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You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Ministry of Defence & Support for Armed Forces of the Islamic Republic of Iran v International Military Services Ltd [2020] EWCA Civ 145 (12 February 2020) URL: https://www.bailii.org/ew/cases/EWCA/Civ/2020/145.html Cite as: [2020] 1 WLR 1726, [2020] EWCA Civ 145, [2020] 2 All ER (Comm) 1003, [2020] WLR(D) 84 |
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ON APPEAL FROM THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
COMMERCIAL COURT (QBD)
Mr Justice Phillips
Strand, London, WC2A 2LL |
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B e f o r e :
LORD JUSTICE NEWEY
and
LORD JUSTICE MALES
____________________
MINISTRY OF DEFENCE & SUPPORT FOR ARMED FORCES OF THE ISLAMIC REPUBLIC OF IRAN |
Appellant |
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- and - |
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INTERNATIONAL MILITARY SERVICES LIMITED |
Respondent |
____________________
Mr Joe Smouha QC and Mr Tom Ford (instructed by Clifford Chance LLP) for the Respondent
Hearing dates: 22-23 January 2020
____________________
Crown Copyright ©
Lord Justice Newey:
Basic facts
"Should the Court refuse enforcement of any post-award interest element of the Awards pursuant to Articles 42 and/or Article 38 of the [2012 Regulation] and/or s. 103(3) of the [Arbitration Act 1996] in relation to the period since MODSAF became a designated entity (it being agreed that IMS is and has been unable to make payment to MODSAF since MODSAF was designated as a specific target of EU sanctions on 24 June 2008)?"
The 2012 Regulation
"1. No claim 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, made by:
(a) designated persons, entities or bodies listed in Annexes IV, V and VI;
(b) any other person, entity or body in Iran, including the Iranian government;
(c) any person, entity or body acting through or on behalf of one of these persons or entities
in connection with any contract or transaction the performance of which would have been affected, directly or indirectly, wholly or in part, by the measures imposed by this Regulation shall be satisfied.
2. The performance of a contract or transaction shall be regarded as having been affected by the measures imposed by this Regulation where the existence or content of the claim results directly or indirectly from those measures.
3. 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."
Recital (4) to the 2008 Regulation explained:
"Regulation (EC) No 423/2007 imposed certain restrictive measures against Iran, in line with Common Position 2007/140/CFSP. As a result, 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 imposed by that Regulation."
"The necessary measures should also be taken to ensure that no compensation is granted to the Government of Iran, or to any person or entity in Iran, or to designated persons or entities, or to any person claiming through or for the benefit of any such person or entity, in connection with any contract or other transaction where its performance was prevented by reason of the measures decided on pursuant to UNSCR 1737 (2006), 1747 (2007) or 1803 (2008), including measures of the European Communities or any Member State in accordance with, as required by or in any connection with the implementation of the relevant decisions of the Security Council."
Further, the 2008 Common Position provided for the amendment of the Common Position which had preceded the 2007 Regulation to include an article in these terms:
"No compensation or other claim of this kind, such as a claim of set-off or a claim under a guarantee, in connection with any contract or transaction the performance of which was affected, directly or indirectly, wholly or in part, by reason of measures decided on pursuant to UNSCR 1737 (2006), 1747 (2007) or 1803 (2008), including measures of the European Communities or any Member State in accordance with, as required by or in any connection with the implementation of the relevant decisions of the Security Council, shall be granted to the designated persons or entities listed in Annexes I or II, or any other person or entity in Iran, including the Government of Iran, or any person or entity claiming through or for the benefit of any such person or entity."
"No funds or economic resources shall be made available, directly or indirectly, to or for the benefit of the natural or legal persons, entities or bodies listed in Annexes VIII and IX".
MODSAF is listed in Annex IX.
"1. Article 23(3) or Article 23a(3) shall not prevent the crediting of the frozen accounts by financial or credit institutions that receive funds transferred by third parties to the account of a listed person, entity or body, provided that any additions to such accounts shall also be frozen. The financial or credit institution shall inform the competent authorities about such transactions without delay.
2. Provided that any such interest or other earnings and payments are frozen in accordance with Article 23(1) or (2) or Article 23a(1) or (2), Article 23(3) or Article 23a(3) shall not apply to the addition to frozen accounts of:
(a) interest or other earnings on those accounts; or
(b) payments due under contracts, agreements or obligations that were concluded or arose before the date on which the person, entity or body referred to in Article 23 or Article 23a has been designated by the Sanctions Committee, the UN Security Council or by the Council."
"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, IX, XIII and XIV;
(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).
2. 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.
3. 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.
4. 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."
"any claim, whether asserted by legal proceedings or not, made before or after the date of entry into force of this Regulation, under or in connection with a contract or transaction, and includes in particular:
(i) a claim for performance of any obligation arising under or in connection with a contract or transaction;
(ii) a claim for extension or payment of a bond, financial guarantee or indemnity of whatever form;
(iii) a claim for compensation in respect of a contract or transaction;
(iv) a counterclaim;
(v) a claim for the recognition or enforcement, including by the procedure of exequatur, of a judgment, an arbitration award or an equivalent decision, wherever made or given".
By article 1(d), "contract or transaction" means:
"any transaction of whatever form and whatever the applicable law, whether comprising one or more contracts or similar obligations made between the same or different parties; for this purpose 'contract' includes a bond, guarantee or indemnity, particularly a financial guarantee or financial indemnity, and credit, whether legally independent or not, as well as any related provision arising under, or in connection with, the transaction".
"This Regulation respects the fundamental rights and observes the principles recognised in particular by the Charter of Fundamental Rights of the European Union and in particular the right to an effective remedy and to a fair trial, the right to property and the right to protection of personal data. This Regulation should be applied in accordance with those rights and principles."
The judgment
"during the sanctions period IMS was precluded from making payments to MODSAF to discharge its liability under the Awards. Thus, insofar as MODSAF seeks interest from IMS in respect of the sanctions period, it is seeking to enforce a liability of IMS whose content (i.e. the quantum of interest) is conditioned by, and in that sense 'results directly or indirectly from', the sanctions."
"I consider that the purpose of Article 38 is to prevent civil claims being brought against a party as a result of the fact that their performance of a contract or transaction was impeded by the operation of the sanctions. I am satisfied that the application of Article 38 to prevent MODSAF from enforcing the interest component of the 7071 Award in respect of the sanctions period falls well within that purpose. As noted previously, the relevant transaction for these purposes is the 7071 Award. During the sanctions period, the existence of the sanctions prevented IMS from discharging its liability to pay the sums due under the Award. That is the reason why, during the sanctions period, IMS came under a liability to pay interest on the principal sum due under the Award. By seeking leave to enforce the interest component of the 7071 Award in respect of the sanctions period, MODSAF is now bringing a claim to hold IMS liable as a result of the fact that IMS's performance of the relevant transaction, i.e. discharge of the debt due under the Award, was affected by the existence of the sanctions. In my view, that runs counter to the object of Article 38."
In a similar vein, the judge said in paragraph 64:
"regardless of the objective that [the 2012 Regulation] as a whole seeks to achieve, I consider that Article 38 serves a specific purpose. As explained above, that is to protect parties against claims being brought against them by virtue of their non-performance of a contract or transaction that was caused by the sanctions. Put differently, the objective of Article 38 is to ameliorate the impact of the sanctions regime on private relationships."
The judge further explained as follows in paragraph 65:
"in any case, I am not persuaded that depriving MODSAF of its right to claim interest during the sanctions period is inconsistent with the objective of the Regulation as a whole i.e., to persuade Iran to comply with UN Security Council Resolution 1737 (2006). On the construction of Article 38 that I regard as being correct, the longer Iran continues to remain non-compliant with Resolution 1737, the longer [the 2012 Regulation] remains in place, and the longer is the period for which MODSAF is deprived of post-award interest under the 7071 Award. It is difficult to see why this is inconsistent with what [counsel for MODSAF] described as the 'carrot and stick' approach of the sanctions regime."
The parties' positions in brief outline
Interpretation of EU instruments
"with regard to judicial review of compliance with the principle of proportionality, the court has held that the European Union legislature must be allowed a broad discretion in areas which involve political, economic and social choices on its part, and in which it is called upon to undertake complex assessments. The court has concluded that the legality of a measure adopted in those areas can be affected only if the measure is manifestly inappropriate having regard to the objective which the competent institution is seeking to pursue."
i) "since legislation must be of general application, its wording cannot be absolutely precise" so "while the use of the legislative technique of referring to general categories, rather than to exhaustive lists, often leaves grey areas at the fringes of a definition, those doubts in relation to borderline cases are not sufficient, in themselves, to make a provision incompatible with article 7 of [the European Convention on Human Rights], provided that the provision proves to be sufficiently clear in the large majority of cases" (paragraph 164 of the judgment) and "those considerations are equally valid" under article 52(3) of the Charter of Fundamental Rights of the European Union (which provides for rights in the Charter to have the same meaning and scope as corresponding rights guaranteed by the European Convention on Human Rights) (paragraph 165 of the judgment);
ii) "the requirement that the law should be foreseeable does not mean that the persons concerned should not have to take appropriate legal advice in order to assess, to a degree that is reasonable in the particular circumstances, the consequences which a given action may entail" (paragraph 166 of the judgment); and
iii) "the terms which are claimed by Rosneft to be lacking in precision, while they are not absolutely precise, are not such that it is impossible for an individual to know for which acts and omissions he may be criminally liable" (paragraph 166 of the judgment).
"the fundamental rights relied on by Rosneft, namely the freedom to conduct a business and the right to property, are not absolute, and their exercise may be subject to restrictions justified by objectives of public interest pursued by the European Union, provided that such restrictions in fact correspond to objectives of general interest and do not constitute, in relation to the aim pursued, a disproportionate and intolerable interference, impairing the very essence of the rights guaranteed".
Purpose
"In so far as the applicants also challenge the proportionality of Article 11 of the contested regulation, as the Council contends, the provision precluding the satisfaction of claims laid down in that article is intended to prevent an entity targeted by the restrictive measures at issue from being able to procure performance of a prohibited transaction, contract or service or from obtaining a remedy under civil law for non-performance of such transactions, contracts or services. Such a provision thus ensures the effectiveness of the restrictive measures at issue, by reflecting in private law the effects of measures that have been properly adopted by the European Union, for so long as those measures are applicable. In that sense, Article 11 of the contested regulation must be considered a proportionate means of achieving the objective of the contested acts."
The "no claims" provision was thus seen, Lord Anderson said, as "ensur[ing] the effectiveness of the restrictive measures at issue" by "reflecting [the effects of the measures] in private law … for so long as those measures are applicable".
"to ensure that no claim shall lie at the instance of the Government of Iraq, or of any person or body in Iraq, or of any person claiming through or for the benefit of any such person or body, in connection with any contract or other transaction where its performance was affected by reason of the measures taken by the Security Council in resolution 661(1990) and related resolutions [i.e. resolutions imposing sanctions on Iraq]".
In keeping with that, article 2 of the relevant Regulation provided:
"1. It shall be prohibited to satisfy or to take any step to satisfy a claim made by:
(a) a person or body in Iraq or acting through a person or body in Iraq; …
(e) any person or body making a claim arising from or in connection with the payment of a bond or financial guarantee or indemnity to one or more of the above-mentioned persons or bodies,
under or in connection with a contract or transaction the performance of which was affected, directly or indirectly, wholly or in part, by the measures decided on pursuant to United Nations Security Council Resolution 661 (1990) and related resolutions.
2. This prohibition shall apply within the Community and to any national of a member state and any body which is incorporated or constituted under the law of a member state."
"2. Paragraph 29 [of the Security Council resolution] thus provides for protection of economic operators against unjustified claims by Iraqi individuals, companies or organisations. In doing so, it prevents Iraq from obtaining compensation retroactively for the negative effects of the embargo. Regarding exposure to claims from Iraq, the banking sector as well as European international contractors, have pointed to the fact that a lifting of the embargo could give rise to an avalanche of requests for payment of performance bonds, guarantees, stand-by credits or similar instruments under existing contracts and transactions for reasons of non-performance. The estimated amount of money involved exceeds 500m ECU. Already now exposure of such a dimension seriously reduces the financial room for manoeuvre of contractors. If the corresponding claims would effectively have to be honoured, the consequences on companies would be dramatic. As regards the position of Iraq, obtaining payment would mean an important financial advantage which would clearly be in contradiction with the very objective pursued by the embargo.
3. Under these conditions, paragraph 29 gives a clear signal that both consequences of admitting claims (i e losses for non-Iraqi operators and compensation to Iraq) are unacceptable to the international community. It is important that in implementing the UN decision, the effect of this signal is not weakened…."
The memorandum then explained that article 29 of the Security Council resolution could be interpreted "either as making claims by Iraq non-enforceable, or as establishing a prohibition to honour such claims" and that the Commission proposed "a system of PROHIBITION TO HONOUR CLAIMS, which would allow to meet both the objective of preventing such retroactive compensation as well as the objective of an effective protection of non-Iraqi parties, and would establish clarity as regards the treatment of the contractual obligations concerned".
"Were the ending of the embargo to be accompanied by removal of the prohibition on satisfaction of claims against non-Iraqi contractors and suppliers, it is obvious that those who had been involuntarily prevented from performing their contracts would or might become liable to their Iraqi opposite numbers, with the result that the ultimate losers as a result of Iraq's gross violation of international law would be the non-Iraqi contractors and suppliers and not the Iraqi entities (including the government) which the embargo was intended to injure."
In Lord Hope's words at paragraph 38, it was "plain that anything less than a permanent prohibition would not relieve economic operators in the Community from the damaging effects of the embargo".
Language
"For the purposes of the interest during the sanctions period issue, the relevant 'claim' is MODSAF's application to enforce the interest component of the 7071 Award in respect of the sanctions period. As [counsel for MODSAF] rightly pointed out, since the Awards pre-dated the sanctions, it is difficult to see how the 'existence' of the claim can be said to have resulted from the sanction. However, in response, Mr Smouha submitted that even though the existence of the claim may not have been based on the sanctions, its content (insofar as it concerns interest) did result from the sanctions. I agree. As noted previously, during the sanctions period IMS was precluded from making payments to MODSAF to discharge its liability under the Awards. Thus, insofar as MODSAF seeks interest from IMS in respect of the sanctions period, it is seeking to enforce a liability of IMS whose content (i.e. the quantum of interest) is conditioned by, and in that sense 'results directly or indirectly from', the sanctions."
"If [BAe] pays into a frozen account of Modsaf's, which account is held by a financial institution within the EU or credits such account, BAe will not make any funds available to Modsaf; the funds will remain frozen for as long as Modsaf is on said list. If Modsaf proves not to have such an account, it is possible to open an interest-bearing escrow account within the EU."
Proportionality, fundamental rights and certainty
Reference?
"In relation to questions such as 1(a) and 2(a) [viz. issues of EU law], I understand the correct approach in principle of a national court (other than a final court of appeal) to be quite clear: if the facts have been found and the Community law issue is critical to the court's final decision, the appropriate course is ordinarily to refer the issue to the Court of Justice unless the national court can with complete confidence resolve the issue itself. In considering whether it can with complete confidence resolve the issue itself the national court must be fully mindful of the differences between national and Community legislation, of the pitfalls which face a national court venturing into what may be an unfamiliar field, of the need for uniform interpretation throughout the Community and of the great advantages enjoyed by the Court of Justice in construing Community instruments. If the national court has any real doubt, it should ordinarily refer."
Conclusion
Lord Justice Males:
"as the law is now, the party might have an action upon the case for the breach of his promise in non-performance of the award. For the submission is an actual mutual promise to perform the award of the arbitrators; …"
"14. … In the first place there is a clear distinction between an arbitration award and a judgment. An arbitration agreement [sc. award] is in essence enforceable because of the implied contractual promise to pay an arbitration award contained in the arbitration agreement; all measures of enforcement essentially rest upon the contract. The provisions of section 26 of the 1950 Act and section 66 of the 1996 Act must be seen in that context. They are simply procedural provisions enabling the award made in consensual arbitral proceedings to be enforced. This is quite different to the pronouncement of a judgment by a court where the state through its courts has adjudged money to be due."
"With regard to the third assumption, either an award may be enforced 'in the same manner as a judgment' (see sections 66(1) and 101(2) of the 1996 Act) or 'judgment may be entered in terms of the award'(sections 66(2) and 101(3)). The leave of the court to enforce 'in the same manner as a judgment' is a prerequisite of the power to enter judgment in terms of the award, but the two are separate. The essential difference is that the obligation to honour an award arises by virtue of the agreement of the parties, whereas in the case of a judgment it follows from the power of the court."
"By submitting the dispute to arbitration by the International Chamber of Commerce, the parties shall be deemed to have undertaken to carry out the resulting award without delay.…"
(1) MODSAF seeks to enforce an arbitration award which IMS is (and since 24 June 2008 when MODSAF was designated under the then current 2007 Regulation has been) prevented from paying.
(2) The consequence of non-payment of the award is that the interest awarded by the arbitrators has continued to accrue during the sanctions period.
(3) A claim for such interest is barred by Article 38:
a) It is a claim in connection with a contract or transaction, namely the contractual obligation to perform the award.
b) The content of the claim for interest during the sanctions period results directly or indirectly from the EU sanctions.
c) Performance of IMS's obligation to pay interest was therefore affected by the measures imposed under the Regulation, even if performance of the underlying obligation to deliver the tanks and armoured vehicles was not.
d) Accordingly no claim for such interest "shall be satisfied", either now or (adopting the reasoning in Shanning International Ltd v Lloyds TSB Bank plc) when the sanctions period eventually comes to an end.
Lord Justice Moylan: