In recent years, sanctions have become one of the issues of greatest concern for parties entering into international transactions. As a result, detailed contractual clauses designed to manage sanctions risks have become commonplace. The October 2018 judgment of the High Court in Mamancochet Mining v. Aegis Managing Agency (the “Judgment”) has highlighted certain pitfalls in the standard wording of some sanctions clauses, and should be heeded by any party seeking to contractually protect itself from sanctions risks by, for example, making its performance under the contract conditional upon the non-occurrence of certain sanctions events, or tying a termination event to sanctions. The Judgment also casts some light on the interpretation of the EU Blocking Regulation and suggests exercising contractual rights (even ones designed to ensure compliance with U.S. sanctions) does not breach the Blocking Regulation.
That said, care should be taken not to overstate the Judgment’s significance since:
- it was a first instance decision;
- it may yet be contradicted or superseded by an EU court (pre-Brexit, at least);
- it was based on a contract pre-dating both the most recent amendments to the Blocking Regulation and the issuance of the EU Commission’s guidance thereon; and
- the discussion on the Blocking Regulation was obiter
The overall impact of the Judgment remains to be seen, therefore. What is clear, is that parties and their lawyers will spend yet more time poring over sanctions clauses in an attempt to address all eventualities in what is an increasingly complex sanctions landscape.
The claimant’s steel – stored in Iran, and consigned to an Iranian national – was stolen. Accordingly, the claimant sought to rely on the insurance covering the steel. The defendant insurers refused to pay out, relying on a sanctions clause that stated:
“…no (re)insurer shall be liable to pay any claim…to the extent that the provision of such cover…would expose that (re)insurer to any [UN, EU, UK or U.S.] sanction, prohibition or restriction”.
The defendant insurers argued that payment under the policy would render them exposed to the risk of breaching sanctions, and that this was sufficient to trigger the sanctions clause.
Some insights on the construction of sanctions clauses
Multiple changes to the U.S. sanctions regime against Iran between the insurance policy being taken out and the Judgment being handed down created some ambiguity about whether pay-out under the policy would breach U.S. sanctions laws. As a result, the defendant insurers argued that pay-out would at least create a risk of breaching U.S. sanctions, which, they said, represented sufficient “exposure” to sanctions under the sanctions clause to excuse them from paying out.
The judge distinguished exposure to sanctions from exposure to a risk of sanctions, finding that the sanctions clause would only excuse non-payment where, on the balance of probabilities, the defendants could show pay-out would breach applicable sanctions. A mere risk that pay-out could breach sanctions was not covered by the sanctions clause in this case as, in the absence of “clear words”, one would not expect an insured to enter into an arrangement that would release the insurer from a valid claim merely by the insurer pointing to a risk of breaching sanctions.
The judge also found that the sanctions clause, where it could be successfully invoked, only suspended the insurers’ liability to pay out rather than extinguishing it entirely. In reaching this conclusion, he relied on the fact that the sanctions clause was expressed to be triggered only “to the extent” pay-out would expose the insurers to sanctions. Put simply, the judge envisaged that the sanctions clause could be “un-triggered” and the payment obligation reinstated if the relevant sanctions were relaxed such that pay-out would no longer be a breach of sanctions.
These findings bear careful consideration in a number of respects:
- The phrase “exposure to sanctions” is not among the typical formulations used in sanctions clauses in international financing or capital markets contracts. Such contracts tend to be more tightly worded, referring instead to relatively clear-cut concepts such as “violation of sanctions”, becoming “the subject or target of sanctions” or being “listed on the Specially Designated Nationals List”. The Judgment acts as a reminder of the virtues of precise drafting, even if it is voluminous and time-consuming.
- U.S. primary sanctions apply where there is a sufficient U.S. jurisdictional nexus – an exceptionally far-reaching concept, since the involvement of U.S. persons, territory and/or currency can all act as jurisdictional ‘hooks’. However, the United States also has a ‘secondary’ sanctions regime that targets certain activities by non-U.S. persons outside the U.S. jurisdiction. The enforcement mechanism is political rather than judicial; effectively, secondary sanctions threaten that if a non-U.S. person engages in a targeted activity (including some dealings with sanctioned persons), then the U.S. authorities may add that non-U.S. person to the Specially Designated Nationals List or impose one or more of a range of other measures varying in severity that restrict the person’s access to the U.S. economy. If the judge in the Judgment thought clear words would be needed to trigger a sanctions clause on the basis of a risk of breaching primary sanctions, presumably even clearer words would be needed to trigger a sanctions clause where there is no risk of breaching primary sanctions, but where there is a secondary sanctions risk.
- The finding that the effect of the sanctions clause was to suspend, rather than extinguish, the defendant insurers’ obligation to pay out is potentially problematic. If a party’s obligations under a contract are not definitively extinguished by the effect of a properly invoked sanctions exclusion clause, but could be resuscitated if the sanctions regime changes, that party becomes subject to an uncrystallized liability of indeterminate duration. That may require that party to determine whether it should make a provision in its financial statements or disclose a contingent liability. Under International Accounting Standards, that requires the party to consider the probability of having to meet the obligation. Given that the response to that enquiry depends on geopolitical factors that in general are highly unpredictable and outside the party’s control, this hardly seems appropriate. Parties should therefore consider drafting sanctions exclusion clauses to extinguish the liability of the party seeking to rely on the clause, if not immediately, then within a reasonable timeframe.
A sensible approach to the EU Blocking Regulation
The Blocking Regulation renders it unlawful for EU persons to comply with certain U.S. sanctions laws that have extra-territorial effect. The claimant sought to argue that the Blocking Regulation prevented the defendant insurers from relying on the sanctions clause (given that, in the claimant’s view, a proper interpretation of the sanctions clause could only allow the defendant insurers to resist pay-out where that would lawfully expose them to sanctions). The judge sided with the defendant insurers on this point, positing that where a party merely relies upon the terms of a sanctions clause to resist performing a contractual obligation, this cannot be construed as an act of “compliance” with a third country’s sanctions regime, and thereby would not breach the Blocking Regulation. While this comment was strictly obiter (since the judge had already decided that the defendant insurers could not rely on the sanctions clause on its proper construction), many will welcome the judge’s commercially minded interpretation. It would allow parties to formulate sanctions clauses without attempting in vain to craft wording that would square the circle of complying with both U.S. sanctions and the Blocking Regulation.
 Mamancochet Mining Limited v. Aegis Managing Agency Limited and Others  EWHC 2643 (Comm).
 Council Regulation (EC) No 2271/96 (the “Blocking Regulation”). The Blocking Regulation prohibits compliance with certain U.S. sanctions by EU companies. Read our blog post on the Blocking Regulation here.
 The claimant was in fact an assignee of the benefit of the insurance policy, but this detail is not relevant to the analysis.