In a geopolitically significant case, the English High Court opined on important provisions of the EU sanctions regime.

By Charles Claypoole, Robert Price, and Olivia Featherstone

The judgment of the English High Court in Ministry of Defence & Support for Armed Forces of the Islamic Republic of Iran v. International Military Services Limited [2019] EWHC 1994 (Comm) constitutes the latest decision in a long-running dispute between the Iranian Ministry of Defence, (MODSAF), and the UK Ministry of Defence (via its subsidiary, International Military Services (IMS) that has been litigated in various courts and tribunals since 1990.

This latest judgment concerns whether IMS is liable to pay interest on the amounts an arbitral tribunal awarded to MODSAF in 2001, or whether IMS is prohibited from paying such interest by EU sanctions laws (specifically, EU Regulation 267/2012 – as amended).

The judgment carries great legal importance, as judicial pronouncements on the interpretation, application, and operation of EU sanctions laws are relatively rare.


The underlying dispute relates to two contracts that concluded in the 1970s, pursuant to which IMS agreed to supply tanks and other armoured vehicles to MODSAF. Following the Iranian revolution in February 1979, the contracts were terminated, resulting in a dispute between the parties as to the outstanding amounts payable under the contracts. This led to two International Chamber of Commerce (ICC) arbitrations: one commenced by MODSAF in 1990, and the other by IMS in 1996.

The same arbitral tribunal rendered final awards in both arbitrations on 2 May 2001 (the Awards). MODSAF’s attempts to enforce the Awards in England were stymied by IMS’ application to adjourn MODSAF’s enforcement proceedings, pending IMS’ attempt to set aside the Awards at the seat of the arbitration in Holland. By a consent order dated December 2002, MODSAF’s enforcement proceedings in England were adjourned pending the outcome of the set-aside proceedings, on the condition that IMS paid £382,500,000 into court by way of security. In April 2009, the Dutch courts ordered that IMS’ liability to MODSAF under the Awards be reduced to £127,651,823.

By that time, however, MODSAF had been added to the EU Consolidated List of Asset Freeze Targets by designation in the Annexes to (what is now called) EU Regulation 267/2012 in June 2008 (the EU Regulation).[i] As a result, it was common ground between the parties that it was unlawful for IMS to pay the sums due under the Awards. However, MODSAF argued that the unlawfulness of the payment itself was no impediment to the English High Court entering judgment in its favour. The Iranian ministry also sought a declaration that it was entitled to interest on the Awards up to the date of payment, including during the period in which MODSAF was designated as an asset freeze target. IMS relied on Articles 38 and 42 of the EU Regulation to resist payment of the interest.

Licence Application

On 16 January 2016, the Central Bank of Iran (CBI) was removed from the list of asset freeze targets under the EU Regulation. This prompted MODSAF to apply for an adjournment of the case so that it had time to apply to the Office of Financial Sanctions Implementation of HM Treasury (OFSI) for a licence under Article 25(a) of the EU Regulation. If the licence were granted (and judgment were entered against IMS), MODSAF planned to invite the Court to direct sums due under the Awards to the CBI, instead of to MODSAF. The outcome of this application remains unknown, and neither party invited the judge to decide whether this licencing route was available for MODSAF to use. The judge consequently decided the case on the basis that the sanctions regime prevented, and prevents, IMS from making payments to MODSAF to satisfy the Awards.

The Court’s Decision

Both Articles 38 and 42 are standard provisions that can be found in most EU sanctions regulations. Article 38 provides that:

“1. No claims in connection with any contract or transaction the performance of which has been affected, directly or indirectly, in whole or in part, by the measures imposed under this Regulation, including claims 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, shall be satisfied, if they are made by:

(a) designated persons, entities or bodies listed in Annexes VIII and IX;

(b) any other Iranian person, entity or body, including the Iranian government;

(c) any person, entity or body acting through or on behalf of one of the persons, entities or bodies referred to in points (a) and (b).

  1. The performance of a contract or transaction shall be regarded as having been affected by the measures imposed under this Regulation where the existence or content of the claim results directly or indirectly from those measures.
  2. 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. …”

The Court held that MODSAF’s claim fell within Article 38. It appeared to be particularly persuaded by the fact that the content of MODSAF’s claim only existed because of the sanctions. Had MODSAF not been designated as an asset freeze target, IMS could have paid the Awards in April 2009, and no interest would have accrued under the Awards.

The Court considered arguments by MODSAF that the overall purpose of the sanctions regime against Iran was rehabilitative, rather than punitive, and that Article 38 had to be interpreted in the context of MODSAF’s legitimate right to property (here the interest due under the Awards). On that basis, MODSAF submitted that Article 38 should not be construed so as to produce a “confiscatory” effect.

The Court rejected this argument. It held that, regardless of the overall purpose of the sanctions regime, the specific purpose of Article 38 was to prevent asset freeze targets bringing civil claims against a party because the very sanctions that designated the entity an asset freeze target impeded performance of a contract or transaction. It was therefore an unusual provision, in that sanctions regimes primarily concern interstate issues, but Article 38 was intended instead to ameliorate the impact of the sanctions regime on private relationships. In any event, the fact that MODSAF was unable to claim interest during the period in which it was sanctioned was not inconsistent with the overall objective of the sanctions regime.

Article 42 provides that:

“1. The freezing of funds and economic resources or the refusal to make funds or economic resources available, carried out in good faith on the basis that such action is in accordance with this Regulation, shall not give rise to liability of any kind on the part of the natural or legal person, entity or body implementing it, or its directors or employees, unless it is proved that the funds and economic resources were frozen or withheld as a result of negligence.”

The Court interpreted Article 42 more narrowly, concluding that the purpose of Article 42(1) is to provide protection for those who have mistakenly (but non-negligently) frozen funds or economic resources, or refused to make them available, in order to comply with the EU asset freeze regime. Given that Article 38 provided a complete defence to the claim for interest, the Court did not need to consider IMS’ further defence under Article 38. The Court also noted that its decision was consistent with OFSI’s (non-definitive) ‘Financial Sanctions Guidance’.


The case represents a rare example in sanctions of judicial comment on the language found in Article 38 of the EU Regulation. The provision, which has its genesis in the sanctions against Iraq during the First Gulf War, and which is included in most EU sanctions regulations, appears to offer a defence to claims for payments of amounts due under a contract, the performance of which has been impeded by the designation of the creditor under the EU sanctions. However, debtors have typically been unwilling to rely too heavily on this provision given its uncertain interpretation and the fact that (at least in England) the courts are slow to release parties from their contractual obligations in the face of disruption by sanctions. This decision provides welcome clarity that the provision can provide meaningful relief for counterparties of asset freeze targets which might otherwise have to rely on express contractual releases from their payment obligations (e.g., force majeure clauses) or the doctrine of frustration.

It remains to be seen how far a contract needs to be affected by the EU sanctions to qualify for relief under this provision, but the wording of Article 38 appears to be deliberately broad, referring to “claims in connection with any contract or transaction the performance of which has been affected, directly or indirectly, in whole or in part, by” the EU sanctions. On that basis, and whilst companies dealing in regions where there is a risk that their counterparty will be designated under the EU sanctions should seek bespoke contractual protections, this decision will provide some comfort that the relevant EU regulation responsible for the sanctions designation itself provides some protection against claims by the asset freeze target, or indeed “any other Iranian person, entity or body“, as this wording implies that the provision could provide relief against claims by non-sanctioned Iranian persons. It is possible that this decision will encourage more use of this “no claims” provision in the future.

[i]   At the time it was known as Regulation 423/2007.