On 6 May 2015, the English Commercial Court rendered a judgment in the on-going case of Bank Mellat v Her Majesty’s Treasury [2015] EWHC 1258 (Comm).  This judgment follows the UK Supreme Court’s decision in June 2013, which held that the UK Treasury (the Treasury) had unlawfully applied sanctions against Bank Mellat.

This decision is significant in that it establishes that the UK can be held financially liable for sanctions measures that are unlawfully applied against an entity, and follows a recent decision inSafa Nicu Sepahan v Council, which was the first judgment to award damages to a natural person in the context of economic sanctions promulgated by the EU.  See our previous advisory for further information.


The UK Financial Restrictions (Iran) Order 2009  (2009 Order) (which was introduced by the Treasury under powers conferred upon it by Schedule 7 of the Counter-Terrorism Act 2008), which entered into force on 12 October 2009, was part of the UK’s efforts to curtail the financing of Iran’s nuclear weapons programme.  Under the 2009 Order, all persons operating in the UK financial sector were banned from entering into or continuing any transactions or business relationships with certain entities associated with Iran.

Bank Mellat, one of Iran’s largest private commercial banks, and its branches were subjected to these sanctions on the basis that the Treasury believed it had two clients – Novin Energy Company and Doostan International – that were directly linked to Iran’s nuclear weapons programme.  However, Bank Mellat maintained that it had done everything that it could to sever links with Novin, following the United Nations Security Council’s designation of Novin as a sanctioned entity.  The bank also insisted that it had carried out an investigation into Doostan and found nothing unusual or suspicious, but had still terminated its business relationship. Nonetheless, the Treasury argued that even if Bank Mellat did not have any relationships with companies such as Novin and Doostan, the fact that the Iranian government owned a minority share in Bank Mellat meant that the bank was potentially vulnerable to being used to financially support the Iranian nuclear and ballistic missile programme.

In July 2010, the 2009 Order was superseded by the European Union Council Regulation (EU) No 668/2010, which excluded Bank Mellat from the European Union market as a whole and froze the Bank’s assets in Europe. 

Overview of the Legal Proceedings

In November 2009, Bank Mellat challenged its inclusion in the 2009 Order, arguing that the 2009 Order breached rules of natural justice, Article 6 of the European Convention on Human Rights (ECHR), and Article 1 of Protocol 1 of ECHR (A1P1) (respectively, the right to a fair trial and the right to peaceful enjoyment of property).  On 11 June 2010, the English High Court issued a judgment rejecting the bank’s procedural and substantive challenges, finding that the 2009 Order was proportionate in light of the importance of the public interest it protected.  The court also found permissible the Treasury’s “closed material procedure”, used to keep certain secret evidence from both the public and the bank.  Bank Mellat appealed this decision, and in January 2011 the Court of Appeal handed down a judgment dismissing the appeal.  

While the court proceedings in the UK were on-going, the European Union’s General Court annulled the EU sanctions against Bank Mellat in January 2013, finding that the Council of the European Union had failed to provide sufficient evidence to support its allegation that Bank Mellat was connected to the Iranian government’s nuclear weapons programme. 

Thereafter, a majority of a nine judge UK Supreme Court allowed Bank Mellat’s appeal in June 2013, holding that the 2009 Order was unlawful as to its inclusion of Bank Mellat, and the Treasury had failed to comply with procedural requirements by not giving Bank Mellat an opportunity to make representations before enacting the 2009 Order [see Bank Mellat v Her Majesty’s Treasury (No 1)and (No 2) [2013] UKSC 38 and 39]. 

Τhe majority found that Bank Mellat’s practices could not be rationally distinguished from those of other Iranian banks operating in the UK.  In singling out Bank Mellat, the effect of the 2009 Order was disproportionate to the Treasury’s intent to curb Iran’s nuclear weapons programme.  The court also examined the secret evidence and ruled that it was not relevant to the case.  Finally, it remitted the case for trial to establish damages due under the Human Rights Act 1998 (HRA 1998) for the government’s breach of its A1P1 obligations.

The Commercial Court’s Judgment of 6 May 2015

This judgment, though the first step in the process to determine damages, dealt with three important preliminary legal issues:

  • Whether the Treasury could contend that it did not act in a way that was (a) incompatible with a Convention right and/or (b) unlawful contrary to Section 6(1) of the HRA 1998 (Issue One)
  • Whether Bank Mellat could claim for losses caused by a diminution in the earnings generated by its subsidiaries (Issue Two)
  • Whether Bank Mellat’s heads of losses were “possessions”, which the 2009 Order could have interfered with, within the meaning of A1P1 (Issue Three)

Issue One

The UK Treasury Department argued that the Court had only found that the unlawfulness of the restrictive measures was a matter of common law, not under the Human Rights Act 1998. This was a significant distinction asserted by Treasury because it sought to limit the damages available to the bank to interference with “possessions” within the meaning of A1P1.  Justice Flaux did not accept this argument, noting that in the litigation proceedings to date Bank Mellat had made it clear that its substantive challenge was based on the 2009 Order being incompatible with the Bank’s rights under A1P1, and therefore unlawful under Section 6(1) of the HRA 1998.  Justice Flaux observed that “[i]t could not be clearer that Lord Sumption considered the 2009 Order was unlawful because it was incompatible with that right under A1P1.  It is simply not open to the Treasury to contend that it did not act in a way which was incompatible with a Convention right when a majority of the Supreme Court has decided that it did.”

Issue Two

Issue Two involved a review of the so-called rule against reflective loss (i.e., that a shareholder cannot claim for losses suffered by him reflecting losses of the company in which he has a shareholding), and whether the rule is applicable under ECHR jurisprudence. 

Bank Mellat argued that but for the 2009 Order, it had a reasonable and legitimate expectation that the earnings and share value of each of its three subsidiaries would have grown annually, rather than decreasing as they did after the 2009 Order.  In particular, its 60% shareholding in the Persian International Bank plc (PIB) was quite affected by the UK restrictive measures. 

The Treasury contended that Bank Mellat’s subsidiaries did not have a cause of action to recover losses from the Treasury because the necessary fact-sensitive enquiry had not been conducted.  The Treasury also argued that PIB could have brought its own claim against the Treasury under Sections 7 and 8 of the HRA 1998, and that Bank Mellat was therefore prevented from doing so.

Justice Flaux held that ECHR jurisprudence does not recognise a rule equivalent to the English law rule against recovery of reflective loss unless there are exceptional circumstances.  He also found that PIB could not have brought a claim against the Treasury under the HRA 1998 or at common law, because it did not have the status of a “direct victim”; the Supreme Court had found that the direct victim of the 2009 Order was Bank Mellat.  Therefore, he concluded that Bank Mellat was free to pursue a claim for diminution in the value of its shareholdings in PIB.

Issue Three

This issue concerns the type of property, assets, claims or legitimate expectations which are classified as “possessions” within A1P1, and whether unlawful interference therewith provides for damages.  Bank Mellat argued that once liability had been established by the Supreme Court’s decision that the 2009 Order was an unjustified interference with its right to peaceful enjoyment of its possessions under A1P1, damages should not be limited by reference to what might technically amount to a “possession”.  Bank Mellat maintained that the fundamental principle of compensation in ECHR jurisprudence is restitutio in integrum, which in appropriate cases includes consequential losses or future losses, if the recovery of those losses is necessary to achieve just satisfaction.

The Treasury asserted that damages are only recoverable in respect of what amounts to “possessions” within the meaning of A1P1, and the European Court has consistently said that future loss of income does not amount to a “possession”.

Justice Flaux noted that the Supreme Court had held that the interference with Bank Mellat’s possessions was unjustifiable, affecting its business in a wide-ranging way – which is the intended effect of sanctions.  Following a review of European case law on A1P1, he concurred with Bank Mellat’s argument that once it is established that there has been an unlawful interference with the applicant’s “possessions” so as to establish a breach of A1P1, “damages are recoverable for whatever loss and damage can be established as having been suffered as a consequence of the unlawful interference, including consequential losses such as loss of future earnings or profits, not constrained by whether what is claimed by way of loss is itself a ‘possession’, but only by whether the loss claimed was caused by the unlawful interference with the relevant ‘possessions’ which the court has found”.

Justice Flaux refused, however, to reach conclusions on causation of damages.  He noted that “[w]hilst it is correct that the possessions with which there was unlawful interference cannot include future loss of profit, rather than goodwill…the issue as to what damages are recoverable…will depend…upon issues of causation”.  Those causation issues will include whether or not it can be established that the damages claimed were “demonstrably and directly caused by a violation of A1P1”.  He concluded that causation had to be determined at a full trial. 

Concluding Remarks

In the Bank Mellat case, the UK courts have found that the government’s conduct in deciding to impose sanctions on Bank Mellat was unlawful, and that the bank is therefore entitled to receive damages from the government.  The amount of damages will be determined through further proceedings, and Bank Mellat is reported to be seeking damages of £2.3 billion for loss of revenue and future profits.

Significantly, the basis for damages for unlawful sanctions found in the Bank Mellat decision are nearly identical to those under Article 340 of the Treaty on the Functioning of the European Union, as determined in the Safa Nicu Sepahan case and other European Court of Justice and General Court decisions.  Although the claimant in Safa Nicu Sepahan was awarded damages of €500,000, that judgment did not provide any information as to how those damages were calculated.

In short, it appears that a European jurisprudence regarding damages for unlawful sanctions is steadily emerging – although there remain many open questions, including as to causation and the quantification of damages.  In addition to providing the possibility of damages for improperly sanctioned parties, this jurisprudence could lead the European Council and individual EU member state governments to be more careful in establishing a legal and evidentiary basis for their sanctions decisions.  On the other hand, there is a general trend over recent years of EU expansion of sanctions, which will certainly lead to substantial further litigation over the propriety of sanctions, the scope of damages, and how causation can be established.