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UK High Court ruling on insurance sanctions clauses

  • United Kingdom
  • Competition, EU and Trade

12-11-2018

On 12 October 2018, the High Court issued its judgment in the case of Mamancochet Mining Ltd v Aegis Managing Agency Ltd & Others, clarifying the extent to which insurers can reject claims on the basis of sanctions clauses.

The sanctions clause in the insurance policy reviewed by the court excluded cover in circumstances where payment of a claim would ‘expose’ the insurer to any sanctions.

The Court rejected the argument that being exposed to a risk of being sanctioned by an authority was sufficient for the insurer to rely on the sanctions clause. Rather, making a payment under the policy had to actually breach sanctions.

Background

The case concerned an insurance claim relating to the theft of steel billets from an Iranian port in 2012, brought against insurers for payment under a marine cargo policy following President Trump’s decision to re-impose sanctions against Iran.

It was accepted that payment of the claim would have breached US and EU sanctions at the time the claim was originally made. However, the Claimant relied on the lifting of EU sanctions following the implementation of the Joint Comprehensive Plan of Action (“JCPOA”) and the waiver of certain US sanctions that took effect at the same time (please see our previous briefing on the US withdrawal from JCPOA here).

The Defendant underwriters sought to rely on the following standard Lloyds sanctions exclusion clause in their marine insurance policy in refusing payment of the claim:

"No (re)insurer shall be deemed to provide cover and no (re)insurer shall be liable to pay any claim or provide any benefit hereunder to the extent that the provision of such cover, payment of such claim or provision of such benefit would expose that (re)insurer to any sanction, prohibition or restriction under United Nations resolutions or the trade or economic sanctions, laws, or regulations of the European Union, United Kingdom or the United States of America."

The Defendants relied on their continued ‘exposure’ to sanctions on the basis that:

(i) there was a sufficient risk that payment of the claim would breach US sanctions and not fall within the ‘wind-down’ implemented following the US’s announcement of its withdrawal from the JCPOA; and

(ii) attempts to obtain a licence or indication that no licence was required from the UK competent authorities had failed, such that there was a sufficient residual risk regarding EU sanctions.

Interpretation of the sanctions clause

The Court held that the defendants were liable to pay the insurance claim, because payment would not ‘expose’ the insurers to US sanctions if made before 4 November 2018 (i.e. the end of the ‘wind-down period’ under the US Iran sanctions regime).

The Judgment clarified that ‘a risk’ of sanctions was insufficient for the insurer to rely on the exclusion clause. The wording of the clause did not refer to ‘risk’ – instead, it referred to circumstances which would ‘expose’ the insurer to any sanctions. The Court stated that ‘exposure’ to sanctions meant that the payment had to actually breach sanctions as opposed to exposing insurers to a risk of being sanctioned by an authority. The Judge concluded that “the clause provides that the insurer is not liable to pay a claim where payment would be prohibited under one of the named systems of law and thus ‘would expose’ the defendants to a sanction”.

Interpretation of US Iranian Transactions and Sanctions Regulations

In relation to the interpretation of US sanctions on Iran, one of the key questions was whether the payment of the claim (while initially prohibited, then permitted under General Licence H) could be considered a transaction ‘ordinarily incident and necessary to the wind-down’ of an activity within the meaning of the US Iranian Transactions and Sanctions Regulations (“ITSR”). Two US lawyers gave expert evidence and they had different views as to the true construction of the wind-down provisions. While one of the experts considered that the wind-down provisions extended to transactions entered into before General Licence H had been issued (such as the insurance policy in question), the other expert expressed the view that the wind-down provisions did not apply to transactions that arose prior to the issue of General Licence H and that there was a “serious question” as to whether OFAC would consider payment of a claim arising before the effective date of General Licence H to be a wind-down activity within the meaning of the ITSR.

By looking at the “plain meaning” of the wind-down provisions introduced into the ITSR, the court accepted as a finding of fact that payment of the claim until 11:59pm on 4 November 2018 EST would not be prohibited by the US:

“The language of the waiver, which is broad, extends the waiver to transactions that would otherwise be prohibited by section 560.215 [of ITSR]. Payment of the insurance claim in question is such a transaction. Reference can be made to [OFAC’s] FAQs when construing the waiver. They support the proposition that the wind-down provision applies to operations that were consistent with the lifting of sanctions under the JCPOA. Payment of the insurance claim in question is consistent with the JCPOA. For these reasons I agree (…) that until 11:59 pm EAT on 4 November 2018 payment of the insurance claim in question is not prohibited by the US and so payment by that date would not expose the defendants to sanction.”

In addition, the Court confirmed that nothing in the sanctions exclusion clause purported to extinguish liability once the clause was triggered. The inclusion of the wording “to the extent that (…) payment of such claim (…) would expose the (re)insurer to any sanction (…)” meant that liability was merely suspended until payment would no longer expose an insurer to sanctions.

EU sanctions

It was submitted by the Defendants that, due to the fact that UK competent authorities had failed and/or refused to confirm that payment of the claim can safely be made, the Defendants nonetheless remained exposed to EU sanctions (or to the risk of EU sanctions). However, the Court rejected this argument, stating that it was “common ground” that the provision of cover and making a payment under the claim was not prohibited by EU law.

EU Blocking Regulation

In its Judgment, the Court did not reach a view on the Claimant’s argument that reliance on the sanctions clause would breach the EU Blocking Regulation (please see our previous briefing on the EU Blocking Regulation here). In fact, the Court did not need to determine the effect of the EU Blocking Regulation, because it found that US sanctions in place at the date of judgment did not prohibit the insurers from making the payment. However, the court recognised “considerable force” in the Defendant’s argument that, where a party validly invokes a sanctions clause, this is not to be regarded as complying with US sanctions in breach of the EU Blocking Regulation, but rather as “simply relying upon the terms of the policy to resist payment”.

Commentary

The Judgment gives some clarity on what kind of sanctions ‘exposure’ could excuse the insurer from paying the claim. More broadly, as sanctions clauses are also commonly included in commercial contracts, the Judgment also gives insight into circumstances under which a contracting party could rely on ‘exposure’ to sanctions as a justification for non-performance.

The important conclusion from the Judgment is that there is a distinction between ‘exposure to’ sanctions and ‘a risk’ of being sanctioned. References to ‘exposure’ are not broad enough to encompass ‘a risk’ of being sanctioned by an authority. This is of particular importance in the context of US secondary sanctions.

The court said that “clear words” would be required to establish a common intention that a party need not perform a contract where there was merely a risk that performance would incur a sanction, without having to show that payment was prohibited as a matter of law. It is worth considering this when negotiating sanctions clauses, in particular if you wish to give yourself an option of non-performance where the commercial circumstances surrounding a transaction (such as access to banking facilities, involvement of US persons or US dollar denomination) might give rise to US secondary sanctions risks (without necessarily breaching any sanctions prohibitions).

The Court’s comment on the EU Blocking Regulation is also important, as it purports to accept that relying on sanctions clauses in contracts does not amount to complying with US sanctions for the purpose of the EU Blocking Regulation. However, the Court’s remarks in this respect are not a finding as such and European authorities enforcing the EU Blocking Regulation may take a different view.

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