A claim was made by The Libyan Investment Authority (LIA) under a guarantee given by Mr Maud in his personal capacity in April 2008, before the imposition of sanctions against Libya in March 2011. The guarantee covered the default of a company (Propinvest Group Ltd). The guarantee was overdue as from 2 March 2010. There was no dispute that the company had defaulted. LIA served a Statutory Demand on Mr Maud based on the guarantee issued in April 2008. The Statutory Demand was challenged by Mr Maud on grounds that to pay would amount to a breach of sanctions, and accordingly that it should be set aside.
Although in some respects the case was specific to the Libyan sanctions regime (in particular Council Regulation (EU No 204/2011) as amended) ("the Regulation"), the decision is relevant to other regimes such as Iran and Syria. There are a number of issues arising from the Judgment, which in the sanctions context are principally as follows:
The Judge decided:
- Meaning of funds
The guarantee was "funds" rather than "economic resources" and therefore subject to the more restrictive regime concerning "unfreezing".
- Derogations applicable to pre-existing contract
Notwithstanding the "unfortunate" wording in the Regulation, there was no inconsistency between allowing funds to be "made available" to the LIA and their "assets outside Libya" being frozen. The derogations available in respect of "making funds available", for example, in respect of pre-existing contracts could not be construed on the wording of the Regulation as applicable to the "freezing restriction". The "freezing restriction" in relation to "funds" prevents "any move, transfer, alteration, use of, access to, or dealing with funds in any way that would result in any change in their volume, amount, location, ownership, possession, character, destination or other change that would enable the funds to be used" (Article1(b) of the Regulation) (emphasis added). The Judge decided that conversion of "the contingent rights under a guarantee into cash once the principle debtor has defaulted and liability under the guarantee had arisen" would amount to a change of character.
- An HM Treasury Licence
An alternative argument was advanced by LIA. This concerned the application of Domestic Regulation applicable to Libya1 which provides that the prohibitions set out do not apply to anything done under the authority of a licence granted by HM Treasury. The LIA maintained that since Mr Maud is the debtor it was his responsibility to take whatever steps he could to make payment under the guarantee. This included an application for a licence to be granted by HM Treasury. It appears that no application was made, neither by Mr Maud nor by the LIA. The Judge decided first, that the obligation to obtain a licence is on the sanctioned entity, i.e. the LIA not Mr Maud. Second, it would be wrong for the Court to make an assumption that a licence would be granted in these circumstances and that payment of money to the LIA in these circumstances would not amount to a breach of the sanctions regime. The Judge's decision seems to have been solely based on the submission of LIA that since the guarantee was not frozen it was not "affected" by sanctions, a point which, as mentioned above, the Judge rejected.
Mr Maud also maintained that he was not obliged to pay under the guarantee by virtue of Article 12 of Regulation 45/2015 which provides immunity for certain sanctions related claims. This provision (which is identical to the provisions in both the Iranian and Syrian regime) provides that "No claims in connection with any contract or transaction the performance of whichhas been affected, directly or indirectly in whole or in part, by the measures imposed under this Regulation, including claims for indemnity or any other claim of that type, such as a claim for compensation or a claim under a guarantee, in particular a claim for extension or payment of a bond, guarantee or indemnity, particularly a financial guarantee or financial indemnity, of whatever form, shall be satisfied, if they are made by ... designated persons; ... any other Libyan person, entity or body". The Judge decided that the guarantee issued by Mr Maud fell within the terms of this Article.
Meaning of "funds"
The designation of a guarantee as funds is unsurprising given that guarantees are specifically identified within the definition of "funds". Comments on the change of characterisation appear at (c) below.
Derogations applicable to "unfreezing"
- The derogation applicable to pre-existing contracts are limited to "make available" exception. This does not mean that any movement of funds would amount to an unfreezing. In particular, the Judge stated that "the payment of a frozen obligation into a frozen bank account does not amount to unfreezing".
- It is submitted that the purpose behind Article 12 is to prevent claims arising under contracts or ancillary contracts where those claims arise out of obligations which are not lawfully performable by reason of the sanctions regime, specifically claims which arise "by measures imposed under [the] Regulation". From the facts described in the Judgment, the guarantee was given by Mr Maud in 2008; the underlying liability of Propinvest Group Ltd arose in 2010; and the applicable sanction regime was imposed in 2011. There is nothing to suggest in the Judgment that the liability under the guarantee arose because of sanctions. On the contrary, it appears that the liability had already arisen following the default of Propinvest Group Ltd which, as stated, pre-dated the applicable sanctions regime. In those circumstances it is hard to see why an obligation to make a payment should be prevented by Article 12.
To take an example, contracts for the provision of humanitarian aid to a sanctioned country are permitted within the parameters of the Iranian sanctions regime. The Iranian Regulation has the equivalent immunity provisions of Article 12 at Article 38. A contract of a sale of foodstuffs between a European company as Seller and an Iranian company as Buyer is therefore lawful and permitted though, of course, it is "affected" by sanctions to the extent there is a requirement for notifications and (depending on the payment route) approvals. If claims were to arise, for example, due to the failure of the Sellers and claims are advanced by the Buyers, it would be a strange result if Buyers would be unable to advance such claims in circumstances where the contracts are lawful and permitted. It would also follow where the obligations of the Sellers are guaranteed, for example, by a parent company guarantee, that claims against the guarantor in those circumstances could not be advanced either. Clearly, in this case the claims would not arise by "measures imposed under the Regulation". They would arise through a contractual default under a contract permitted by the Regulation. Accordingly, one would expect there to be a causal link between the claim and the regulation in terms of whether the underlying contract was lawfully performable. Of course, this causal link would arise where the contract was for the sale of a prohibited product. Clearly, in those circumstances, the contract could not be lawfully performed and one could see why Article 38 would apply both to that contract or any ancillary contracts, such as guarantees.
H.M. Treasury Licence
- It is a matter of speculation whether HM Treasury would have granted a licence but on the basis that the LIA could demonstrate that any proceeds would be paid into a frozen account, it is hard to see why it would offend any principle of the EU or UN sanctions regime. This is on the basis that the funds which derived from the cause of action would be frozen and any change of character would not, in any event, "enable the funds to be used". This appears to be consistent with the Judge's comment that payment of a frozen obligation into a frozen account does not amount to "unfreezing".