Reed Smith Client Alerts

On 12 February 2020, the Court of Appeal handed down its decision in Ministry of Defence and Support for Armed Forces of the Islamic Republic of Iran v. International Military Services Limited.1 This article follows on from our previous client alert, which considers the first instance decision.

The Court of Appeal dismissed the appeal from the Ministry of Defence and Support for Armed Forces of the Islamic Republic of Iran (MODSAF), confirming that where a debtor owes a sum of money to an EU-sanctioned entity, interest will not accrue on that sum while the entity to whom the debt is owed remains subject to sanctions, even if there is a court order or judgment, or an arbitration award, against the debtor.

This confirmation provides further reassurance to companies that have refused to make payments to EU-sanctioned entities, and also some clarity on the purpose, language and proportionality of asset-freezing measures. That said, companies should note that the Court of Appeal acknowledged that a designated person with an appropriate EU account could be credited with interest and in such instances, companies may have to make payments into such blocked accounts.

Authors: Leigh T. Hansson Brett Hillis Ray-Shio Ho Conor Shevlin

Delivering the leading judgment, Lord Justice Newey determined the appeal turned on a consideration of:

  1. the purpose and language of Article 38 of EU Council Regulation 267/2012 (the “Regulation”); and
  2. an examination of whether depriving MODSAF of interest owed in accordance with Article 38 of the Regulation amounted to disproportionate interference with the appellant’s fundamental right to property.

By way of reminder, Article 38 the Regulation states:

  1. No claims in connection with any contract or transaction the performance of which has been affected, directly or indirectly, in whole or in part, by the measures imposed under this Regulation, including claims for indemnity or any other claim of this type, such as a claim for compensation or a claim under a guarantee, notably a claim for extension or payment of a bond, guarantee or indemnity, particularly a financial guarantee or financial indemnity, of whatever form, shall be satisfied, if they are made by:

(a) designated persons, entities or bodies listed in Annexes VIII and IX;

(b) any other Iranian person, entity or body, including the Iranian government;

(c) any person, entity or body acting through or on behalf of one of the persons, entities or bodies referred to in points (a) and (b).

  1. The performance of a contract or transaction shall be regarded as having been affected by the measures imposed under this Regulation where the existence or content of the claim results directly or indirectly from those measures.
  2. In any proceedings for the enforcement of a claim, the onus of proving that satisfying the claim is not prohibited by paragraph 1 shall be on the person seeking the enforcement of that claim.
  3. This Article is without prejudice to the right of the persons, entities and bodies referred to in paragraph 1 to judicial review of the legality of the non-performance of contractual obligations in accordance with this Regulation.