In Arash Shipping Enterprises Company Limited v Groupama Transport, the Court of Appeal considered the impact of Council Regulation (EU) No.961/2010 (the Regulation) on a contract of insurance. The Regulation aimed to impose restrictive measures against Iran "with a view to supporting the resolution of all outstanding concerns regarding Iran's development of sensitive technologies in support of its nuclear and missile programmes".
Article 26 of the Regulation prohibits the provision of insurance or reinsurance to an Iranian person, entity or body other than a natural person. The subject of the appeal concerned the operation of Article 26(4): "This article prohibits the extension or renewal of insurance and reinsurance agreements concluded before the entry into force of this Regulation, but without prejudice to Article 16(3), it does not prohibit compliance with agreements concluded before that date." (emphasis added)
The appellant Arash Shipping Enterprises Company Limited (Arash) was insured under a composite policy of marine insurance covering hull and machinery risks (the Policy). The respondent Groupama Transport (Groupama) was the leading underwriter on the Policy and was sued as a representative of those underwriters subscribing to the Policy. The assets insured under the Policy include the Iranian fleet of oil tankers. Arash accepted for the purposes of the appeal that it was an Iranian entity within the meaning of the Regulation.
The Policy incepted in May 2010 some five months before the Regulation came into force and contained the following clause:
"Insurers hereon may…cancel the Insurer's participation under this Policy in circumstances where the Assured has or may, in the opinion of the Insurer, expose the Insurer to the risk of being or becoming subject to any sanction, prohibition or adverse action…".
The Policy also contained a "Review Clause" in the following terms:
"Provided that if, after 10 months of the policy period, the credit balance of this insurance is 50% or better for all fleets combined underwriters hereon will extend the period of this insurance for a further twelve months on an unaltered basis."
Groupama gave notice of cancellation in reliance on the Regulation.
The Court of Appeal had two principal issues to determine. Firstly, whether the extension of the period of the policy was prohibited by Article 26(4) of the Regulation; and secondly whether the Respondent was entitled to serve its notice of cancellation, and whether its notice was effective. Full submissions were heard on Issue 2 however the Court of Appeal declined to hear full argument on Issue 1.
Arash submitted that the cancellation clause required that the Insured has exposed or may expose the Insurer to the risk of becoming subject to the prohibition and that this requires an act or omission on the part of the Insured giving rise to that risk. It was common ground that there was no such act or omission.
The Court of Appeal rejected Arash's submission. It held that the Policy, including the cancellation clause, must be construed as a whole and given a sensible effect. Arash's submissions as to the first paragraph of the cancellation clause was unduly narrow and deprived the clause of any, or almost any, practical effect. The court accepted Counsel for Groupama's submission that "sanctions are often aimed not so much at acts of the target nationals but rather at the acts of those dealing with target nationals." A number of other submissions, including the reasonableness of the notice of cancellation served after proceedings had commenced, were also rejected by the Court of Appeal.
Implications for the insurance industry
Disappointingly, the Court of Appeal declined to give judgment on Issue 1. It was submitted that that the application of Article 26(4) is of general concern to the insurance market. The Court of Appeal held that the European Court of Justice was the court of final decision in relation to the correct interpretation of Article 26(4) and that it was not the role of the Court of Appeal to be an advisory court.
However, in considering the interpretation of Article 26(4) of the Regulation, insurers may receive some guidance from this case. Lord Justice Tomlinson said obiter that his preliminary view was that the judge's finding at first instance on Article 26 was "plainly correct". Tomlinson LJ said that reference in Article 26(4) back to Article 16(3) was in his view related to the performance or run-off of existing insurance rather than preserving the ability to enter into a contractual extension or renewal.