In Islamic Republic of Iran Shipping Lines v Steamship Mutual Underwriting Association (Bermuda) Ltd & HM Treasury [2010] EWHC 2661, the court determined whether the provision of insurance cover by the Defendant P&I Club to the Claimant Iranian shipowner had been rendered illegal, and further whether the contract of insurance had been discharged by frustration.

The Defendant had certified that a particular vessel belonging to the Claimant (the “Vessel”) was entered for class 1 P&I insurance, which included cover against liability for pollution. The Defendant also issued a Blue Card to the Maritime and Coastguard Agency evidencing that the insurance in place in respect of the Vessel met the requirements of the International Convention on Civil Liability for Bunker Oil Pollution Damage (the “Convention”). The Agency then issued a certificate in respect of the Vessel in accordance with Article 7 of the Convention.

During the period of the insurance, the Financial Restrictions (Iran) Order 2009 came into force, which prohibited transactions and business relationships between certain persons and designated Iranian entities. The latter category included the Claimant. HM Treasury issued a licence permitting the Defendant to continue to provide insurance cover to the Claimant for a period of three months, however the Defendant elected to terminate the cover. It took the view that the terms of the licence issued by HM Treasury meant that it was no longer permitted to provide insurance cover to the Claimant. The Vessel subsequently suffered a casualty which rendered it a total constructive loss, and which also caused bunker oil pollution.

The Defendant submitted that:

  1. under the terms of the licence it was not permitted to provide insurance cover or to indemnify the Defendant in respect of claims made by third parties against the Defendant for pollution damage, but was only permitted to make payments to third parties asserting a direct right of action against the Club under Article 7(1) of the Convention; and  
  2. in any event, the contract of insurance between the parties in respect of the Vessel had been discharged by frustration and/or supervening illegality when it became unlawful for the Defendant to insure the Claimant in respect of all other risks.  

The Court held that:

  1. The requirements of the Convention had to be considered, because there was a presumption that the licence would be consistent with the UK’s international law obligations. While the protection of third parties was one of the most important purposes of the Convention, it was not the only one. Other purposes included the promotion of preventative measures and reinstatement. Both categories of costs fell within the compulsory insurance required by Article 7(1), but no distinction was made as to whether the costs of preventative measures and reinstatement were initially borne by the shipowner or a third party. To distinguish between the positions of the insured shipowner and third parties did not reflect the language of the Convention. On its proper construction, the licence permitted the Defendant to continue to provide the Claimant with insurance cover in respect of the risks required to be insured by reason of the provisions of the Convention, and also to meet claims made in respect of those risks and not only claims made by third parties pursuant to Article 7(10).  
  2. The contract was not frustrated. The licence did not render the Defendant’s obligations so radically different as to frustrate the contract: while the scope of the permitted cover was significantly narrower, its nature was not different. Part of the purpose of the contract, i.e. to provide indemnity insurance, remained lawful, and the performance by the Defendant of the part of the cover which remained lawful was not dependent on the other parts of the cover which were no longer lawful.