Ministry of Defence & Support for Armed Forces of the Islamic Republic of Iran v International Military Services Ltd
| Jurisdiction | England & Wales |
| Judge | Lord Justice Newey,Lord Justice Males,Lord Justice Moylan |
| Judgment Date | 12 February 2020 |
| Neutral Citation | [2020] EWCA Civ 145 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | Case No: A4/2019/2690 |
| Date | 12 February 2020 |
[2020] EWCA Civ 145
Lord Justice Moylan
Lord Justice Newey
and
Lord Justice Males
Case No: A4/2019/2690
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
COMMERCIAL COURT (QBD)
Mr Justice Phillips
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Anderson QC and Mr David Heaton (instructed by Stephenson Harwood LLP) for the Appellant
Mr Joe Smouha QC and Mr Tom Ford (instructed by Clifford Chance LLP) for the Respondent
Hearing dates: 22–23 January 2020
Approved Judgment
This appeal concerns the liability of the respondent, International Military Services Limited (“IMS”), for interest on sums which an arbitral panel has found to be due to the appellant, Ministry of Defence & Support for Armed Forces of the Islamic Republic of Iran (“MODSAF”). MODSAF has since 2008 been subject to the European Union (“EU”) sanctions regime now embodied in Council Regulation (EU) No 267/2012 (“the 2012 Regulation”). In a judgment dated 24 July 2019, Phillips J concluded that MODSAF is precluded from enforcing the interest component of the relevant arbitration award as regards the period since it became subject to the sanctions regime. MODSAF appeals against that decision.
It is worth stressing the limited ambit of what we are deciding. In the first place, there is no issue before us as to whether IMS can make any payment to MODSAF. MODSAF is frustrated that, four decades on from the events giving rise to arbitration awards in its favour and 18 years after those awards were made, it has still received nothing. However, it is common ground between the parties that, as things stand, the 2012 Regulation means that IMS cannot lawfully pay MODSAF anything. The question we have to determine relates to liability, not payment.
A second point is that the appeal does not concern either the principal sum awarded to MODSAF or interest up to 2008. The appeal is limited to liability for interest in respect of the period since 2008 and so relates to a relatively small proportion of the sums which MODSAF claims pursuant to the arbitration awards. We were told that the amount at stake on the appeal is in excess of £20 million. That is a significant sum, but it represents only a fraction of the £127,651,823 plus interest from 1984 to which MODSAF has been found to be entitled.
In essence, the issue raised by the appeal is whether the 2012 Regulation operates to deprive MODSAF of any right to interest as regards the period during which it has been subject to the EU's sanctions regime.
Basic facts
In the 1970s, IMS, whose shares are held by the United Kingdom's Ministry of Defence and Treasury, contracted to supply tanks and armoured recovery vehicles to what is now MODSAF. Each contract contained an arbitration clause providing for disputes to be determined by way of International Chamber of Commerce (“ICC”) arbitration with The Hague as the place of arbitration.
The contracts were terminated following the Iranian Revolution of 1979. Disputes subsequently arose as to the balance of accounts between the parties in consequence of which MODSAF (in 1990) and IMS (in 1996) both initiated arbitrations. On 2 May 2001, the arbitral tribunal rendered a final award in each arbitration. As regards the MODSAF claim, the tribunal determined that IMS was liable to pay MODSAF £140,599,570 in respect of the termination of the contracts, that interest on that sum should be paid “from 28 July 1984 to the date of payment at the LIBOR rate + 0.5%”, that IMS should pay MODSAF US $6,255,404 in respect of the latter's costs of the arbitration and that IMS was responsible to the ICC for US $1,143,750 for arbitration costs and expenses (“the 7071 Award”). As for IMS's claim, the tribunal concluded that this should be dismissed and that IMS should pay MODSAF US $3,127,701 in respect of costs (“the 9268 Award”).
MODSAF made without notice applications in the Commercial Court for permission to enforce the 7071 and 9268 Awards (together, “the Awards”) in the same manner as judgments or orders of the High Court pursuant to section 101 of the Arbitration Act 1996. Morison J acceded to the applications on 31 July 2001, but IMS applied to set his orders aside. On 5 December 2002, the proceedings were stayed by consent pending the resolution of challenges to the Awards that IMS had brought in the Dutch Courts. The consent order provided, however, for IMS to pay into Court £382,500,000 by way of security in respect of any sums that might ultimately be determined to be due to MODSAF. The requisite payment into Court was made on 18 December 2002 and, with interest, the sum in Court had risen to more than £500 million by the time of the hearing before Phillips J.
IMS enjoyed only limited success in the Dutch proceedings. On 21 December 2006, the Dutch Court of Appeal reduced IMS's liability under the 7071 Award from £140,599,570 to £127,651,823. In other respects, however, the Awards were upheld and on 24 April 2009 the Supreme Court of the Netherlands dismissed an appeal from the Court of Appeal's decision.
By then, MODSAF had been added to the list of entities subject to the EU's sanctions regime relating to Iran. As I have already indicated, it is common ground that, in consequence, IMS has been (and remains) unable to make any payment to MODSAF under the Awards. MODSAF, however, maintains that there is no bar to the Court entering judgment in its favour and declaring the funds in Court to be held for its benefit. On that basis, it issued an application seeking such relief in 2012. On 1 May 2019, Moulder J gave directions for certain issues to be determined in advance of the full hearing of MODSAF's application. One of these was what has been called “the interest during the sanctions period issue”, namely:
“Should the Court refuse enforcement of any post-award interest element of the Awards pursuant to Articles 42 and/or Article 38 of the [2012 Regulation] and/or s. 103(3) of the [Arbitration Act 1996] in relation to the period since MODSAF became a designated entity (it being agreed that IMS is and has been unable to make payment to MODSAF since MODSAF was designated as a specific target of EU sanctions on 24 June 2008)?”
It was this issue which Phillips J determined in the judgment now under appeal. He held that article 38 of the 2012 Regulation precluded MODSAF from enforcing the interest component of the 7071 Award as regards the sanctions period and, hence, that the amount due pursuant to the Awards should be recalculated on that basis. MODSAF, however, challenges that conclusion in this Court.
For completeness, I should mention that, although IMS relied on article 42 of the 2012 Regulation before Phillips J, it did not pursue any argument founded on the provision before us.
The 2012 Regulation
The 2012 Regulation has its origins in the United Nations Security Council's resolution 1737 (2006) (“Resolution 1737”). This was passed in response to Iran's nuclear programme and decided, among other things, that all UN Member States should freeze funds, financial assets and economic resources of specified persons linked to that programme. Subsequent Security Council resolutions have emphasised “the importance of all States … taking the necessary measures to ensure that no claim shall lie at the instance of” a specified person “in connection with any contract or other transaction where its performance was prevented by reason of the measures imposed by” Resolution 1737 and its successors (see paragraph 17 of resolution 1803 (2008) and paragraph 35 of resolution 1929 (2010)).
In line with Resolution 1737, the EU's Council Regulation (EC) No 423/2007 (“the 2007 Regulation”) provided for the freezing of funds and economic resources of various persons, entities and bodies. MODSAF was so designated with effect from 24 June 2008 pursuant to Council Decision 2008/475/EC.
The 2007 Regulation was amended to include a “no claims” provision by Council Regulation (EC) No 1110/2008 (“the 2008 Regulation”). A new article 12a of the 2007 Regulation now provided:
“1. No claim for indemnity or any other claim of this type, such as a claim for compensation or a claim under a guarantee, notably a claim for extension or payment of a bond, guarantee or indemnity, particularly a financial guarantee or financial indemnity, of whatever form, made by:
(a) designated persons, entities or bodies listed in Annexes IV, V and VI;
(b) any other person, entity or body in Iran, including the Iranian government;
(c) any person, entity or body acting through or on behalf of one of these persons or entities
in connection with any contract or transaction the performance of which would have been affected, directly or indirectly, wholly or in part, by the measures imposed by this Regulation shall be satisfied.
2. The performance of a contract or transaction shall be regarded as having been affected by the measures imposed by this Regulation where the existence or content of the claim results directly or indirectly from those measures.
3. In any proceedings for the enforcement of a claim, the onus of proving that satisfying the claim is not prohibited by paragraph 1 shall be on the person seeking the enforcement of that claim.”
Recital (4) to the 2008 Regulation explained:
“ Regulation (EC) No 423/2007 imposed certain restrictive measures against Iran, in line with Common Position 2007/140/CFSP. As a result, economic operators are exposed to the risk of claims and it is therefore necessary to protect such operators permanently against claims in connection with any contract or other transaction the...
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