James Rose Managing Associate
Could or would standard sanctions wordings leave underwriters exposed?
Mamancochet Mining v. Aegis Managing Agency  EWHC 2643
The Court has recently held that underwriters were obliged to pay a claim under a marine cargo insurance policy in respect of a cargo of steel sold to an Iranian national. This was the case notwithstanding the sanctions provision in the policy and President Trump’s decision to withdraw from the international agreement to ease economic sanctions against Iran, the Joint Comprehensive Plan of Action (commonly referred to as the “JCPOA”). In determining the case, the Court was required to interpret the sanctions exclusion clause developed by the London market Joint Hull Committee and adopted by the Joint Cargo Committee.
The background facts
The cargo policy was issued in respect of two cargoes of steel billets, carried from Russia to Iran in 2012. The billets were stolen from bonded storage in Iran in the autumn of 2012 and the assured claimed under the policy in March 2013. The defendant insurers (being 11 of the 30 insurers on the slip) resisted payment of the claim on the basis of the standard form ‘Sanction Limitation and Exclusion Clause’ in the policy, which provided that no 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.”
At the time that the insurance claim was made, payment was prohibited by virtue of both US and EU sanctions preventing the sale or supply of goods or services to Iran. The parties agreed that this prohibition extended to the provision of insurance in respect of the relevant goods or services. With effect from 16 January 2016, by implementation of the JCPOA, the US, UK, China, Russia, France, Germany and the EU agreed to lift certain sanctions against Iran. However, on 8 May 2018, President Trump announced the US withdrawal from the JCPOA, with a wind down period ceasing on 4 November 2018.
The Claimant commenced an expedited action in the Commercial Court on 22 May 2018, seeking payment of the insurance claim before 4 November 2018, after which US-owned or controlled foreign entities (such as nine of the UK-based defendant insurers) could be caught by the US sanctions.
The Commercial Court decision
The insurers argued that, by virtue of the sanctions clause, they had no liability to pay the otherwise valid claim because there was a risk that the authorities applying the sanctions might conclude that payment of the claim was ‘prohibited conduct’. However, the Court concluded that this was not sufficient and that the sanctions exclusion clause was effective only where payment would be prohibited under one of the named systems of law and thus would “expose” the insurer to a sanction. The insurer, therefore, had to show that the payment would, more likely than not, in fact be prohibited by an applicable law. The Court added that if the parties had intended it to be sufficient for the insurer to show that there was a risk that an authority might conclude that there was prohibited conduct, then this intention needed to be made clear in the clause, which it was not.
As regards whether it would, in fact, have been a breach of US sanctions to pay the claim, the Court found that the insurers could have paid the claim in sterling after 16 January 2016 and until 4 November 2018, without being in breach.
In relation to the EU sanctions, where it was common ground that there was no prohibition on paying the claim in question, the Court stated that the failure by the relevant authorities to confirm that the claim could safely be paid could not of itself“expose [the] (re)insurer to any sanction” within the proper meaning of the sanctions clause. Therefore, the insurers could not rely on the clause to deny the claim.
The Court further held that there was nothing in the sanctions clause that purported to extinguish a claim. The sanctions clause only suspended the insurers’ liability to pay for as long as the sanctions prohibited payment. When the sanctions were lifted, the insurer was again liable to pay the claim under the policy. The Court, therefore, found that the assured was entitled to payment of its claim and that the insurers would not be exposed to a sanction if they made payment before 11:59 EST on 4 November 2018.
The international sanctions position is constantly changing as political situations develop across the world. It is now commonplace for insurance policies and other contracts to have sanctions clauses included to mitigate against the effect of sanctions. This decision shows that the English Court will take the same approach to interpreting a sanctions clause as it would to any other contractual provision, considering the ordinary meaning of the words used, in the context of the contract as a whole and taking into account the wider commercial context.
As far as the standard form JHC and JCC sanctions clause is concerned, this decision should provide greater clarity to the insurance market as to the ambit of the protection afforded by the clause. Other market standard clauses may also need to be revisited in light of this decision.
For further information on sanctions and how they may impact on your business, please contact Fionna Gavin or James Rose or your usual contact at Ince & Co.
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