On 12 February 2020, the Court of Appeal handed down its decision in Ministry of Defence and Support for Armed Forces of the Islamic Republic of Iran v. International Military Services Limited.1 This article follows on from our previous client alert, which considers the first instance decision.

The Court of Appeal dismissed the appeal from the Ministry of Defence and Support for Armed Forces of the Islamic Republic of Iran (MODSAF), confirming that where a debtor owes a sum of money to an EU-sanctioned entity, interest will not accrue on that sum while the entity to whom the debt is owed remains subject to sanctions, even if there is a court order or judgment, or an arbitration award, against the debtor.

This confirmation provides further reassurance to companies that have refused to make payments to EU-sanctioned entities, and also some clarity on the purpose, language and proportionality of asset-freezing measures. That said, companies should note that the Court of Appeal acknowledged that a designated person with an appropriate EU account could be credited with interest and in such instances, companies may have to make payments into such blocked accounts.

Delivering the leading judgment, Lord Justice Newey determined the appeal turned on a consideration of:

  1. the purpose and language of Article 38 of EU Council Regulation 267/2012 (the “Regulation”); and
  2. an examination of whether depriving MODSAF of interest owed in accordance with Article 38 of the Regulation amounted to disproportionate interference with the appellant’s fundamental right to property.

By way of reminder, Article 38 the Regulation states:

  1. No claims in connection with any contract or transaction the performance of which has been affected, directly or indirectly, in whole or in part, by the measures imposed under this Regulation, including claims for indemnity or any other claim of this type, such as a claim for compensation or a claim under a guarantee, notably a claim for extension or payment of a bond, guarantee or indemnity, particularly a financial guarantee or financial indemnity, of whatever form, shall be satisfied, if they are made by:

(a) designated persons, entities or bodies listed in Annexes VIII and IX;

(b) any other Iranian person, entity or body, including the Iranian government;

(c) any person, entity or body acting through or on behalf of one of the persons, entities or bodies referred to in points (a) and (b).

  1. The performance of a contract or transaction shall be regarded as having been affected by the measures imposed under this Regulation where the existence or content of the claim results directly or indirectly from those measures.
  2. In any proceedings for the enforcement of a claim, the onus of proving that satisfying the claim is not prohibited by paragraph 1 shall be on the person seeking the enforcement of that claim.
  3. This Article is without prejudice to the right of the persons, entities and bodies referred to in paragraph 1 to judicial review of the legality of the non-performance of contractual obligations in accordance with this Regulation.


Lord Anderson QC, arguing for MODSAF, took issue with Phillips J’s first instance conclusion that the purpose of Article 38 was “to ameliorate the impact of the sanctions regime on private relationships”.2 In contrast, Lord Anderson contended that the purpose of Article 38 was to reflect in private law the effects of Articles 23 and 29. According to Lord Anderson:

  • Article 23 does not operate to confiscate funds or economic resources from a person designated under the relevant sanctions regime but simply to prevent access; and
  • Article 29 specifically authorises a designated person to be credited with interest if such interest is paid into a frozen account.

Rejecting Lord Anderson’s submission, Lord Justice Newey relied on the House of Lords decision in Shanning3 to assert “that ‘no claims’ provisions such as article 38 of the…Regulation do have confiscatory consequences.”4

Lord Justice Newey proceeded to consider recital (4) of the 2008 iteration of the Regulation, which states: “economic operators are exposed to the risk of claims and it is therefore necessary to protect such operators permanently against claims in connection with any contract or other transaction the performance of which was affected by reason of the measures imposes by that Regulation.”5

Accordingly, Lord Justice Newey concluded that the purpose of Article 38 must be to protect parties against claims being brought against them by reason of their non-performance of a contract or transaction, which was itself caused by the sanctions.


Pursuant to Article 1(d) of the Regulation, “contract or transaction” refers to “any transaction… whether comprising one or more contracts or similar obligations made between the same or different parties”. 

On Lord Anderson’s construction of Article 38 of the Regulation, an arbitration award cannot be properly regarded as a “contract or transaction”. He contended that: 

  • an arbitration award is not naturally referred to as having an “applicable law”;
  • an arbitration award is not “made between” parties – it is something imposed upon them; and
  • an arbitration award is incapable of being “performed”. 

Addressing Phillips J’s position that Article 1(c)(v) of the Regulation presupposes that arbitration awards and judgments do fall within the remit of “contract or transaction”, Lord Anderson further argued that Article 1(c)(v) instead shows that a claim for the recognition or enforcement of an award or judgment can be one “under or in connection with” a distinct “contract or transaction”, not that an award or judgment can itself be a “contract or transaction”. 

While agreeing that arbitration awards and judgments do not amount to a “contract or transaction”, Lord Justice Newey pointed out that Article 1(c)(v) “refers to claims for the recognition or enforcement of judgments and arbitration awards, not because a judgment or arbitration award can itself be a ‘transaction’, but because such a claim may be an aspect of the pursuit of a claim ‘under or in connection with’ a separate contract or transaction.”6

To Lord Justice Newey’s mind, it was the 1970s contracts at the centre of the initial dispute which form the “contract or transaction”. MODSAF’s application for judgment to be entered in its favour should, according to Lord Justice Newey, be considered a “claim” “in connection with any contract or transaction”. Lord Justice Newey concluded that such an application is patently “for the…enforcement…of…an arbitration award” within the meaning of Article 1(c)(v) and, given that the award flows from the original contracts, the application for relief in respect of the award should be considered “in connection with” those contracts.

Proportionality and fundamental rights

Lord Anderson also argued that construing the Regulation in such a way as to deprive MODSAF of interest would amount to a disproportionate interference with MODSAF’s fundamental right to property.7

He contended that the sole purpose of the asset-freezing measures contained within the Regulation was to freeze, not confiscate or penalise. He also asserted that it would be arbitrary for MODSAF’s entitlement to interest to be contingent on whether it happened to have a suitable account with an EU financial institution.

On this, Lord Justice Newey reaffirmed that Article 38 was intended to have confiscatory consequences; it “was designed to ensure that…the burden was borne by the designated persons rather than the counterparties.”8

Acknowledging that a designated person with an appropriate EU account could be credited with interest pursuant to Article 29 of the Regulation, Lord Justice Newey highlighted the rational basis for such position – interest amounts can be frozen once in the account and the designated person’s counterparty can avoid future liability for failure to pay those interest amounts.

However, the reality was that, where a designated person holds no qualifying account, the counterparty would be unable to pay and, without Article 38, could not escape liability for any such failure to pay. In Lord Justice Newey’s words, “[i]t is therefore comprehensible that a counterparty should enjoy protection where the designated person has no relevant account but not where he does.”9


The Court of Appeal’s judgment provides welcome confirmation that, where an entity subject to sanctions under the Regulation does not have a qualifying EU bank account, despite the fact of a court order or judgment, or an arbitration award, its counterparties will not be required to pay interest on any such order, judgment or award, for the period during which that entity remains sanctioned.

The EU’s future position on Iranian sanctions remains uncertain. As mentioned in our previous alert, the dispute resolution mechanism of the Joint Comprehensive Plan of Action (JCPOA) has been triggered. However, the United Kingdom, France and Germany have been continuously rolling the initial time period of the dispute resolution, and therefore no further steps have been taken.

Further, as per our previous alert on applicable UK sanctions in the transition period post-Brexit and in light of the UK’s involvement in the JCPOA, it is unlikely that the UK sanctions regime will differ from the EU’s position at this stage.