When Trump announced in May 2018 that the US was withdrawing from the Iran Nuclear deal, and unilaterally reinstating sanctions that were suspended as part of that deal, the sanctions regimes in the UK/EU and in the US were set on a collision course. US sanctions purport to have extra-territorial effect, with consequences outside of US territory for non-US persons and companies. The indirect effect of breaching such sanctions include banks refusing to handle all US dollar transactions, whether or not connected with Iran. The EU considers this to be objectionable, and since 1996 has had in force a "Blocking" regulation (Council Regulation (EC) 2271/96) protecting against the effects of the extra-territorial application of specified legislation. The regulation was updated in August 2018 to include various US sanctions against Iran. As implemented in UK law, it is a criminal offence to "comply" with such sanctions. Those involved in transactions which fall foul of US extraterritorial sanctions, but are UK/EU persons are therefore given a choice between criminality on the one hand and risking a loss of banking services.
In Mamancochet Mining Limited v Aegis Managing Agency Limited (2018), a marine cargo policy covered consignments of steel billets from Russia to Iran in 2012. The cargoes were stolen from bonded storage in Iran and the insured made a claim in March 2013. Of the 30 underwriters, 9 were ultimately controlled or owned by a US person, and were therefore a relevant entity for the US sanctions regime. They declined to pay their proportions of the claim on the basis that they would be subject to US sanctions were they to do so. Although the insurance was not subject to sanctions at the time it was entered into, or at the time the cargo was stolen, payment would arguably have been caught by the US sanctions regime by the time the claim was submitted to underwriters.
The policy included the standard wording developed by the Joint Hull Committee as follows:
"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 US owned underwriters argued that they were not liable to pay the claim, as they were at risk of being sanctioned by the US authorities, and were therefore "exposed" to sanctions. The judge construed the sanctions clause as requiring it to be shown that payment would actually be a breach of sanctions. This the underwriters were unable to do, and so they were liable to pay the claim. Accordingly, the court did not have to consider the impact of the EU Blocking Regulation on the sanctions clause, an issue which remains alive.
Article 5 of the Blocking Regulation provides that no EU person "shall comply, ... actively or by deliberate omission, with any requirement or prohibition" in specified laws, including some US sanctions. , ... based on or resulting, directly or indirectly, from [specified] laws..."
The sanctions clause responds to sanctions from four different sources: the United Nations; the European Union; the United Kingdom; and the United States of America. As a matter of English law there is an alignment between most of these regimes, the US being the exception. English law gives effect (through legislation) to UN sanctions, and until recently there was no difference between EU and UK sanctions law. Even post-Brexit, UK and EU sanctions law in practice remains aligned, at least for the present. US sanctions law, however, has no force in English law and would be irrelevant to a policy governed by English law where performance would not take place in the US.
The sanctions clause first provides that no insurer "shall be deemed to provide cover". The word "deemed" is a little awkward, as sometimes it has connotations of the position being treated as if it were something other than what it really is. However, if the clause responds to a change in sanctions, it is more than a mere rule of construction, and purports to vary the parties' rights and obligations as to cover. The clause further provides that no insurer "shall be liable to pay any claim". This cannot be construed as a limit on cover, since it plainly assumes that there is a valid claim. In Mamancochet, the judge decided that the sanctions clause only suspended the obligation to pay, and did not extinguish it. The effect of the clause was therefore that for the duration of the US sanctions, underwriters would not be liable to pay, but upon the sanctions ending, the payment obligation would once again be effective.
The insured argued that failing to pay was contrary to public policy due to the Blocking Regulation. Underwriters responded that if the sanctions clause applied, there is no liability that insurers are declining to discharge in prohibited compliance with sanctions. The judge was attracted to this short answer on the basis that the underwriter is not complying with the extraterritorial sanctions but is simply relying on the terms of the policy. This seems to be too quick an answer. The sanctions clause is an agreement in advance that the parties' rights and obligations will be suspended in accordance with US sanctions. If the blocking regulation would otherwise have made it unlawful not to pay a claim, it is difficult to see why an agreement in advance that payment would not be made is not also caught. If so, the sanctions clause would be unenforceable as contrary to public policy. In Mamancochet, underwriters were found not to be at risk of US sanctions, but if underwriters do find themselves at risk, the sanctions clause is not likely to provide them with much comfort.
This article was first published in The Marine Insurer, March 2020.
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