Introduction

The case of Ministry of Defence & Support for Armed Forces of the Islamic Republic of Iran v. International Military Services Ltd ([2020] EWCA Civ 145) adjudicated by the England and Wales Court of Appeal (Civil Division) on February 12, 2020, delves into the complexities surrounding the enforcement of arbitral awards against entities subjected to EU sanctions. The appellant, International Military Services Limited (IMS), seeks to challenge the decision that precludes the Ministry of Defence & Support for Armed Forces of the Islamic Republic of Iran (MODSAF) from enforcing the interest component of an arbitration award during the period when MODSAF was under the EU sanctions regime outlined in Council Regulation (EU) No 267/2012 ("the 2012 Regulation").

Summary of the Judgment

The Court of Appeal upheld the lower court's decision, affirming that Article 38 of the 2012 Regulation effectively bars MODSAF from enforcing the interest component of the arbitration award during the sanctions period. The core issue revolved around whether an arbitration award qualifies as a "transaction" under the 2012 Regulation, thereby invoking the "no claims" provision that restricts enforcing certain claims against sanctioned entities. The appellate court concluded that the regulation's language and purpose support the lower court's interpretation, preventing MODSAF from accessing the interest accrued during the period it was designated under the EU sanctions.

Analysis

Precedents Cited

The judgment extensively referenced key precedents to interpret the applicability of the 2012 Regulation:

• Shanning International Ltd v Lloyds TSB Bank plc: Established that "no claims" provisions in sanctions regimes aim to prevent counterparties from enforcing claims that arise due to sanctions-imposed non-performance.
• Rosneft Oil Company Cases (C-715/14 and C-117/06): The Court of Justice of the European Union (CJEU) reinforced the proportionality and purpose behind "no claims" clauses, ensuring that such measures are effective in achieving their intended policy objectives without being overly restrictive.
• Purslow v Bailey (1704): Highlighted the foundational principle that arbitration agreements entail a mutual promise to perform arbitral awards.
• Bremer Oeltransport GmbH v Drewry (1933): Asserted that arbitration awards replace the parties' original contractual obligations, framing them within the context of enforceable transactions.

Legal Reasoning

The court's legal reasoning centered on the interpretation of Article 38 of the 2012 Regulation, which prohibits the satisfaction of claims connected to transactions affected by sanctions. The key points include:

• Definition of "Transaction": The court scrutinized whether an arbitration award constitutes a "transaction" under the regulation. It concluded that while arbitration awards are linked to prior contracts, they do not themselves qualify as transactions within the regulatory framework.
• Purpose of Article 38: The regulation aims to prevent sanctioned entities from leveraging prior contracts to enforce claims that arise due to the sanctions. This includes interest accrued during the sanctions period, as these were a direct consequence of IMS's inability to fulfill its contractual obligations to MODSAF.
• Interpretation of "Affected": The term "affected" was interpreted broadly to encompass any indirect consequences of sanctions on the contractual obligations, thereby including the accrual of interest during the sanctions period.
• Proportionality and Legal Certainty: The court addressed concerns about proportionality and legal certainty, ultimately finding that the regulation's objectives justified the prohibition on enforcing interest claims, and that the regulation was sufficiently clear in its application.

Impact

This judgment has significant implications for the enforcement of arbitral awards against entities under EU sanctions. Key impacts include:

• Clarification of "No Claims" Provisions: The decision provides a clearer understanding of how "no claims" clauses operate within arbitration contexts, especially regarding interest components linked to sanctioned entities.
• Precedent for Future Cases: Establishes a precedent that arbitration awards, particularly interest accrued during sanctions, may be unenforceable against sanctioned entities under EU regulations.
• Protection of Economic Operators: Reinforces the protection mechanisms for non-sanctioned counterparties by ensuring that sanctions do not lead to disproportionate financial burdens due to enforced claims.
• Interplay Between Arbitration and Sanctions: Highlights the need for parties engaging in contracts with entities from sanctioned jurisdictions to consider the implications of such sanctions on future enforceability of contractual obligations.

Complex Concepts Simplified

No Claims Provisions

"No claims" provisions are legal mechanisms within sanctions regimes that prevent sanctioned entities from enforcing claims related to contracts or transactions affected by those sanctions. This means that if a company's contractual obligations are hindered due to sanctions, it cannot seek to enforce certain aspects of those contracts through legal means.

Article 38 of the 2012 Regulation

Article 38 specifically prohibits the satisfaction of any claims connected to contracts or transactions that have been affected by EU sanctions. This includes claims for indemnity, compensation, or any financial guarantees arising from such contracts or transactions.

Arbitration Awards vs. Judgments

An arbitration award is a decision made by an arbitration panel regarding a dispute between parties, based on their mutual agreement to resolve disputes outside of courts. A judgment, on the other hand, is a decision made by a court of law. The enforceability of arbitration awards against sanctioned entities is distinct because arbitration is based on the contractual promise to abide by the award.