Ministry of Defence & Support for Armed Forces of the Islamic Republic of Iran v International Military Services Ltd

Factual and Procedural Background

This appeal concerns the liability of the Defendant, International Military Services Limited ("IMS"), for interest on sums found due to the Appellant, Ministry of Defence & Support for Armed Forces of the Islamic Republic of Iran ("MODSAF"), pursuant to arbitration awards. MODSAF has been subject to the European Union sanctions regime since 2008, embodied in Council Regulation (EU) No 267/2012 ("the 2012 Regulation"). A judgment by Phillips J dated 24 July 2019 held that MODSAF is precluded from enforcing the interest component of the arbitration award for the period post-sanctions. MODSAF appeals against that decision.

The dispute arises from contracts in the 1970s between IMS and MODSAF for supply of military equipment, which included arbitration clauses. Following the Iranian Revolution, contracts were terminated and disputes led to arbitrations resulting in awards in 2001, with IMS liable to pay substantial sums plus interest and costs. Enforcement proceedings were initiated in the UK Commercial Court, stayed pending Dutch court challenges. The Dutch courts reduced IMS's liability but upheld the awards otherwise. Since MODSAF became subject to EU sanctions in 2008, IMS has been unable to pay sums due. MODSAF sought court declarations to enforce the awards and the funds IMS paid into court. The key issue determined by Phillips J was whether the 2012 Regulation precludes enforcement of interest accruing during the sanctions period. This appeal challenges that ruling.

Legal Issues Presented

1. Whether the 2012 Regulation operates to deprive MODSAF of any right to interest for the period during which it has been subject to the EU sanctions regime.
2. Whether an arbitration award constitutes a "contract or transaction" within the meaning of the 2012 Regulation for the purpose of Article 38.
3. Whether the interest component of the arbitration award for the sanctions period is enforceable despite the sanctions regime.
4. Whether the interpretation of Article 38 respects principles of proportionality, fundamental rights (including the right to property), and legal certainty.
5. Whether the contractual obligation to perform arbitration awards can ground the application of Article 38 to bar interest claims.

Arguments of the Parties

Appellant's Arguments

• The arbitration awards are not "transactions" within the meaning of the 2012 Regulation; the judge erred in construing them as such.
• The judge's interpretation of Article 38 conflicts with both the language and purpose of the Regulation.
• Applying Article 38 to bar interest claims is disproportionate and represents an unjustified interference with MODSAF's right to property.
• The principle of legal certainty is infringed by the judge's approach.
• Article 38 should be interpreted consistently with Article 29, which permits interest to be credited to frozen accounts, and should not effect a permanent confiscation of claims.

Respondent's Arguments

• The judge's decision correctly reflects the language and purpose of the 2012 Regulation, including Article 38.
• An arbitration award can be regarded as a "transaction" because it embodies contractual obligations and replaces prior obligations.
• The contractual obligation to perform arbitration awards supports the application of Article 38 to bar interest claims accruing during the sanctions period.
• Performance of the contractual obligation to pay interest was affected by the sanctions, even if performance of the original supply contracts was not.
• The interpretation aligns with the Regulation's objective to protect counterparties from claims arising due to sanctions-imposed non-performance.

Table of Precedents Cited

Court's Reasoning and Analysis

The court began by emphasizing the limited scope of the appeal: it concerns only liability for interest accruing since MODSAF became subject to EU sanctions in 2008, not the principal sums or interest prior to that date. It was common ground that IMS cannot lawfully pay MODSAF under the sanctions regime, so the question was whether Article 38 of the 2012 Regulation bars enforcement of the interest component for the sanctions period.

The court analyzed the language of Article 38, which prohibits satisfaction of claims connected to contracts or transactions affected by sanctions, made by designated persons. The judge below had held that the arbitration award itself constituted a "transaction" under the Regulation. The court recognized that while the definition of "contract or transaction" is broad, an arbitration award is not conventionally described as a contract or transaction, nor is it "made between" parties or "performed" in the usual sense. However, the court accepted that MODSAF's application to enforce the award is a claim connected to the original contracts for military equipment supply, which are "contracts or transactions" within the meaning of the Regulation.

The court further considered the purpose of Article 38, concluding it aims to protect parties from claims arising due to non-performance caused by sanctions, thereby ameliorating the impact of the sanctions regime on private relationships. This supports barring enforcement of interest claims accruing during the sanctions period, as such claims arise because IMS was prevented from paying.

Regarding proportionality and fundamental rights, the court acknowledged that Article 38 has confiscatory effects but found this consistent with the Regulation's objectives and the EU legislature's broad discretion in sanctions matters. The court rejected the argument that the Regulation’s effect on MODSAF’s property rights is disproportionate, noting that counterparties require protection from potentially ruinous claims. The absence of an account into which funds could be paid justified the protection afforded to IMS under Article 38.

The court also addressed legal certainty, concluding that although some grey areas exist, the Regulation is sufficiently clear for those subject to it to understand their rights and obligations.

On the argument that enforcement of arbitration awards is founded on a contractual obligation to perform the award, the court recognized this principle in English law but rejected its application to justify a different outcome under the EU Regulation. The court reasoned that it would be incoherent for the Regulation to treat interest claims differently depending on whether they arise from arbitration awards or judgments, as both are referenced together in the definition of "claim". Therefore, the contractual obligation to perform an award does not alter the application of Article 38.

Finally, the court declined to make a reference to the Court of Justice of the European Union, finding the issues sufficiently clear for determination.

Holding and Implications

The appeal is dismissed.

The court held that Article 38 of the 2012 Regulation bars MODSAF from enforcing the interest component of the arbitration award for the period since it became subject to EU sanctions in 2008. This decision confirms that "no claims" provisions in EU sanctions regulations can have permanent confiscatory effects on claims for interest accruing during sanctions, consistent with the purpose of protecting counterparties from claims arising due to sanctions-imposed non-performance.

The ruling does not affect the principal sums or interest accrued prior to the sanctions period, nor does it preclude eventual payment should the sanctions regime change. The judgment clarifies the scope and interpretation of EU sanctions provisions in relation to arbitration awards but does not establish new precedent beyond the facts and statutory context presented.