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Financial Institutions FSDR e-briefing: Designation and asset freeze under the Iran (European Community Financial Sanctions) Regulations 2007.

    • Financial services - Briefings and articles


    Melli Bank PLC –v– Holbud Limited [2013] EWHC [1506] (Comm)


    The claimant Bank (the “Bank”), a subsidiary of Bank Melli Iran, that had been designated under Council Decision 2008/475/EC (the “Decision”) and had had its funds frozen under the Iran (European Community Financial Sanctions) Regulations 2007 (the “Regulations”) was granted summary judgment in relation to commitment fees due under a facility agreement and pricing letter with its customer (the “Customer”). The court rejected arguments that the Customer was discharged from its obligations to pay commitment fees on the grounds of either frustration or repudiation.  


    The Customer had entered into a facility agreement with the Bank, under which the Customer could obtain payment prior to the maturity date of letters of credit and other financial instruments by the Bank's purchase of those financial instruments.

    The Customer made a request under the facility agreement to assign to the Bank at a discount a deferred payment letter of credit, and the Bank issued a pricing letter setting out the terms on which it was willing to purchase the Customer's letter of credit. The letter also set out commitment fees that were due from the Customer if the facility was unutilised at the expiry of the availability period for the facility.

    Seven days before the expiry of that period, the Bank was designated under the Decision, and its assets were frozen.  The Regulations however provide that H M Treasury may grant a licence to exempt specified acts from the restriction, which included payments under an agreement concluded before the date of the Designation. Although it had remained open to the Customer to apply for such a licence in order to allow any payment to be made to it, the Customer neither made any inquiries in relation to a licence, nor applied for one. At the expiry of the availability period, the Customer had not communicated its intentions to the Bank as to whether it intended to utilise the facility.

    The Bank applied for summary judgment in relation to the commitment fees under the facility agreement and pricing letter.  The Customer argued that:

    1. the agreement had been frustrated as it could no longer be performed by the Bank;  
    2. alternatively, that as a result of the Designation and asset freeze, the agreement had become illegal, or that the Bank no longer had the funds to honour the agreement, which amounted to a repudiatory breach which the Customer had accepted, thereby terminating the agreement.


    The frustration argument

    The Bank’s designation did not render obligations under the facility agreement and the pricing letter incapable of performance. On the evidence before the court it was clear that a licence, had one been sought, would have been forthcoming.

    The facility agreement expressly anticipated that the onus was on the Customer to do what was necessary and to take the required action in order to effect drawdown. After designation, seeking a licence would have readily fallen within those provisions the moment that the Customer indicated to the Bank that it intended to use the facility.  Nothing in the facility agreement or in the pricing letter rendered performance impossible if in due course a licence should be required. However, the Customer neither sought a licence nor asked the Bank to obtain one.

    In addition, there was no evidence to suggest that a licence might not have been granted had one in fact been applied for; the Customer did not make any contemporaneous inquiry in this regard.

    Accordingly, the doctrine of frustration was not engaged. 

    The repudiation argument

    In addition to the fact that there was no evidence that the Bank did not have sufficient funds to comply with any drawdown request, it was also quite clear that the Customer never expressed any intention to accept any alleged repudiation of the pricing letter and/or the facility agreement between the date of the Bank's designation and the expiry of the facility. Moreover, repudiation could not be inferred from the Customer's silence or its failure to take any steps to utilise the facility during the relevant seven day period; there was no clear or unequivocal evidence of such an intention.

    In fact the court found to the contrary, that the Customer’s silence was consistent with its affirmation of the contract and that it had elected to treat it as continuing in existence; that is, as a decision not to utilise the facility and to allow it to expire unutilised. The agreement had not been terminated by repudiation.

    The Judge decided that a trial would add nothing and granted summary judgment in favour of the Bank for the full amount of the commitment fees.


    The case serves as a reminder that frustration is a doctrine that the courts are reluctant to invoke and will require quite exceptional circumstances to apply. The courts do not want to encourage spurious arguments based on frustration when it has simply become inconvenient or disadvantageous for a party to continue to perform its contractual obligations.

    As regards the repudiation argument, it is important for parties to remember that acceptance of an alleged repudiation cannot be effected by mere silence; the acceptance of a repudiation in termination of an agreement must be actively communicated to the party in breach.