by the EU pursuant to what is now EU Council Regulation 267/2012 (the Regulation). As a result, IMS, as an “EU Person”, was prohibited by the Regulation from paying the Award Amount due to MODSAF.
The recent proceedings, however, concerned whether interest accrues and is payable on the Award Amount while MODSAF is a sanctioned entity under the Regulation.