Islamic Republic of Iran Shipping Lines v Steamship Mutual Underwriting Association (Bermuda) Ltd [QBD (Comm)]

JurisdictionEngland & Wales
Judgment Date26 October 2010
Neutral Citation[2010] EWHC 2661 (Comm)
Docket NumberCase No: FOLIO NO. 178 OF 2010
CourtQueen's Bench Division (Commercial Court)
Date26 October 2010
Islamic Republic of Iran Shipping Lines
Steamship Mutual Underwriting Association (Bermuda) Limited
HM Treasury
Interested Party

[2010] EWHC 2661 (Comm)

Before: The Honourable Mr Justice Beatson

Case No: FOLIO NO. 178 OF 2010




Christopher Butcher Qc and Peter De Verneuil Smith (instructed By Holman Fenwick and Willan Llp) for the Claimant

Jonathan Hirst Qc and Richard Eschwege (instructed by Reed Smith LLP) for the Defendant

Jonathan Swift Qc and Ben Olbourne (instructed by The Treasury Solicitor) for the Interested Party

Hearing dates: 26–28 July 2010

Approved Judgment

I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.


The Hon. Mr Justice Beatson:

I. Introduction


This case concerns the effect of measures taken by HM Treasury pursuant to powers conferred by the Counter-Terrorism Act 2008 (the “2008 Act”) on a contract of insurance between the claimant and the defendant, and, in particular, on cover in respect of liabilities in respect of bunker oil pollution. Such cover (or similar security) is required by the International Convention on Civil Liability for Bunker Oil Pollution Damages 2001 (“the Bunkers Convention” 1) in order for a ship to trade in the territorial waters of States which are parties to the Convention. The defendant, Steamship Mutual Underwriting Association (Bermuda) Ltd. (the “Club”) provides marine P & I insurance to its members on a mutual basis against a wide range of risks including pollution. Prior to the events giving rise to these proceedings, the claimant, Islamic Republic of Iran Shipping Lines (“IRISL”) was a member of many years standing.


In 2009 twenty-eight ships owned by IRISL or otherwise part of its fleet were entered with the Club with effect (see Rule 14(i)) from noon GMT on 20 February 2009 until noon GMT on 20 February 2010. The “ZOORIK” was one of the ships owned by IRISL which was so entered. It was entered for Class 1 Protection and Indemnity insurance. On 31 October 2009 it suffered a casualty in the territorial waters of the People's Republic of China causing bunker oil pollution and rendering it a constructive total loss. Less than 24 hours earlier, the Club had terminated cover in respect of all the ships entered by IRISL with the Club with effect from midnight GMT time on 30 October. It did this on the ground that the contract of insurance between it and IRISL had been discharged by reason of frustration or supervening illegality as a result of the measures taken by the government of the United Kingdom.


Those measures taken were the promulgation of the Financial Restrictions (Iran) Order 2009 SI No 2725 of 2009 (“the Order”) and a number of associated licences issued by HM Treasury. The Order, which was made on 9 October 2009 and came into effect on 12 October, prohibited transactions and business relationships between persons operating in the financial sector (“relevant persons”) and two designated Iranian entities, IRISL and Bank Mellat. HM Treasury was empowered to exempt specified acts from the Order by issuing licences. It issued two licences authorising the Club to continue to provide insurance cover under an existing contract with IRISL for specified periods. The second of these periods expired on 30 October. On that day HM Treasury issued a further licence but it was in different terms to the previous licences about the arrangements between the Club and IRISL. The Club terminated cover because it took the view that the terms of the Licence issued on 30 October meant that it was no longer permitted to provide insurance cover to IRISL.


Was the contract of insurance discharged by frustration or supervening illegality, or did the terms of the Licence issued on 30 October 2009 mean that it was not and that the Club remains liable to IRISL in respect of certain liabilities incurred by it as a result of the casualty to the “ZOORIK”? The liabilities in question are those imposed on State Parties by the Bunkers Convention, which inter alia provides for State

Parties to require compulsory insurance to be taken out by the owners of ships of over 1,000 gross tons. The gross tonnage of the “ZOORIK” was 16,173 tons and this provision of the Convention thus applied.

The statutory authority for the Order is contained in section 62 of, and Schedule 7 to, the 2008 Act (hereafter “Schedule 7”). Schedule 7 empowers HM Treasury to “give a direction” to (see paragraph 3(1)) a person operating in the financial sector (a “relevant person”) if, inter alia, (see paragraph 1(3) & (4)) it reasonably believes that “the development or production of nuclear, radiological, biological or chemical weapons” in a country or the doing in that country of anything that facilitates the development or production of any such weapons poses a significant risk to the national interests of the United Kingdom.


In the present case the Explanatory Memorandum to the Order, the other documents issued with it, and the written ministerial statement about it stated that the Secretary of State believed that Iran had ballistic missile and nuclear programmes which posed a risk to the United Kingdom. The documents also stated that the provision of services by IRISL and Bank Mellat, in the case of IRISL by transporting goods for both programmes, contributed to those programmes and that risk.


A direction in an Order may impose requirements ranging from “customer due diligence” and “ongoing monitoring” to requiring a relevant person to limit or, as it did in this case, to cease business with a designated person: see paragraphs 9(4) and 13 of Schedule 7. A direction must (see paragraph 14(2)) be contained in an Order subject to an affirmative resolution of each House of Parliament and (see paragraph 16(4)) the Order ceases to have effect one year after it was made.


HM Treasury's power to grant a licence to exempt acts specified in the licence from the requirements contained in a direction is contained in paragraph 17 of Schedule 7. On 12 October when the Order designating IRISL and Bank Mellat came into force the Treasury issued an interpretative note and three general licences (“the General Licences”) pursuant to the power conferred by paragraph 17. The material terms of these licences are set out at [30–32]. The third General Licence allowed “relevant persons” to “continue to provide insurance cover under an existing contract with a designated person [i.e. with IRISL] for a period of seven days”. This was extended by a licence made on 19 October which permitted the Club to “continue to provide insurance cover under an existing contract with” IRISL until 30 October 2009. A further licence (hereafter “the Licence” and “the 30 October Licence”) was made on 30 October which provided inter alia that “[the Club] may continue to provide insurance cover in accordance with the Blue Cards issued to IRISL for a period of three months starting on 30 October 2009…”. The reference to “Blue Cards” concerns the compulsory insurance required by Article 7(1) of the Bunkers Convention. A Blue Card is the document issued by the Club evidencing that the insurance required is in place, although (see [33]) the cards were not issued “to IRISL”.


Initially IRISL commenced proceedings against HM Treasury under section 63 of the 2008 Act challenging the legality of the Order. The grounds of the challenge are that IRISL had not provided the services relied on by the Secretary of State, and there was no evidence demonstrating that it had. IRISL claims that the decision to make the Order was irrational because of the absence of evidence demonstrating that IRISL transported goods for Iran's ballistic missile and nuclear programmes. It also claims that the decision was in breach of the requirements of procedural fairness, and an infringement of the UK's obligations under the Bunkers Convention. On the assumption, contrary to its position in these proceedings, that the 30 October Licence rendered it unlawful for the Club to provide an indemnity to it, IRISL also challenged the legality of the Licence. The grounds in respect of the Licence are similar to those in respect of the Order, but there is also one based on IRISL's legitimate expectations.


It, however, became apparent that the first issue that needed to be determined was whether the Order and the Licence did in fact render it unlawful for the Club to provide an indemnity to IRISL in respect of the liabilities arising from the casualty to the “ZOORIK”. The Club indicated that it was willing to participate in proceedings in the Commercial Court rather than insist upon arbitration under Rule 47(ii)(a) of its Rules. Following a Directions Hearing before Gross J on 9 February 2009 at which the section 63 proceedings were stayed, on 15 February 2010 these proceedings were instituted. Accordingly, while IRISL does not accept the validity of the Order, these proceedings are not concerned with that question.


The parties have agreed a statement of facts, and the issues for the court are ones of the proper construction of the Order and the 30 October Licence and as to the law on the basis of those facts and that construction. The Club's position is that the correct interpretation of the Licence means that it is not permitted to provide insurance cover and thereby to indemnify IRISL in respect of claims made by third parties against IRISL for pollution damage. Mr Hirst QC, on behalf of the Club, submitted that the entire contract of insurance between it and IRISL in respect of the “ZOORIK” was discharged by frustration and/or supervening illegality. He also submitted...

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