In Arash Shipping Enterprises Co Ltd v Groupama Transport [2011] EWCA Civ 620 the Court of Appeal expressed preliminary views that an automatic extension of a marine insurance policy would offend the prohibition on the extension or renewal of (re)insurance contracts in Article 26(4) of Council Regulation (EU) No 961/2010 which prohibits the provision of insurance and reinsurance to Iranian persons.


The appellant ("Arash"), a Cypriot company controlled by an Iranian entity, was the representative of co-insureds under a composite marine insurance policy (“the Policy”). The respondent ("Groupama") acted as the lead insurer under the Policy, which insured one of the world's largest fleets of oil tankers.

The Policy provided cover for a period of 12 months incepting in May 2010. It included a clause (“the Review Clause”) which provided for the period of the Policy to be extended for a further 12 months from the 2011 anniversary date, subject to the achievement of a prescribed loss ratio.

The Policy also contained a sanctions clause (the “Iranian Sanctions Clause”) which provided that insurers had a right of cancellation “where the Assured has exposed or may, in the opinion of the Insurer, expose the Insurer to the risk of being or becoming subject to any sanction”.

It was common ground between the parties that Arash, as an Iranian controlled entity, was an “Iranian person, entity or body” for the purposes of Council Regulation (EU) No 961/2010 (the “EU Regulation”). The EU Regulation came into effect on 27 October 2010, some 5 months after the Policy incepted.  From that date, Article 26(1) of the EU Regulation prohibits (with very limited exceptions) the provision of insurance or reinsurance to an "Iranian person, entity or body other than a natural person". As the Policy incepted prior to the commencement of the EU Regulation, the transitional terms of Article 26(4) were of significance. Article 26(4) provides:

"4. This Article prohibits the extension or renewal of insurance and re-insurance 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.".

The question arose as to whether compliance with the Review Clause, and the extension of the Policy period for an additional 12 months from May 2011, was prohibited by Article 26(4) of the EU Regulation.

Groupama took the view that the operation of the Review Clause would contravene Article 26(4), and therefore if Groupama were to continue to insure Arash after May 2011 it would be exposed to criminal sanctions for breach of the EU Regulation. Groupama therefore served a notice (on its own account) of cancellation in accordance with the Iranian Sanctions Clause. The other insurers followed suit.

Arash brought proceedings against Groupama (both as representative of the other insurers and in its individual capacity) challenging Groupama's right to serve the notice of cancellation. Arash contended that insurers were obliged to extend the period of the Policy. The Review Clause provided for an 'automatic renewal' of the Policy on unaltered terms provided that the prescribed loss ratio threshold was achieved, and therefore the nature of this 'automatic renewal' did not infringe Article 26(4).

Groupama contended that it was not properly joined as a representative defendant for the other insurers under the Policy, and that the case was not appropriate for representative proceedings.

The first instance judgment

In an expedited hearing in the Commercial Court, Burton J held that Article 26(4), properly construed, did prohibit the extension of the Policy period in accordance with the Review Clause. As the notice of cancellation was effective, the judge made no order as to whether or not Groupama was correctly sued as a representative party. Arash appealed.

The decision

The Court of Appeal had two issues to decide:

  1. was the extension of the period of the Policy prohibited by Article 26(4) of the EU Regulation? ("Issue 1"); and
  2. was Groupama entitled to serve its notice of cancellation, and was its notice effective? ("Issue 2").

The Court of Appeal heard full argument on Issue 2 alone, treating this as the primary issue for its consideration. Arash made various submissions in respect of Issue 2 concerning the proper construction of the Iranian Sanctions Clause and the technical requirements for its exercise, none of which found favour with the Court of Appeal which dismissed Arash's appeal on Issue 2. Groupama was therefore entitled to serve its notice of cancellation and that notice was effective. Issue 1 thus became academic.

Nevertheless, the Court of Appeal acknowledged that the question of the correct interpretation of Article 26(4) was of some importance to the market as a whole. The court made reference to the interpretations given to Article 26(4) by HM Treasury (the UK body responsible for the enforcement of the EU Regulation) and the EU Commission, and noted that both bodies were of the opinion that the 'automatic renewal' provided for by the Review Clause was not permissible.

Lord Justice Stanley Burton giving the leading judgment ultimately considered that it would be inappropriate in the circumstances for a civil court to make a decision upon the correct interpretation of Article 26(4), not least because a breach of the EU Regulation constitutes a criminal offence under English law.

However, Lord Justice Tomlinson was prepared to state that in his own preliminary view, the first instance judgment of Burton J was "plainly correct". Article 26(4) should not be read as exempting from the prohibition an extension or renewal of a policy, notwithstanding that such an extension or renewal might be said to be no more than compliance by underwriters with the express terms of a policy which had been concluded before the entry into force of the Regulation. He offered the following analysis of the correct interpretation of Article 26(4):

"It is also my present view that the word “agreements” as last used in Article 26(4) means an insurance or re-insurance agreement, by which is intended, I think, a contract of insurance. Insofar as underwriters may be contractually obliged to extend the existing policy, that as it seems to me is compliance with an agreement which is not itself a contract of insurance or an “insurance agreement” but rather a contract to provide a contract of insurance or “insurance agreement”. Thus the obligation to extend may be an agreement about insurance and it is of course contained within an insurance agreement, but I doubt whether it is an agreement of the type compliance with which is permitted by Article 26(4)."


Insurers and reinsurers as well as policyholders and brokers have been grappling with the effects of the EU Regulation since it came into force and the question of what constitutes an extension or renewal of a contract of (re)insurance (as opposed to the permissible performance of a contract of (re)insurance made prior to the EU Regulation) has exercised organisations in a range of contexts.

The first instance judgment of Burton J concerning the restrictive nature of Article 26(4), and the preliminary support for his interpretation by the Court of Appeal nevertheless offers some measure of clarity to market participants. In this case HM Treasury had given an indication that the 'automatic renewal' effected by the Review Clause would be caught by the EU Regulation prohibiting the extension or renewal of contracts providing cover to Iranian entities, even in circumstances where there was to be no exercise of underwriting judgment. That seems to us to be the common sense approach and that an extension or renewal of a (re)insurance contract, however it comes about, would risk offending the Article 26(4) prohibition. The Court of Appeal's preliminary observations are helpful in identifying an agreement to extend or renew an insurance agreement as a separate agreement contained within a (re)insurance contract but one which would nevertheless also, on the face of it, offend Article 26(4).

The Court of Appeal was unconvinced by Arash's arguments in favour of a narrow interpretation of the Iranian Sanctions Clause, which would have restricted insurers' ability to exercise their discretion in electing to cancel the Policy. From a practical perspective (re)insurers should communicate their position to the policyholder well in advance of the contractual extension date and do so strictly in accordance with cancellation provisions arising through any sanctions clause in the contract.