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||Neutral Citation Number:  EWHC 2321 (Comm)
||Case N0s. 2012 Folio 1678 2012 Folio 1690 2013 Folio 364
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
||Royal Courts of Justice
Strand, London, WC2A 2LL
||31 July 2013
B e f o r e :
Mr Justice Simon
|| DVB Bank SE
||(1) Shere Shipping Company Limited
(2) Tongham Shipping Company Limited
(3) Uppercourt Shipping Company Limited
(4) Vobster Shipping Company Limited
||(1) Melli Bank PLC
(2) Persia International Bank PLC
||(1) Shere Shipping Company Limited Tongham Shipping Company Limited
(2) Uppercourt Shipping Company Limited
(3) Vobster Shipping Company Limited
||DVB Bank SE
||(1) Woking Shipping Investments Limited
(2) Islamic Republic of Iran Shipping Lines Limited
Mr James Cutress (instructed by Dentons UKMEA LLP) for DVB Bank SE
Mr Peter Irvin (instructed by Stephenson Harwood LLP) for Melli Bank Plc and Persia International Bank Plc
Mr Peter de Verneuil Smith (instructed by Holman Fenwick Willan LLP) for the Defendants
Hearing dates: 26-27 June 2013
HTML VERSION OF JUDGMENT
Crown Copyright ©
Mr Justice Simon:
- By a syndicated loan agreement dated 5 December 2006 (as later amended) (the 'Loan Agreement'), DVB Bank SE ('DVB') and Bank Sepah International plc ('Bank Sepah') each advanced US$50m to Shere Shipping Company Limited, Tongham Shipping Company Limited, Uppercourt Shipping Company Limited and Vobster Shipping Company Limited (the 'Borrowers') to provide post-delivery financing in respect of the acquisition costs of four vessels. It is common ground that such sums were advanced and that the Borrowers have failed to make any payments of interest and principal since 14 September 2011.
- On 22 November 2012, DVB (as agent for all the lenders) served notice accelerating the repayment of the loans. The outstanding amounts due under the Loan Agreement (approximately €42.3m) have not been repaid.
- The Borrowers' obligations under the Loan Agreement were guaranteed by Woking Shipping Investments Limited ('Woking') and Islamic Republic of Iran Shipping Lines ('IRISL'), whom it is convenient to refer to collectively as the 'Guarantors'. The Borrowers are wholly owned by Woking, which is in turn owned by IRISL.
- Following what were claimed to be defaults under the Loan Agreement and failure to satisfy demands under the Guarantee, DVB began the present proceedings (2012 Folio 1687), and the other two lenders which had replaced Bank Sepah, Melli Bank Plc ('Melli Bank') and Persia International Plc ('PIB') also brought proceedings seeking repayment of the sums due to them under the Loan Agreement (2012 Folio 1690). A further set of proceedings was then brought by DVB (as Security Trustee for all three lenders) against the Guarantors seeking payment of the sums due to all three lenders under the Guarantees (2013 Folio 364). It is convenient to group the Claimants together for the purposes of this judgment. Where they advance particular arguments I shall identify the particular claimant who makes the argument.
- The Claimants in each of the three sets of proceedings have applied for summary judgment. The applications are (1) DVB's application (in 2012 Folio 1687) against the Borrowers in respect of €22.5m due to DVB under the Loan Agreement; (2) Melli Bank's and PIB's application (in 2012 Folio 1690) against the Borrowers in respect of the €19.8m due to them under the Loan Agreement, and (3) DVB's application (in 2013 Folio 364) against the Guarantors in respect of the sum of €42.3m due to DVB as security trustee under the Guarantees.
- The Loan Agreement named DVB and Bank Sepah as the lenders and the shipowning companies as the borrowers. The Borrowers, who were Maltese registered companies, provided security in the form of mortgages of the four vessels. Subsequently, on 14 December 2006, Woking and IRISL entered into the Guarantees which guaranteed to the loan.
- In summary, the Loan Agreement provided that the Borrowers would pay capital and interest in forty quarterly instalments (clause 8.1), would insure the vessels on approved terms and with approved brokers/insurers (clause 13.3.1(e) and (f)) and would keep them registered in their respective names in Malta (clause 14.2). Principal instalments and interest on the loan were to be paid by the Borrowers transferring earnings from the vessels each month into an Earnings Account, held in the name of each Borrower in Germany with (at the material time) Unicredit Bank AG. This would then be transferred from the Earnings Account to a Retention Account with DVB held in the name of each Borrower; and DVB would transfer the sums due under the Loan Agreement to the respective Lenders. It will be necessary to refer to the terms of the 'Application of Earnings' clause (clause 18) in more detail later in this judgment. If the Borrowers failed to meet certain obligations, including payment of interest, an Event of Default would occur and DVB (as agent for the Lenders) was able on notice to call for immediate payment of all sums owed under the Loan Agreement (clause 19). The Loan Agreement was governed by English law (clause 31) with the English Courts having jurisdiction (clause 32).
- On 5 December 2006 DVB had entered into an Agency and Trust Deed with the Borrowers which entitled it to act as Security Trustee on behalf of the Lenders.
- The Loan was drawn down on 14 December 2006, with DVB and Bank Sepah each lending $50 million to the Borrowers; and on the same date DVB, in its capacity of Security Trustee, entered into the Guarantees with Woking and IRISL.
- On 14 March 2007 the Loan Agreement was amended so that Bank Sepah's loan became what was referred to as the Euro Currency Tranche, which was novated to Melli Bank/PIB on 21 March 2007.
- From 2006 international business with Iranian commercial entities began to be affected by UN imposed sanctions, which were effectively incorporated into and supplemented by the European Union.
- So far as material to the present case, the sanctions were imposed in stages as follows:
(1) Regulation 1100/2009 (dated 17 November 2009) added Melli Bank to the list of Iranian entities which were subject to sanctions under Regulation 423/2007.
(2) On 26 July 2010 Regulation 668/2010 added PIB and IRISL to the list of Iranian entities which were subject to sanctions under Regulation 423/2007.
(3) On 27 October 2010 Regulation 961/2010 introduced a new set of sanctions against Iranian entities including IRISL, Melli Bank and PIB.
(4) On 24 May 2011 Regulation 503/2011 added the Borrowers and Woking to the list of Iranian entities which were subject to sanctions under Regulation 961/2010.
(5) On 24 March 2012 Regulation 267/2012 replaced Regulation 961/2010 and continued the sanctions imposed against the Borrowers, the Guarantors and Melli Bank/PIB.
- Despite being subject to sanctions the Borrowers continued to perform their repayment obligations under the Loan Agreement for another four months until 14 September 2011.
- Regulation 961/2010 (Article 18) and Regulation 267/2012 (Article 25) both contained derogations which permitted designated persons to make payments due under contracts made before the date they were designated. In broad terms, the Articles permitted Competent Authorities to authorise the release of frozen funds for the purpose of making payments which were due under such contracts. It will be necessary to look more closely at the nature of this authorisation later in this judgment.
- It is common ground that the Loan Agreement and the Guarantees fall within this exception, in that they were entered into in 2006. It is also common ground that between September 2010 and September 2011, successful applications were made to the Bundesbank for authorisation under Article 18 of Regulation 961/2010 for quarterly repayments of principal and interest to be paid under the Loan Agreement to DVB from the Borrowers' retention accounts; and that the last instalment of principal and interest was made on 14 September 2011. The only payment that has been credited to the Borrowers' accounts since that date is a payment of €781,400 (USD$1m), received on 28 March 2013, which was recovered from accounts which had been pledged to DVB. DVB had applied to the Bundesbank for authorisation for such funds to be released from the asset freeze to repay the loan; and such authorisation was granted on 19 November 2012.
- The Borrowers and the Guarantors contend that the performance of the Borrowers' obligations under the Loan Agreement has been rendered impossible due to the effect of the Regulations to which they were subject. The Claimants submit that the Borrowers were able to carry out their obligations for the four months after they became subject to Regulation 503/2011 and are simply using the imposition of sanctions as an excuse not to honour their contractual obligations.
- In addition to their complaints of default under the repayment obligations in the Loan Agreement, the Claimants point out that the Borrowers have also defaulted on other provisions. In particular, it is common ground that they transferred ownership of the ships, apparently in April/May 2012, in breach of Clause 11.3 of the Loan Agreement, which only permitted transfers with the Lenders' consent. The Claimants contend that the breaches of the repayment obligations and of Clause 11.3 constituted Events of Default within the meaning of Clause 19.1(a) and (b) of the Loan Agreement, entitling DVB to accelerate the loans under Clauses 19.2(a) and 19.4.
- Regulation 267/2012 repealed and replaced Regulation 961/2010 and, although it maintained the designation and asset freeze of the Borrowers and Guarantors, in almost identical terms, it introduced a potential confusion. The asset freeze provisions which were formerly in Article 16 of Regulation 961/2010 are now contained in Article 23 of Regulation 967/2012, and the authorisation provisions formerly in Article 18 of Regulation 961/2010 are now contained in Article 25 of Regulation 967/2012.
- Although they were not the Regulations which were in force prior to 24 March 2012, the hearing proceeded on the basis of a sensible agreement that the issues of interpretation could be confined to the terms of Regulation 267/2012.
- On 22 November 2012, in the absence of any payment for over a year, DVB served a notice accelerating the loans; and on the same day, arrested one of the vessels (the 'Uppercourt') in China.
- On 20 December 2012 DVB and Melli Bank/PIB brought proceedings against the Borrowers for repayment of the sums due under the Loan Agreement. On 1 February 2013 DVB made demand on the Guarantees; and on 14 March began proceedings against the Guarantors for recovery of the sums due under the Guarantees.
- A central issue on this application is whether the Borrowers have a defence which should proceed to trial: that they are excused from liability to repay the sums outstanding under the loans by the operation of Regulation 967/2012.
- The Claimants' robust response to this defence is that it is without substance. The Regulations contain provisions enabling authorisation to be obtained from the relevant authorities; and in any event, between May and September 2011, and after the imposition of the relevant sanctions, the Borrowers were able to, and did in fact, continue repayment of the loans, following the grant of express authorisation by the competent authorities. In short they say that the Borrowers and Guarantors are impermissibly 'hiding behind' the Regulations in order to avoid their contractual liabilities.
The test on an application for summary judgment
- In his helpful skeleton argument Mr de Verneuil Smith (for the Borrowers and Guarantors) set out the test to be applied where a party applies for summary judgment under CPR Part 24.2(a)(ii) on the basis that a defendant has no real prospect of successfully resisting the claim. He did so by reference to the well-known summary of the law in Easyair Limited v Opal Telecom Limited  EWHC 339 (Ch), Lewison J at ; approved subsequently (among others) by Etherton LJ in A C Ward & Son v Caitlin (Five) Limited  EWCA Civ 1098 at .
(i) The court must consider whether the claimant has a 'realistic' as opposed to a 'fanciful' prospect of success: Swain v Hillman  2 All ER 91;
(ii) A 'realistic' claim is one that carries some degree of conviction. This means a claim that is more than merely arguable: E D & F Man Liquid Products v Patel  EWCA Civ 472;
(iii) In reaching its conclusion that the court must not conduct a 'mini-trial': Swain v Hillman;
(iv) This does not mean that the court must take at face value and without analysis everything that a claimant says in his statements before the court. In some cases it may be clear that there is no real substance in factual assertions made, particularly if contradicted by contemporaneous documents: ED & F Man Liquid Products v Patel at ;
(v) However, in reaching its conclusion the court must take into account not only the evidence actually placed before it on the application for summary judgment, but also the evidence that can reasonably be expected to be available at trial: Royal Brompton Hospital NHS Trust v Hammond ...No. 5)  EWCA Civ 550;
(vi) Although a case may turn out at trial not to be really complicated, it does not follow that it should be decided without the fuller investigation into the facts at trial than is possible or permissible on summary judgment. Thus the court should hesitate about making a final decision without a trial, even where there is no obvious conflict of fact at the time of the application, where reasonable grounds exist for believing that a fuller investigation into the facts of the case would add to or alter the evidence available to a trial judge and so affect the outcome of the case: Doncaster Pharmaceuticals Group ltd v Bolton pharmaceutical Co 100 Ltd  FST 63;
(vii) On the other hand it is not uncommon for an application under Part 24 to give rise to a short point of law or construction and, if the court is satisfied that it has before it all the evidence necessary for the proper determination of the question and that the parties have had an adequate opportunity to address it in argument, it should grasp the nettle and decide it. The reason is quite simple: if the respondent's case is bad in law, he will in truth have no real prospect of succeeding on his claim or successfully defending the claim against him, as the case may be. Similarly, if the applicant's case is bad in law, the sooner that is determined, the better. If it is possible to show by evidence that although material in the form of the documents or oral evidence that would put the documents in another light is not currently before the court, such material is likely to exist and can be expected to be available at trial, it would be wrong to give summary judgment because there would be a real, as opposed to a fanciful, prospect of success. However, it is not enough simply to argue that the case should be allowed to go to trial because something may turn up which would have a bearing on the question of construction: ICI Chemicals & polymers Limited v TTE Training Limited  EWCA Civ 725.
- Mr de Verneuil Smith also invited attention in the context of what might constitute 'a compelling reason' for a trial, within the meaning of CPR Part 24.2(b), to the statement of principle of Megarry J in Miles v Bull  1 QB 258 at p.265:
Under rules 3 and 4 of the present Order 14, the defendant can obtain leave to defend if (and I read from rule 3 (1)) the defendant satisfies the court 'that there is an issue or question in dispute which ought to be tried or that there ought for some other reason to be a trial.' These last words seem to me to be very wide. They also seem to me to have special significance where, as here, most or all of the relevant facts are under the control of the plaintiff, and the defendant would have to seek to elicit by discovery, interrogatories and cross-examination those which will aid her. If the defendant cannot point to a specific issue which ought to be tried but nevertheless satisfies the court that there are circumstances that ought to be investigated, then I think that those concluding words are invoked. There are cases when the plaintiff ought to be put to strict proof of his claim, and exposed to the full investigation possible at a trial; and in such cases it would, in my judgment, be wrong to enter summary judgment for the plaintiff.
- Although the application was issued under both CPR Part 24 and Part 3.4 (strike out) the Claimants' argument was based on the former; and it is unnecessary to say anything further about the principles which apply when the latter rule is invoked.
- In the present case the Claimants contend, first, that the determination of the claim does not depend on making any findings of fact. In so far as there are disputed facts, as there are in relation to one issue at the margins of the case, the Claimants did not invite the Court to make any findings adverse to the Defendants. Secondly, the Claimants submit that this is a case which falls very squarely within Lewison J's category (vii) in  in the Easyair case: a point of interpretation which the Court should decide, confident that it can do so on clear facts, including the context and background.
- There is a further matter which it is also convenient to deal with at this stage: the application issued by all the Defendants on 19 June 2013 for the Court to make a reference under CPR Part 68 for a preliminary ruling from the European Court of Justice. The first application for summary judgment was issued on 22 February and the last on 25 March 2013. This hearing has been fixed to be heard over two days from 26-27 June for some time. In my view the Defendants' application was issued too late to promote the just disposal of the application; and having considered the matter, I did not consider it necessary to accede to the application in order to resolve the dispute between the parties.
- Article 23 is contained within Chapter IV of the Regulation which is entitled 'Freezing of Funds and Economic Resources'. Article 23(2) provides,
All funds and economic resources belonging to, owned, held or controlled by the persons, entities and bodies listed in Annex IX shall be frozen.
Article 23(3) provides
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 Annexe ... IX
It is common ground that the Defendants are to be treated as listed in Annex IX.
- Some of the terms in Article 23 are defined in various sub-paragraphs of Article 1:
(h) 'economic resources' means assets of every kind, whether tangible or intangible, movable or immovable, which are not funds, but which may be used to obtain funds, goods or services;
(j) 'freezing of economic resources' means preventing the use of economic resources to obtain funds, goods or services in any way, including, but not limited to, by selling, hiring or mortgaging them;
(k) 'freezing of funds' means preventing any move, transfer, alteration, use of, access to, or dealing with funds in any way that would result in any change in their volume, amount, location, ownership, possession, character, destination, or other change that would enable the funds to be used, including portfolio management;
(l) 'funds; means financial assets and benefits of every kind, including, but not limited to:
(i) cash, cheques, claims on money, drafts, money orders and other payment instruments;
(ii) deposits with financial institutions or other entities, balances on accounts, debts and debt obligations;
(iii) publicly-and privately-traded securities and debt instruments, including stocks and shares, certificates representing securities, bonds, notes, warrants, debentures and derivatives contracts;
(iv) interest, dividends or other income on or value accruing from or generated by assets;
(v) credit, right of set-off, guarantees, performance bonds or other financial commitments;
(vi) letters of credit, bills of lading, bills of sale; and
(vii) documents showing evidence of an interest in funds or financial resources
- It is clear from this that the definition of 'funds' and 'economic resources' which are frozen by Article 23 is broad.
- Article 25 qualifies Article 23.
By way of derogation from Article 23 and provided that a payment by a person ... listed ... is due under a contract or agreement that was concluded by, or an obligation that arose of the person ... concerned, before the date on which that person ... had been designated ... the competent authorities may authorise ... the release of certain frozen funds or economic resources, if the following conditions are met:
(a) the competent authority has determined that:
(i) the funds or economic resources shall be used for a payment by a person ... listed ...
(iii) the payment is not in breach of Article 23(3) ...
- The term 'Competent Authority' is defined in Article 1(c) as the competent authority of the EU Member states identified on the website in Annexe X.
The Borrowers' Grounds of Defence
- The Borrowers accept, for the purpose of these applications, that they have no real prospect of denying that an Event of Default occurred in or around May 2012 by the sale of the vessels, but submit that obligations in the Loan Agreement and/or the clauses relied upon by the Claimants became discharged and/or unenforceable and/or were frustrated and/or were suspended and continue to be suspended by reason of supervening illegality due to the operation of the Regulations.
- They advance four main reasons for this conclusion. First, the operation of the Loan Agreement is 'suspended' because it constitutes 'economic resources' within the meaning of Article 23(3). Secondly, payments under the Loan Agreement are unenforceable because either they breach the asset freeze in Article 23(2) or such payments would make funds available under Article 23(3), by way of increased equity in the vessel, and must be frozen. Thirdly, since the operation of the Loan Agreement is suspended and not frustrated, the Claimants are not entitled to repayment of sums under the Law Reform (Frustrated Contracts) Act 1943. Fourthly, in any event, payment of the claim by Melli Bank/PIB is suspended because they are themselves designated legal persons.
(1) The argument that the Loan Agreement is an economic resource
- In support of the first argument, Mr de Verneuil Smith referred to the decision of the ECJ in Afrasiabi, Sahabi and Kessel [Case C-72/11], concerning the effect of Regulation 423/2007 (a predecessor of Regulation 267/2012). At , the Court noted the very broad definition of 'economic resources' and at  the 'wide meaning' of the term 'made available.' At  the Court also emphasised that the objects of the European Union Resolution which founded the Regulation were matters to be taken into account in interpreting the resolution; those objects being set out in the preamble to the Regulation.
- He submitted that all this reinforced what is clear from their terms: the Regulations are drawn broadly and with the purpose of restricting Iran's ability to trade. He also referred to another decision of the ECJ in E and F [Case C-550/09] which, although it was concerned with different regulations (aimed at prohibiting and preventing terrorist funding following the 11 September 2001 attack in the United States) throws light on the breadth of meaning of terms 'funds' and 'economic resources'. At  the Court said:
The notion of 'funds, other financial assets and economic resources' as used in Regulation No 2580/2001 also takes on, by virtue of the related definition given in Article 1(1) of that regulation, a wide meaning which covers assets of every kind, however acquired. It is not important, in that regard, whether own assets or assets which have been collected or obtained from third persons are concerned.
- Mr Cutress submitted in answer that the Loan Agreement could not sensibly be said to constitute 'economic resources' within the meaning of Article 23(2). 'Economic resources' is defined in Article 1(h) as 'assets of every kind ...' and the Loan Agreement is not an 'asset', but rather (once the funds were fully drawn down) an instrument which imposed a liability on the Borrowers to repay. Nor could it be said the Loan Agreement constituted 'funds' within the meaning of Article 1(l), since 'funds' are defined as financial assets and benefits.
- It seems to me that Mr Cutress is plainly right. The key obligation which the Borrowers have to say is frozen is the obligation by a designated person to make payment under a loan entered into before they became designated persons; and, whether one is looking at the broad intent of the Regulation or interpreting the detailed wording, it is (unsurprisingly) the assets of the designated persons which are frozen and not the discharge of their liabilities.
- Mr de Verneuil Smith adopted two responses to this point. First he submitted that, if the Court considered that the Loan Agreement was not caught by the sanctions regime this itself strongly points to a reference to the ECJ. This, of course, assumes that the payment obligations under the Loan Agreement should be 'caught' by the Regulations, which is not self-evident. In any case, I have already set out why I am not going to make a reference.
- Secondly, he advanced an argument designed to show that if the Borrowers discharged their liabilities, they would benefit and would thereby acquire an economic resource. I will return to this point later in the judgment.
(2) The argument that a bank transfer is prevented by Articles 23(2) and (3).
- The derogation in Article 25 enabled the Borrowers to obtain authorisation for 'the release of certain frozen funds or economic resources' in order to pay sums due under contracts entered into before they were designated on 24 May 2011.
- On this basis Mr Cutress submitted that the freeze on the Borrowers' assets was plainly qualified and that the Competent Authority could, and did, determine that funds could be used by the Borrowers for the payments due under the Loan Agreement, which was entered into before the date on which they had been designated. He referred to and relied on a passage from the judgment in Dalmia Dairy Industries Ltd v. National Bank of Pakistan  2 Lloyd's 223 at 253l), where Kerr J said that it was the,
... settled law in England ... that a supervening prohibition of some contractually undertaken obligation, which can be overcome by obtaining a licence, will only frustrate a contract at once if the person affected by the prohibition can show that no licence could in any event have been obtained. If this is uncertain, then his obligation is to use his best endeavours to obtain the necessary licence, and the contract then only becomes frustrated if and when all such efforts have failed.
- In the present case Mr Cutress was additionally able to point to the Borrowers' contractual obligation under Clause 11.9(a) of the Loan Agreement. This required each Borrower to,
... promptly obtain ... all consents required ... for that Borrower to perform its obligations ... under any Finance Document
'Finance Document' was defined in Clause 1.1 to include the Loan Agreement.
- Following the designation of the Borrowers on 24 May 2011, the Competent Authorities (as identified by reference to websites listed in Annexe X of the Regulations) of two member states had given authorisation under Article 25 (or its predecessor Article 18 of Regulation 261/2010) for repayments to be made in order to discharge the Borrowers' obligations under the Loan Agreement. Thus, between September 2010 and September 2011, the German Bundesbank granted authorisation under Article 18 of Regulation 261/2010 for quarterly repayments of principal and interest to be paid from the Borrowers' retention accounts to DVB; and on 19 November 2012, the Bundesbank granted authorisation under Article 25 for a further US$1m of the Borrowers' funds in an account at UniCredit Bank AG to be released for partial repayment under the Loan Agreement. In addition, DVB was able to point to a licence which it was granted on 18 January 2012 by HM Treasury, granting authorisation for listed persons (which included the Borrowers and the Guarantors) to pay funds from frozen accounts in the UK if instructed to do so as a result of enforcement action taken by DVB following a demand for accelerated repayment.
- The importance of these authorisations is not only that they have been obtained in the past, but that Article 25 provides for the Competent Authority,
to determine that
(1) the funds or economic resources shall be used for a payment by a person entity or body listed in ... Annexe IX;
(2) the payment will not contribute to an activity prohibited under this Regulation; and
(3) the payment is not in breach of Article 23(3).
- Article 25(3) is important in the present context, because its effect is to leave for the determination of the Competent Authority whether or not the payment is a breach of Article 23(3); and the provision was presumably introduced so as to avoid wasteful and time-consuming applications to domestic courts, with the prospect of rulings by the ECJ, on the facts of particular cases.
- The Borrowers have not said that they made an application after September 2011 for authorisation to make a contractual payment which was refused; and in these circumstances, they cannot say that no licence could have been obtained if they had applied for the release of frozen funds. As Devlin J put it in Charles H. Windschuegl v Alexander Pickering & Co Ltd  84 Ll.L.Rep 89 at 95l, in circumstances where defendants do not even apply for a licence, it is for them to satisfy the Court that it was no use their attempting to make the application, because it would quite clearly fail. In Malik Co v. Central European Trading Agency Ltd  2 Lloyd's Rep 279, Kerr J at 282l, expressed what needs to be proved as either the failure to obtain a licence despite the exercise of best endeavours or proof that the licence was unobtainable.
- In circumstances where no application was made by the Borrowers and where applications had been successfully been made in the past, the Borrowers cannot say it would have been impossible for them to obtain a licence. Given that authorisations had been previously granted, the clear probability is that a Competent Authority would (acting consistently with past views) have granted authorisation and determine that there would be no breach of Article 23(3).
- As was stated in Melli Bank v Holbud  EWHC 1506 (Comm) at , where summary judgment was granted in the face of a similar argument:
... the designation of the Bank did not render obligations under the Facility Agreement ... incapable of performance where, as here, a licence could be sought and, on the evidence, could be expected to be forthcoming.
- Mr de Verneuil Smith submitted in response that, first, the Loan Agreement was itself frozen, so that no derogation could be granted under Article 25; and secondly, that although authorisations had in the past been granted, it could not be done legally because repayment of the loan would constitute the making available of funds or economic resources to the Borrowers contrary to Article 23(3). He referred to the case of Möllendorf and Möllendorf-Niehuus [Case C-117/06], which drew attention to the very wide ambit of a similar provision in relation to Regulations dealing with the Taliban, and where the Court found that the conveyance of property constituted the making available of an economic resource.
- I do not accept these arguments. Although it may not be a complete answer to the illegality point now raised, the fact that applications for the authorisation of repayments have been made, and have been allowed on the basis that the payment is not in breach of Article 23(3), is an unpromising start. In any event, so far as the first point is concerned, it is wrong to characterise the Borrowers' obligations to repay as constituting 'funds' or 'economic resources' which are frozen. They constitute the discharge of liabilities which are not frozen.
- So far as the second point is concerned, the characterisation of the repayment of the loan as the making of funds available in breach of Article 23(3) because it would have the effect of reducing the liabilities charged against the Ships and thereby enhance the Borrowers' equity in the Ships, seems to me to be commercially unreal. It is, as Mr Cutress puts it, an 'abuse of language' to describe the repayment of a loan as making funds available to anyone other than the creditor. In addition, and if further analysis were required, repayment of a loan clearly has a neutral effect since, to the extent that the equity in the ships might increase, the Borrowers' cash reserves would reduce. As the Claimants are entitled to point out, if the Borrowers' argument were correct, they would be entirely relieved of the obligation to repay, with the consequence that the economic resources available to designated companies would increase by €42m. In addition, as Mr Irvin pointed out, the Borrowers' argument has the anomalous and undesirable consequence that it would be unlawful for a creditor under a secured loan to receive repayment, but not for a creditor under an unsecured loan. This is entirely different to Möllendorf and Möllendorf-Niehuus where the ECJ at  made clear that, in a sale of land, one could not evaluate on which side the balance of benefit weighed between the consideration given under the contract and the consideration received. It is also important to bear in mind when considering Möllendorf that the regulations in that case were concerned with terrorist activity, where the payment of prior obligations and a regime of derogation did not exist.
- In the light of this analysis, I accept Mr Cutress's conclusion that the Borrowers' submission that their obligations under the Loan Agreement were indefinitely suspended was not only opportunistic and unmeritorious, but unfounded as a matter of factual and legal analysis.
- Accordingly, I have concluded that the defence of Supervening Illegality has no real prospect of success. I would add that I do not accept Mr de Verneuil Smith's argument that the rights of the parties have been 'indefinitely suspended'.
(3) The effect of the Regulations on the repayment obligations
- This issue relates to the effect of the Regulations on the performance of the contract. Mr de Verneuil Smith submitted that some types of supervening illegality operate to excuse performance rather than to frustrate the contract, see for example, Chitty on Contracts, 31st Ed. §23-025.
Temporary war-time restrictions may not frustrate a long-term lease, which will continue in force for many years after the restrictions are lifted; so long as it exists, the restrictions will however, provide an excuse for not complying with the covenant in the lease.
- In Cricklewood Property and Investment Trust Ltd v. Leightons Investment Trust Ltd  AC 221, the House of Lords concluded that, on the assumption that the doctrine of frustration could apply to a lease, the circumstances of the case were not such as to amount to a frustrating event. The case concerned the effect of war-time restrictions on building in relation to a 99-year lease entered into in 1936. In his speech at p.231 Viscount Simon LC held that the building restrictions were not sufficient to strike at the root of the arrangement.
The lease at the time had more than 90 years to run, and though we do not know how long the present war, and the emergency regulations which have been made necessary by it, are going to last, the length of the interruption so caused is presumably a small fraction of the whole term.
- In my judgment this case does not assist the Borrowers in the very different circumstances of a commercial contract where the repayment obligations arose because of a breach of the terms of Loan Agreement.
- Nor in my view does the second case which was relied on by Mr de Verneuil Smith assist his argument. K Ltd v. National Westminster Bank and others  2 Lloyd's Rep 569 concerned the operation of the criminal law on a bank's obligation to honour its customer's mandate. The Court of Appeal held that the Court should not grant an injunction obliging the bank to break the law. At p.572, the Court rejected an argument that where the bar on performance was temporary, the contract was frustrated.
- It follows that if, contrary to my primary view, the repayment obligations are incapable of being performed indefinitely due to the Regulations, the result is not that this obligation is 'suspended'. On this hypothesis, what has occurred is a supervening event (without the fault of either party and for which the contract does not provide) which has significantly changed the nature of the contractual obligations in a way which could not have been anticipated at the time the contract was made. In short the contract has been frustrated, see for example National Carriers Ltd v. Panalpina (Northern) Ltd  AC 675 Lord Simon of Glaisdale at 700 and J Lauritzen AS v/ Wijsmuller BV  2 Lloyd's Rep 1, Bingham LJ at 8.
- In such circumstances, and by the operation of s.1 of the Law Reform (Frustrated Contracts) Act 1943, see Chitty on Contracts 31st Edition §23-074 to 23-083, the Lenders would be entitled to recover and the Borrowers would be bound to repay the amount of the loans. Although the Borrowers have asserted in §15 of the Reply to Defence and Counterclaim that they are entitled to deduct certain expenses, they have not explained the basis on which they are entitled to do so, nor have they quantified such expenses.
- At §65 of Mr de Verneuil Smith's skeleton argument there are references to various costs, with the conclusion: 'these considerations are fact sensitive and require ventilation at trial. They are not suitable for summary judgment.' In my view it is for the Borrowers to advance a cogent case on why they are entitled to deduct particular costs, and they have not done so. If it had been material I would have reflected this view by ordering a substantial sum to be paid under s.1(2) of the 1943 Act.
DVB's claim against the Guarantors
- The Guarantors advanced two defences to the claims under the Guarantees: first, a defence of Unfair Prejudice, and secondly, a defence of Supervening Illegality in respect of the Guarantees.
The Unfair Prejudice defence
- Although I accept for the purposes of a Part 24 application that there is a defence of 'unfair prejudice', it is important to recognise its limits. The position is conveniently summarised in Chitty on Contracts, under the chapter dealing with Suretyship, at §44122:
The Court of Appeal has affirmed that there is no general principle that 'irregular' conduct on the part of the creditor, even if prejudicial to the interest of the surety, will discharge him. Short of bad faith, misrepresentation or concealment amounting to misrepresentation, connivance with the default of the principal debtor, or variation of the terms of the contract to the possible prejudice of the surety, the creditor can act as he chooses ... the courts have clearly set their face against imposing a duty of care in the tort of negligence on a creditor to the surety to safeguard the economic welfare of the latter's position.
- The authors of O'Donovan & Philips, 'The Modern Contract Guarantee' observe at §8-107 that:
... despite the apparent width of the principle it is difficult to find any clear examples in either England or Australia of the discharge of a guarantor on this basis ;
and conclude (at §8-111) with their view that:
... the weight of authority is contrary to the existence of a general rule that the guarantor will be discharged if the creditor acts in a prejudicial manner towards the guarantor.
- In Bank of India v. Patel (1982) 1 Lloyd's Rep 506, Bingham J summarised an important distinction at 515l.
But as a matter of principle I cannot accept [Counsel's] submission that a surety is discharged if a creditor acts towards the principal debtor in a manner which is irregular and prejudicial to the interests of the surety. Leaving aside what may be the special case of fidelity guarantees, I consider the true principle to be that while a surety is discharged if the creditor acts in bad faith towards him or is guilty of concealment amounting to misrepresentation or causes or connives at the default by the principal debtor in respect of which the guarantee is given or varies the terms of the contract between him and the principal debtor in a way which could prejudice the interests of the surety, other conduct on the part of the creditor, not having these features, even if irregular, and even if prejudicial to the interests of the surety in a general sense, does not discharge the surety.
- In the Court of Appeal, (1983) 2 Lloyd's Rep 292 at 302, Robert Goff LJ agreed with this formulation although preferring to express it as a general rule that the surety is not discharged subject to the particular circumstances described by Bingham J.
- The terms of the Guarantees provided:
3.1 The Guarantor shall be liable under this Guarantee as if it were a principal and independent debtor and accordingly it shall not have, as regards this Guarantee, any of the rights or defences of a surety.
3.2 Without limiting the generality of Clause 3.1, the liability of the Guarantor under this Guarantee shall not be reduced, discharged or otherwise adversely affected by:
(a) any ... dealing with ... of any right or remedy which any Creditor Party may now or after the date of this Guarantee have against the Borrowers (or any of them) ...
(g) ... anything done or omitted by any person which, but for this provision, might operate to exonerate or discharge the Guarantor or otherwise reduce or extinguish any of its liabilities under this Guarantee.
- These clauses are drafted on behalf of commercially sophisticated parties in clear and emphatic terms; and in my view preclude the Guarantors from relying on 'unfair prejudice', short of bad faith in the sense described by Bingham J.
- In the light of the above, although Mr de Verneuil Smith re-characterised his argument in terms of bad faith, I am not satisfied that what he relied on is sufficient (even for the purposes of Part 24).
- The first matter is set out in §11.3.1 of the Defence:
On or before 31 October 2012, the Claimant had discussions with the [United States] Office of Foreign Assets Control ('OFAC'), which is part of the US Department of the Treasury that administers economic sanctions. OFAC pressurised the Claimant to terminate the Loan Agreement and to arrest the Ships in order to put economic pressure on the Defendants. In making the Demand the Claimant acted pursuant to a collateral purpose and had it not done so would not have made the Demand.
- This assertion is disputed as a matter of fact by the Claimants. However, on the assumption the facts are true and that good faith can be characterised as the observance of reasonable commercial standards of fair dealing and adherence to the spirit of the contract, it does not follow that a party is required to subordinate its own interests to those of the other contracting party or to surrender freely negotiated financial advantages deriving from the contract: see Chitty on Contracts §1-048 and Gold Group Properties Ltd v BDW Trading Ltd  EWHC 1632 (TCC) at . I should add that in my view it would be a rare case in which the reasons for the exercise of a contractual right would be material, let alone give rise to a successful defence of unfair prejudice or bad faith.
- In any event, although the Borrowers made their last payment of principal and interest on 14 September 2011, the loan was not accelerated until over a year later (on 22 November 2012), and the demand under the Guarantees was not made until 1 February 2013.
- In circumstances in which the Lenders had not been paid either principal or interest for over a year, and where the Borrowers had committed other defaults, including the transfer of ownership of the vessels, it cannot be argued that these matters were not properly relevant to the Lenders' intention in making demand for the €42m due to them. Nor, if it were correct that DVB made the demand as a result of pressure applied by OFAC and this was relevant (see above), could it be argued that conduct which took into account relationships with a government authority when deciding whether to exercise a contractual right, was unacceptable or unreasonable.
- The second matter relied upon as constituting unfair prejudice is set out in §11.3.2 of the Guarantor's Defence.
... the Borrowers invited [DVB] to nominate an account in a suitable country (meaning one not subject to the sanctions regime) and currency to which the Borrowers could make payments under the Loan Agreement. [DVB] deliberately failed to do so and unfairly prejudiced the Borrower's ability to make payments and thereby unfairly prejudiced the Guarantors.
- DVB quite reasonably point out that this factual assertion is 'flatly inconsistent' with the Borrowers and Guarantors' primary argument that payment was prevented by illegality. However, even on the assumption that the Guarantors' allegations as to the failure to nominate an account were correct as a matter of fact, the argument fails. If payment under the Loan Agreement were prevented by illegality, then nominating an alternative account would have made no difference, since the Borrowers would still have been unable to pay; and if the payment under the Loan Agreement were not prevented by illegality, then the Guarantors were not unfairly prejudiced, because the Borrowers could still have made payment.
- The Guarantors refine the argument based on what they say was DVB's failure to designate an Earnings Account into which the payments could be made. It appears that this relates to 4 instalments over a period of a year. However, I am not persuaded that this argument raises an arguable defence. First, the argument does not arise if DVB are correct, as I have found them to be, in relation to the Supervening Illegality argument. Secondly, although clause 18 provided for a mechanism of payment by the Borrowers from an Earnings Account to a Retention Account, the alleged failure to designate an Earnings Account did not prevent the Borrowers from repaying the Loan. This was because clause 18.4 made it clear that the provisions of clause 18 did not affect the liability of the Borrower to make payments of principal and interest on the due date, or any other liability or obligation of the Borrowers or Security Party (i.e. the Guarantors) under any Finance Document. There was no good reason why the Borrowers should not have made a payment direct to the Retention Account, or otherwise seek out their creditor in accordance with well-established principles.
- In any event, even if the conduct of DVB can be said to have been prejudicial to the Guarantors, it cannot properly be said to amount to bad faith.
The Supervening Illegality defence
- The Guarantors advance three reasons as to why performance of their obligations under the guarantee would be illegal: (1) payment would subrogate the Guarantors to the Lenders' security rights against the Borrowers, or in any event result in the Guarantors having a claim in restitution against the Borrowers, which would make funds available contrary to the terms of Article 23(3); (2) payment would discharge the Borrowers' debts to the Lenders, which would also constitute making funds available to the Borrowers contrary to Article 23(3); and (3) payment would breach the terms of Article 38(1), because DVB would be acting as security trustee for two designated entities, namely Melli and PIB.
- The first point taken by DVB in answer is that the Article 25 derogation applies equally to the Guarantees (since they pre-date the relevant dates of designation) as it does to the Loan Agreement. The Guarantors were expressly obliged under Clause 11.6(a) of the Guarantees in similar terms to the borrowers' obligation in Clause 11.9(a) of the Loan Agreement, 'promptly [to] obtain ... all consents required: (a) for the Guarantor to perform its obligations under this Guarantee'. As Mr Cutress observes, there is no suggestion or evidence that the Guarantors have complied with this obligation and applied for authorisation to satisfy their obligations under the Guarantees. Nor are there reasonable prospects of showing that they would not have obtained consent.
- Again, in the absence of an application which they were contractually bound to make, the Guarantors have to show such applications would, if made, have been foredoomed to failure, see Windschuegl v Pickering (above). In circumstances in which HM Treasury had previously granted a licence enabling enforcement action to be taken under the security (which includes the Guarantees), they cannot discharge this burden.
- In any event, I am quite clear that the specific arguments raised by the Guarantors are unfounded.
- As to (1) above, it is unrealistic to characterise the payment by the Guarantors of their obligations to DVB as making funds or economic resources available to the Guarantors: it has the opposite effect. The fact that the Guarantors may have a claim against the Borrowers as a result of the payment, cannot be said to constitute the making available of economic resources to the Guarantors. I doubt whether the creation of a right of action falls within the Article 23(3), but in any case they would have to recover from what appear to be wholly owned direct or indirect subsidiaries, and such a claim would therefore add nothing at all to the Guarantors' existing economic resources. The Borrower is simply exchanging one debt for another and no additional funds are being made available in contravention of the broad purpose of the Regulations.
- I should add that there was late evidence on behalf of the Borrowers which appeared to show that they no longer retained beneficial ownership in the vessels. This further undermined any argument that either they or the Guarantors would benefit from repayment of the loan by an increase in or acquisition of an equity in the vessels such as to constitute the making available of economic resources contrary to Article 23(3).
- As to (2), on the Guarantors' own case, payment would (by virtue of the Guarantors' restitutionary and/or subrogation rights) result in the Borrowers having a debt payable to the Guarantors rather than to the Lenders. In these circumstances I do not see how it can properly be said that funds would be made available to them.
- As to (3), Article 38 comes within Chapter VII of the Regulations, headed 'General and Final Provisions'. Art 38(1) provides so far as material:
No claims in connection with any contract ... the performance of which has been affected directly or indirectly, in whole or in part, by the measures imposed under this Regulation, including claims ... under a guarantee ... shall be satisfied, if they are made by:
(a) designated persons ...
- Article 38(2) sets out,
The performance of a contract ... shall be regarded as affected by the measures imposed under this Regulation where the existence or content of the claim results directly or indirectly from those measures.
- Article 38(4) provides,
This Article is without prejudice to the right of persons, entities and bodies referred to in paragraph 1 to judicial review of the legality of the non-performance of contractual obligation in accordance with this Regulation.
- So far as DVB claims on its own behalf in respect of its share of the monies due under the Guarantee, Article 38 does not assist the Guarantors: DVB is not a designated person.
- In so far as DVB claims as trustee for Melli Bank/PIB, I accept its argument that, in circumstances where repayment is not illegal under the Regulations and repayments were made under appropriate authority between May and September 2011 after the imposition of the Regulation, Article 38 does not apply. It applies to those cases where the existence of the claim results directly or indirectly from the measures imposed by the Regulations. This is not such a claim. The present claim arises by operation of the contract under the acceleration provisions of the Loan Agreement.
(4) The Claim by Melli Bank/PIB
- Mr Irvin advanced similar arguments on his clients' application against the Borrowers as Mr Cutress had advanced on behalf of DVB: either the Borrowers' defence based on the EU Regulations failed or, if it did not, then his clients were able to recover under s.1(2) of the Law Reform (Frustrated Contracts) Act 1943. There is, of course, the added complication that his clients are designated persons under the Regulations; but Mr Irvin submitted that this was no bar to recovery under a judgment of the Court. The claim of Melli Bank/PIB is for payment due under a contract that arose before either they or the Borrowers had been designated.
- In my view the position of Melli Bank/PIB is not significantly different to the position of DVB. Article 38(1) is a saving provision which is designed to prevent the circumvention of the Regulations. For the reasons already indicated, the Borrowers are not entitled to rely on the Regulations to defend the claim and the judgment of the Court in favour of Melli Bank/PIB would not constitute a circumvention of the Regulations which, in so far as Article 38 applies at all, would be covered by the provisions of Article 38(4). The effect of Article 29 is that Article 23.3 does not prevent Melli Bank/PIB from crediting frozen accounts provided those accounts remain frozen.
- If one stands back and considers the broad effect of the argument of the Borrowers and the Guarantors, it amounts to a contention that large sums of money which were advanced before the Regulations were made do not have to be repaid. In my view this is not the effect of the Regulations nor is it consonant with their broad intent.
- I have therefore concluded that the Borrowers and Guarantors have no prospect of success at trial and therefore there should be summary judgment for DVB and Melli Bank/PIB against the Borrowers under the Loan Agreement and for DVB against the Guarantors under the Guarantees.
- I will hear the parties on the form of the order.
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