Summary: Mamancochet Mining Limited v Aegis Managing Agency Limited and ors [2018] EWHC 2643 (Comm).

Background

Mamancochet were the assignee of a marine cargo insurance policy. This policy protected against (amongst other things) the risk of theft of two cargoes of steel billets being transported by sea from Russia to Iran on 23 and 25 August 2012. Whilst the steel billets were held in storage in Iran, goods (with a total value of $3.8m) were stolen at some point between 22 September 2012 and 7 October 2012.

11 of the original 30 underwriters did not settle. They did not assert any wrongdoing on the part of the Claimant. Instead, they argued that they were entitled to rely on the market standard “Sanction Limitation and Exclusion Clause” in the policy. This clause is designed to allow insurers to avoid paying a claim if doing so would otherwise “expose” them to sanctions.

The Sanctions Regime

Of the 11 Defendant insurers, 9 relied on US sanctions arguments. Each of the 9 were established and maintained in the UK, but ultimately owned or controlled by a US entity or person. Each was therefore a ‘US owned or controlled foreign entity’ (“USCFE”) for US sanctions purposes.

Legislation introduced under the Obama regime meant that, from 9 March 2013, USCFE’s were prohibited from entering into contracts of insurance with (amongst others) persons organised within Iran, or ordinarily resident in Iran (“Iranian Persons”). It also prevented USCFEs from paying out on a contract of insurance to an Iranian Person whilst the sanctions were in force. Mamancochet is an Iranian Person.

The Joint Comprehensive Plan of Action (“JCPOA”) relaxed sanctions against Iranian Persons to a certain extent from 18 October 2015. However, President Trump’s decision to withdraw from the JCPOA meant that with effect from 27 June 2018, it would not be possible for insurers to pay the claim, without prior approval from the Office of Foreign Assets Control. However, there is a “wind-down” period in force which is to end on 4 November 2018 (the “Wind Down Period”), during which “all transactions and activities that are ordinarily incident and necessary to the wind down of [JCPOA]” are authorised (the “Wind Down Provision”).

The relevant questions before the court, therefore were: (a) what did it mean to be “exposed” to a sanction, and (b) would payment of the claim is US Dollars during the wind-down period “expose” the insurers to a sanction, and therefore allow them to avoid paying the claim.

The Decision

On the first issue, as to the proper interpretation of “expose”, it was the insurer’s position that, if they were ‘at risk’ of being exposed to a sanction, then that would be enough to satisfy the clause. Mamancochet, on the contrary, claimed that the insurers had to show, on the balance of probabilities, that payment of the claim would put them in breach of the applicable sanctions, and thus lawfully expose them to sanction.

The judge was clear that it was necessary for the insurers to show that “the payment of the claim in question would be conduct which was prohibited by the applicable laws or regulations”, because “unless the conduct is prohibited, there can be no sanction”. Had the insurers wanted a risk of sanction to be sufficient, clear drafting would be needed for this purpose.

After determining the first issue in favour of Mamancochet, the judge then had to decide whether payment of the claim was, in fact, prohibited by the US sanctions legislation. It was common ground that, at the time the claim was submitted (in March 2013), payment of the claim to an Iranian Person was prohibited. It was also common ground that following implementation of the JCPOA, payment of the claim in a currency other than dollars was not prohibited by the JCPOA.

Whilst the parties made a joint application to the UK’s Office of Financial Sanctions Implementation (“OFSI”) to have the insurance claim paid in sterling in the interim period, OFSI decided to refer the matter onwards to the UK Export Joint Control Unit (“UKEJCU”), which had not approved the payment by the time this case came to be heard. The Defendant insurers raised the argument, from an EU sanctions perspective, that as UKEJCU had not yet confirmed whether payment could be made, that this would in and of itself be sufficient to trigger the sanctions clause. The court did not agree.

This is why it fell for the court to consider whether payment of the claim after President Trump’s commitment to withdraw from the JCPOA, but during the Wind Down Period, was permitted.

Despite this being a claim which was submitted prior to the JCPOA’s implementation, with little material development (from a US Dollar perspective) during the period the JCPOA was effective, the court decided that this would be a transaction caught by the Wind Down Provision. The court’s view was that if the JCPOA authorised what was previously prohibited (and payment of the insurance claims was authorised during the JCPOA period) then payment during the Wind Down Period would be equally authorised. The court formed the view that it was of relevance that the Wind Down Provision authorised “all transactions and activities”. Further, it was held that there was nothing in the Wind Down Provision to support a distinction between claims arising during the JCPOA period, and those arising prior to it. Therefore insurers were liable to pay the claim prior to 11.59 eastern standard time on 4 November 2018.

Impact

Whilst this case is specific to Iranian sanctions, it provides guidance for sanctions and the likely attitude of the courts to them. It is sure to be a case of importance for many insurance companies. Given that it was a market standard clause that was subject to judicial scrutiny, and the court’s interpretation favoured the insured, it will be interesting to see how the market responds to this decision and whether the exclusion is amended.