Introduction

U.S. legislation seeking substantially to broaden the Iran Sanctions Act of 1996 could have huge repercussions for the trade of refined petroleum products to Iran for both U.S. and non-U.S. owners, charterers, and insurers.

Iran does not currently refine enough oil to meet its own demand. The U.S. Congress is moving ahead with new trade restrictions designed to hit Iran where it hurts – its ability to import refined petroleum products. The Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2009 was passed by the Senate in January, and the Iran Refined Petroleum Sanctions Act of 2009 passed the U.S. House of Representatives in December, both by wide bi-partisan margins.

Congressional staff are currently working on reconciling the two bills, and a final measure is expected for President Obama's signature this term. Secretary of State Clinton has asked Congress for increased flexibility and discretion for the President, given that harsh extraterritorial U.S. sanctions could undercut her efforts to forge a multilateral sanctions regime against Iran this spring.

Once the legislation is finalized, the U.S. Treasury will move quickly to prepare implementing regulations. Treasury officials have made it clear to us that they are interested in hearing the international shipping sector's concerns to ensure that implementation of the sanctions is as workable as possible; however, they warn that their hands will be tied in many regards by the text of the legislation.

The proposed legislation

Whilst the wording in the two Acts is slightly different, their effect (amongst other things) is that the U.S. President is to impose sanctions on persons (both U.S. and foreign) who provide ships or services relating to shipping for the transportation of refined petroleum products to Iran or provide insurance or reinsurance for such activities. Persons who provide brokering, financing, underwriting, insurance, or reinsurance in connection with refined petroleum trade to Iran also are targeted under the proposed law.

The "persons" against whom sanctions could be imposed would extend to owners, charterers, managers, brokers, banks, insurers and P&I clubs.  

The Iran Refined Petroleum Sanctions Act of 2009 provides that:

"The President shall prohibit any transfers of credit or payments between, by, through, or to any financial institution, to the extent that such transfers or payments involve any interest of the sanctioned person."

The "sanctioned person" is the company which has been involved in the transportation of refined petroleum products to Iran. The prohibition of any U.S. dollar transactions by a "sanctioned person" could clearly have a dramatic affect on that company's business operations. Moreover, the legislation would provide authority for freezing any assets of sanctioned persons which come within U.S. jurisdiction.

Discussion

In respect of future charters, if the parties wish a vessel to be able to carry refined petroleum products to Iran unless and until the final legislation comes into force then the parties should include a clause in the charter explicitly setting out the impact that such legislation will have on the ability of the vessel to trade to Iran. This is complicated by the fact that such trade could impact upon the parties' insurance where International Group clubs are contemplating rule changes to ensure that they themselves comply with the U.S. legislation.

In respect of existing charters where the charterer wishes to order the vessel to Iran to discharge refined petroleum products after the legislation comes into force, whether the owner will be entitled to refuse such orders is not a straightforward question. As the sanctions are likely to impact on charterers as well as owners, it may be that highlighting the risk that charterers would face by ordering the vessel on such a voyage would be sufficient to lead to an agreement between owners and charterers to revise the voyage orders.

Assuming the charterers restate their orders to discharge refined petroleum products in Iran, and that there is no express exclusion in the charter preventing them from so doing, the owners would be left with a number of arguments.

Firstly, it may be possible to argue that such an order should be considered illegal as the vessel is only permitted to carry lawful merchandise in lawful trades. In English law an order would be illegal not only if it is contrary to English law but also, it is thought, if it is illegal under the law of the vessel's flag state or the law of the "place of performance" of the charter. But in many cases it may be difficult to argue that the place of performance should be considered the U.S. and thus the order is unlawful. Interesting arguments might develop if the hire payments are being routed through the U.S. and it is then said that the payment of hire is effectively prohibited by the U.S. legislation.

Another linked argument is whether such a voyage to Iran should be considered frustrated by the U.S. legislation. Supervening illegality is a recognised instance of frustration. Again, where the freight or hire is to be routed through the U.S. then there might be better grounds for arguing that the charter has been frustrated in light of the risk that such payments would be frozen.

Finally, owners should also review any War Risks clauses in the charter party. Recent terrorist activity in Iran against European embassies, for example, mean that owners should carefully consider the legitimacy of orders to Iran. All of the above depends, of course, on the form of the final legislation and implementing regulations.

Conclusions

This note should serve as an introduction to the topic. Reed Smith's Shipping team in Washington maintains contact with the U.S. Treasury officials. We will be watching closely how the issues and the legislation develop in the coming months.