Commercial Court construes Lloyd’s market standard sanctions clause

12/10/18

Today the Commercial Court (Mr Justice Teare) handed down judgment in highly expedited proceedings brought against 30 Lloyd’s syndicates claiming an indemnity under a policy of marine cargo insurance in respect of a loss suffered in September 2012.

The claim involved two shipment of steel billets shipped from Russia to Iran in 2012. The cargoes were stolen from the port of Bandar-e-Anzali. The insured claimed under the policy in early 2013.

In the interim, the United States had expanded its sanctions against Iran to apply to entities owned or controlled by US entities and the EU had prohibited the export of unfinished steel to Iran and the provision of “financial assistance” to such export.

The insurers refused payment in reliance on a market-standard Sanctions Clause contained in the policy. This provided that: ““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 United States of America.”

It was common ground that payment of the claim would have breached US and EU sanctions at the time the claim under the policy was made. However, the Claimant relied on the lifting of EU sanctions following Implementation Day (16 January 2016) under the Joint Comprehensive Plan of Action and the waiver of certain US sanctions that took effect from the same date.

When President Trump indicated that the US was pulling out of the JCPOA, proceedings were commenced in May 2018. In August 2018, Popplewell J ordered an expedited trial on the basis that once the US withdrawal from the JCPOA was complete on 4 November 2018, any window for payment (for the US owned or controlled syndicates) would be closed.

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

The Claimant argued that there was no exposure within the meaning of the clause and alleged that in light of the EU’s Blocking Statute, the updated version of which came into force on 7 August 2018, the Defendants were debarred from relying on the clause. The Blocking Statute (via the Extraterritorial US Legislation (Sanctions against Cuba, Iran and Libya) (Protection of Trading Interests) Order 1996) makes compliance with US extra-territorial sanctions a criminal offence and provides for a civil cause of action for anyone harmed by such sanctions. The Claimant alleged that it was a crime to rely on the Sanctions Clause such that the Court should not permit it, and that it was entitled to damages in any event.

This was the first time that the Blocking Statute had been considered by a UK Court or the EU Courts (or, so far as research revealed, by any court anywhere in the world).

There were, broadly speaking, three issues at trial:

The proper construction of the Sanctions Clause: (i) what did ‘exposure’ require, breach or risk of breach; (ii) did the clause extinguish liability or merely suspend it?

Were the insurers exposed on the basis of EU sanctions or US sanctions?

Did the Blocking Statute prevent the Defendants from relying on the Sanctions Clause or provide a remedy in damages to the Claimant?

The Court preferred the Claimant’s construction of the Sanctions Clause, holding: (i) that exposure required it to be a breach of sanctions before the clause operated and not a risk of breach; and (ii) that as regards payment it served to suspend liability and not extinguish it. Applying this construction, the Court found that there was no exposure within the meaning of the clause. 

This meant there was no need to resolve issues around the application of the Blocking Statute. However, the Court expressed the view that the Defendants were correct and that reliance on a contractual Sanctions Clause did not constitute compliance with extra-territorial sanctions; the release from liability was simply the consequence of the clause itself. 

The judgment is here.