Does Interest Accrue on Sums Owed to some Sanctioned Entity?
The judgment provides reassurance to commercial creditors and important guidance to debtors involved with payment disputes that are influenced by the imposition of sanctions.
Background
The dispute arose out of two contracts concluded within the 1970s, before the Iranian Islamic Revolution pursuant to which IMS agreed to provide Chieftain tanks and Armoured Recovery Vehicles to MODSAF. The contract itself was terminated on 6 February 1979, creating a dispute between the parties regarding the balances payable.
This resulted in two ICC arbitrations, the initial one commenced by MODSAF in 1990 and the second one by IMS in 1996. In May 2001, the ICC tribunal rendered final awards both in arbitrations. The ICC tribunal gave an award towards MODSAF in the first arbitration and dismissed IMS's claim under the second arbitration . 7071 Award was susceptible to later applications and adjournments pending a choice in the Hauge and the Supreme Court of Netherlands. IMS was eventually ordered to pay MODSAF lb127,651,823 plus costs and as a part of its claim MODSAF seeks interest at LIBOR +0.5 from 28 July 1984 towards the date of payment.
On 24 June 2008 and in front of you payment being designed to MODSAF, the MODSAF was susceptible to sanctions imposed against Iran by EU Council Regulation 423/2007 ). The parties agree the sum due underneath the award cannot presently get paid to MODSAF as MODSAF still remains under sanctions. IMS argued that MODSAF is not eligible for enforce the interest element of the 7071 Award in respect of the period in the date of sanction listing of MODSAF.
In to facilitate payment, MODSAF made an application for a licence under Article 25 of Regulation 267 to allow payment of sums due underneath the Awards towards the Central Bank of Iran . The CBI have been delisted as of 16 January 2021. IMS does not believe that this licensing route is available to MODSAF and the results of the licence application was unknown at the time of the judgment.
The ultimate question used to be sanctions imposed upon MODSAF are lifted and payments are permitted, will IMS need to pay interest on the amounts that it owes underneath the arbitral award for that period since MODSAF was a designated entity in 2008?
Phillips J, in his judgment conducted a consideration of Articles 38 of Regulation 267. Article 38 provides that no claims made by sanctioned entities, in connection with any contract or transactions, the performance of which has been impacted by the Regulation, will be satisfied.
MODSAF raised various arguments against the applicability of Article 38 for example the original dispute and Award pre-dated the imposition of sanctions and that the claim was not arising out of a contract or transactions whose performance was influenced by the Regulation. The English Court did not accept this.
The English Court concluded that the security supplied by Article 38 extended to the payment of great interest accrued with an arbitration award while the debtor was sanctioned. The Court agreed that even though the existence of the claim might not have been based on the sanctions, its content did derive from the sanctions. Therefore, MODSAF will not be able to obtain interest around the pending award since, 24 June 2008.
This judgment does not impact the Award and any accrued interest on the Award just before 24 June 2008. The question of actual payment from the award will remain a problem between the parties.
Important points for commercial parties
In conclusion of his decision, Phillips J designed a direct reference and provided judicial comfort to the position stated in the OFSI's “Financial Sanctions Guidance”. Within this Guidance OFSI had earlier stated “If a court has ordered a judgment in favour of an individual subject to an asset freeze, under EU regulations, there aren't any licensing grounds to allow the payment to be made, the third party can't be made subject to any more liability for their non-payment as the sanctions continue to apply“.
The guidance clearly suggests that it cannot issue definitive information on how courts may interpret laws. However, this reference clearly highlights the importance of guidance provided by OFSI for commercial parties and that commercial entities should continue to maintain effective sanction policies to avoid an immediate or indirect payment to a sanctioned entity without the existence of the appropriate licence. It is noteworthy that as shown in this instance, the OFSI may take an extensive and unpredictable period of time to determine over licence applications.
Although this case concerned the use of restrictive measures on Iranian entities, most EU economic restrictive measures contain equivalent provisions. This includes restrictive measures imposed on Russian, Syrian and Venezuelan entities. Similar provisions are likely to continue after Brexit that a similar sanction regime will probably be created under Sanctions and Anti-Money Laundering Act. Provisions much like Article 38 are particularly likely as they provide comfort to UK based businesses who would finish up in a difficult position because of imposition of sanctions on foreign entities.
The reasoning adopted just in case included a consideration from the wording, the aim and reason for provisions included in the regulation. Provisions much like Article 38 concern private relationships whereas most restrictive Regulations as a whole primarily concern interstate issues. Even though the judgment provides reasonable comfort in similar cases, both cases concerning an applicable provision within restrictive measure will have to be thoroughly considered based on its surrounding facts.
