In Islamic Republic of Iran Shipping Lines v Steamship Mutual Underwriting Association (Bermuda) Limited [2010] EWHC 2661 (Comm) the Commercial Court had to assess the impact of the Financial Restrictions (Iran) Order 2009 (the Order), and a licence made under it (the Licence), on the provision of marine professional and indemnity (P&I) insurance.

The claimant, Islamic Republic of Iran Shipping Lines (IRISL), was a member of the defendant P&I club, Steamship Mutual Underwriting Association (Bermuda) Limited (the Club), which provided cover for a wide range of risks, including pollution. Insurance cover (or security) is required by the International Convention on Civil Liability for Bunker Oil Pollution Damages 2001 (the Convention) in respect of ships trading in the territorial waters of States who are a party to the Convention.

IRISL had a number of ships entered with the Club, including the "ZOORIK", for the period from 20 February 2009 to 20 February 2010. The Club issued a Blue Card evidencing that insurance meeting the requirements of the Convention was in place and the Maritime and Coastguard Agency issued a certificate of insurance (such a certificate being required to be carried by ships registered in a state not a party to the Convention, Iran being one such state).

The Club terminated its cover of all ships entered by IRISL with effect from 00:00 GMT on 30 October 2009 on the grounds that the contract of insurance had been discharged by reason of frustration or supervening illegality. This was as a result of the commencement of the Order and in accordance with the terms of the Licence issued by HM Treasury (an interested party in the proceedings). On the 31 October, the "ZOORIK" suffered a casualty in Chinese waters (China being a party to the Convention) resulting in both a constructive total loss to the vessel and significant bunker oil pollution requiring a clean-up operation.

The Order prohibits all relevant persons (those operating in the financial sector, including the Club) from entering into or continuing to participate in any transaction or business relationship with IRISL. However, the Licence allowed the Club to continue to provide, until 30 October 2010, insurance to IRISL allowing IRISL time to obtain insurance outside of the UK. The Licence also allowed the Club to continue to provide insurance cover in accordance with the Blue Cards for a period of three months commencing on 30 October 2010 and to continue a business relationship with IRISL to the extent necessary to handle, negotiate and pay any claims arising from the three month period.

Firstly, Mr Justice Beatson had to consider the extent, if any, of cover the Club was allowed to continue to provide to IRISL taking into account the Convention and the construction of the Licence. The judge held that on its proper construction, the Licence did permit the Club to continue to provide insurance cover in respect of those risks requiring cover by virtue of the Convention, in addition, it allowed the Club to meet all claims in respect of those risks.

Secondly, the judge had to consider whether the terms of the Order and Licence discharged the insurance by reason of frustration. Counsel for the Club submitted that the court should look at the contract as a whole and whether its purpose as gathered from the terms had been defeated or whether the contractual obligation was radically different from that which had been undertaken by the parties.

Beatson J held that whilst the scope of cover permitted was significantly narrower than it was prior to 30 October "its nature is not different". Distinguishing the House of Lords decision in Denny-Mott and Dixon v James Fraser and Co, the judge held that the contract between the Club and IRISL was to provide indemnity insurance and that "[p]art of that purpose remained lawful." Following his finding that the contract was not frustrated, the judge held that IRISL was entitled to be indemnified in respect of its costs and liabilities arising out of the casualty.

This decision provides a reminder to insurers of the importance of adhering to international sanctions, but also of understanding the scope of any continuing obligations to their insureds.

To view a copy of the judgment, please click here.