Put to the test: the proper interpretation of the standard London insurance market “Sanctions Limitation and Exclusion Clause”

Mamancochet Mining Ltd v Aegis Managing Agency Ltd & Others [2018] EWHC 2643 (Comm)

On October 12, 2018, the Commercial Court determined that defendant underwriters were liable to pay an insurance claim under a marine cargo insurance policy, as doing so was not prohibited under EU or US sanctions against Iran. It was not prohibited, provided that payment was made prior to the re-imposition of US sanctions upon the payment of insurance claims, on November 5, 2018. The underwriters were unable to rely on the standard London market sanctions exclusion clause to refuse payment as, on a plain reading of that clause, the mere “risk” of sanction was insufficient to “expose” them to sanctions under EU or US law.

The judgment contains valuable guidance for the shipping industry in relation to the interpretation of sanctions exclusion clauses, which will assist in the negotiation of marine cargo or other insurance policies on the London market. It also includes the first judicial commentary, albeit obiter, on the relationship between Council Regulation (EC) No 2271/96 (as amended) (the Blocking Regulation) and US sanctions against Iran following the withdrawal of the US from the Joint Comprehensive Plan of Action (JCPOA).

Background

The dispute focussed on whether the non-US defendant underwriters, some of whom were owned or controlled by US persons, could resist payment under a marine cargo insurance policy (the Policy) following the theft of two cargoes of steel billets when in Iran.

The defendants sought to rely on the Policy’s “Sanctions Exclusion and Liability Clause” (the Sanctions Clause). The Sanctions Clause used the standard wording developed by Joint Hull Committee (of the London market), as adopted by the Joint Cargo Committee, which provided that:

“…no (re)insurer shall be liable to pay any claim… to the extent that… payment of such claim… would expose that (re)insurer to any sanction, prohibition or restriction under… the trade or economic sanctions, laws, or regulations of the European Union, United Kingdom or the United States of America.”

In brief, the key questions at issue were

• What was the proper interpretation of the Sanctions Clause?
• Would payment of the claim “expose” the defendants to US and/or EU sanctions within the meaning of the Sanctions Clause?
• Would the defendants otherwise be prevented from relying on the Sanctions Clause by virtue of Article 5 of the Blocking Regulation?

Issue 1: Interpretation of the Sanctions Clause

The Court decided that for an insurer not to be liable to pay under the Sanctions Clause as drafted, it would be necessary for the insurer to show that the payment of the claim in question would constitute conduct that was prohibited by the applicable laws or regulations. In other words, “exposure” to sanctions meant that the payment had to actually breach sanctions, as opposed to merely exposing insurers to a real risk of breach.

On a separate point, the Court rejected the defendants’ submission that the Sanctions Clause served to extinguish the claim. It was held that the Sanctions Clause merely suspended the underwriters’ liability to pay for so long as payment was prohibited by the applicable laws or regulations. Therefore, although payment was prohibited from 2012 to 2016, once the relevant EU and US sanctions were lifted on Implementation Day (January 16, 2016) under the JCPOA, the insurers were able to pay the claim, for which they were liable.

Issue 2: US and EU sanctions against Iran

US Sanctions

Having heard evidence from two experts on US law, Mr Justice Teare concluded that the Sanctions Clause did not prevent payment by non-US insurers who were owned or controlled by US persons because US sanctions waivers for the payment of insurance claims were in place until 11:59pm on November 4, 2018.

EU Sanctions

Whilst it was common ground that the payment of the claim was not prohibited by EU law, the Court rejected the defendants’ argument that the relevant regulators’ failure and/or refusal to confirm that payment of the claim could safely be paid “exposed” the defendants to EU sanctions.

Issue 3: EU Blocking Regulation

One final issue, which ultimately did not arise for determination, was whether the Blocking Regulation otherwise prevented the defendants from relying on the Sanctions Clause.

The Blocking Regulation is designed to counter the effects of specified third-country extra-territorial sanctions on “EU operators”, which includes EU nationals, any natural person resident in the EU and EU-incorporated companies. With effect from August 7, 2018, it was updated to cover certain of the re-imposed US secondary sanctions against Iran. The updated Blocking Regulation (inter alia) prohibits EU operators from complying with any requirement or prohibition set out in the re-imposed US sanctions against Iran to the extent those measures purport to have extraterritorial application.

While the Court did not reach a concluded view in relation to the EU Blocking Regulation, the Court saw “considerable force” in the argument that the EU Blocking Regulation is not engaged where the insurer’s liability to pay a claim is suspended under a sanctions clause. This obiter comment was made on the basis that the insurer would be relying upon the terms of the policy to resist payment as opposed to “complying” with a third country’s prohibition.

This is potentially significant for future contractual claims if it can be successfully argued that reliance on sanctions clauses to withhold payment or terminate an agreement on account of relevant sanctions is not necessarily a violation of the EU Blocking Regulation itself (although it remains an arguable point).