Application to the Office of Financial Sanctions Implementation of HM Treasury (OFSI)

On 16 January 2016, the Central Bank of Iran was removed from the EU list of sanctioned entities under the Regulation. Subsequently, MODSAF made an application to OFSI for a licence under article 25(a) of the Regulation. MODSAF’s position was that, if the application was successful, it would facilitate payment of the Award Amount and enable the courts to enter a judgment on the enforceability of the Award. This was on the basis that MODSAF considered that the de-listing of the Central Bank of Iran as a sanctioned entity would enable IMS to make payment of the Award Amount to the Central Bank of Iran. If the licence application was successful, MODSAF would request that the courts make an order that this payment be made.

The licence application has yet to be decided, and, consequently, Phillips J. proceeded on the basis that the sanctions regime continues to prevent IMS from making payment to MODSAF.

Interest during the sanctions period

IMS relied on articles 23, 38 and 42 of the Regulation in its submissions to the court.

Article 23 of the Regulation has the effect of freezing all funds and economic resources belonging to certain persons, bodies and entities related to Iran. It further prohibits any “EU Person” from making any funds or economic resources available to, or for the benefit of, sanctioned entities.

Article 38 provides that no claims made in connection with any contract or transaction that has been affected by the Regulation can be satisfied if they are made by sanctioned entities. To be “affected by the Regulation”, the existence or content of the claim must have resulted directly or indirectly from measures imposed by the Regulation.

Article 42 further sets out that if a party refuses to make funds or economic resources available, in accordance with the Regulation, no liability shall attach to that party unless those funds or economic resources were withheld as a result of negligence.

Interpretation of article 38

The court concluded that there were five material components to article 38:

(i) no claims;

(ii) in connection with any contract or transaction;

(iii) the performance of which has been affected, directly or indirectly, in whole or in part, by the measures imposed under this Regulation;

(iv) shall be satisfied;

(v) if they are made by designated persons, entities or bodies listed in Annexes VIII and IX of the Regulation.

First component: It was held that the relevant “claim” was MODSAF’s application for judgment to be entered in terms of the Awards. Article 1(c) of the Regulation, defines the term “claim” as including “a claim for the recognition or enforcement…of…an arbitration award”. The “claim” was therefore found to fall within the scope of article 1(c) and satisfy the first element of article 38.

Second component: The relevant “transaction” was found to be the arbitration award that MODSAF seeks to enforce. The court came to this conclusion for two reasons:

1. the Regulation defines the term “transaction” fairly broadly in article 1(d);
2. furthermore article 1(c), as noted above, defines a claim as a claim for the recognition or enforcement of an arbitration award. Consequently, this definition presupposes that, for the purposes of the Regulation, judgments, arbitration awards and equivalent decisions do fall within the expression “contracts or transactions”.

Third component: The court noted that IMS could resist enforcement of the interest component of the Award if it could establish that part of the Award was affected by the measures imposed by the Regulation. Article 28 also clarifies that the performance of a contract or transaction shall be regarded as being affected by the Regulation where the claim results directly or indirectly from those measures. The court found that, although the Award predated MODSAF’s  listing as a sanctioned entity, meaning that the Award’s did not result from the sanctions, the content of the claim (insofar as it concerns interest) during the sanctioned period did result from the sanctions. As a result, MODSAF was seeking to enforce a liability that results “directly or indirectly from” the sanctions.

Fourth and fifth components: The court further held that the fourth and fifth elements of article 38 were not contentious and were therefore satisfied.

Accordingly, the court found that the enforcement of the award, insofar as it relates to interest, was precluded by article 38.

In his analysis, Phillips J. considered the purpose of article 38 and concluded that its purpose is 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 sanctions”. The sanctions imposed by the Regulation prevented IMS from discharging its liability to pay the Award Amount. It is because of this that interest became due on that amount.

Consequently, the application of article 38 to prevent MODSAF from enforcing the interest component of the Award during the sanctions period falls within  the intended purpose of Article 38.

In reaching this decision, the court rejected MODSAF’s attempts to rely on article 29 of the Regulation, which provides that article 23(3) shall not prevent financial or credit institutions from crediting frozen accounts. In addition, article 29 states that article 23(3) shall not apply to the addition to frozen accounts of interest or other earnings on those accounts. The court held that article 29(1) was inapplicable to IMS as IMS is not a financial or credit institution.

Guidance on the application of article 42

As the court concluded that article 38 precluded interest from accruing during the sanctions period, the court did not need to consider article 42.

However, the court commented that the expansive language must be construed narrowly in order to restrict its scope to cases where liability arises from mistaken, but non-negligent, actions taken by reference to the regulation. As a result of this interpretation, article 42 would not have applied to this case.

Comments

OFSI’s financial sanctions guidance states that if a court has ordered a judgment in favour of a person subject to an asset freeze and there are no licensing grounds to allow payment to be made, the third party  will not be subject to any further liability, such as accruing interest, for non-payment while sanctions continue to apply.

This judgment provides welcome judicial confirmation of this guidance. As a consequence, companies that have suspended their payment obligations to entities listed on the EU sanctions list, either under contracts, arbitration awards or other judgments, will not be required to pay interest on those payment obligations while those entities remain sanctioned.

Furthermore, companies should continue to ensure that no payments are made to sanctioned entities without an applicable licence, in order to avoid being in breach of EU sanctions.

As a separate practical point, it is interesting to note how long the licence application has taken, especially in respect of recent political events and the high-profile nature of this case.

EU sanctions against Iran (general comments)

Currently, the EU maintains its ongoing commitment to the Joint Comprehensive Plan of Action (JCPOA) and has not reimposed any sanctions on Iran. Furthermore, the EU has updated blocking regulation aimed at neutralising U.S. secondary sanctions. However, in recent weeks Iran has taken steps to breach the JCPOA by allowing its stockpile of low-enriched uranium to exceed 300kg. As a result, there have been calls for the EU to reimpose Iranian sanctions. The EU has, so far, resisted those calls, but it is possible that, in the coming months, the EU and U.S. positions on Iran will begin to converge, and the scope of the EU Blocking Regulation will be reduced. Companies should be mindful of this but in the meantime remain conscious of the need to potentially navigate the competing sanction regimes of the U.S. and EU. 

1. [2019] EWHC 1994 (Comm).

Client Alert 2019-187