November 12, 2018

Sanctions Clause In A Marine Policy – Mamancochet Mining Ltd. V. Aegis Managing Agency Ltd

On 12 October 2018 the English Commercial Court decided on the case of Mamancochet Mining Ltd. V. Aegis Managing Agency Ltd., which was primarily concerned with the sanction exclusion clause wording in a marine cargo insurance policy.

The claimant (the assured) relied on the policy and claimed for the losses it suffered as a result of theft of cargo kept in a bonded facility at an Iranian port. The defendant underwriters never denied the assured had a valid claim but resisted payment on the basis of the Sanction Limitation and Exclusion Clause (the Sanction Clause) provided for in the assured’s marine policy. The Sanction Clause was the Joint Hull Committee standard wording which was fully adopted by the Joint Cargo Committee and stipulated:

“No (re)insurer shall be deemed to provide cover and no (re)insurer shall be liable to pay any claim or provide any benefit hereunder to the extent that the provision of such cover, payment of such claim or provision of such benefit would expose that (re)insurer to any sanction, prohibition or restriction under the United Nations resolutions or the trade or economic sanctions, laws, or regulations of the European Union, United Kingdom or the United States of America.”

The main issue before the judge, Mr Justice Teare, was to consider the proper interpretation of the Sanction Clause agreed in the policy and, in particular, the plain meaning of the phrase “to the extent that … payment of such claim … would expose that insurer to any sanction, prohibition or restriction under … the trade or economic sanctions, laws, or regulations ….” The Judge also had to decide whether payment of the claim would “expose” the defendant underwriters to the US and/ or EU sanctions, within the meaning of the Sanction Clause in the policy. In other words, whether payment of the claim to the assured under the policy would be regarded as breach of the US and/ or EU sanction regimes.

The defendant insurers argued that the term “expose” should be construed as ‘a risk of being sanctioned by OFAC for paying a claim under the policy’ and therefore they were not liable to pay the claim. The claimant, on the other hand, submitted that ‘the clause required the insurers to establish that payment of the claim would put them in breach of those sanctions and thus would lawfully expose them to the sanctions’. In order to elaborate on the term “expose”, Mr Justice Teare took an objective approach and stated that “it is necessary for the insurer to show that the payment of the claim in question would be conduct which was prohibited by the applicable laws and regulations.” He further stated that “for unless the conduct is prohibited, in law there can be no sanction.” The Judge rejected the legality of the defendants’ argument that the US authorities (OFAC) could decide to impose sanctions on the insurers without any reference to or reliance on the applicable laws and regulations. He made it clear that the clause in question and the term “exposed” in the provision did not refer “to being exposed to the risk of a sanction or prohibition” but referred “to a payment which would expose the insurer to any sanction, prohibition or restriction.” He concluded that the Sanction Clause provided that the insurer was not liable to pay claims where payment would be prohibited under a system of law and “would expose” the insurer to a sanction. The Judge, however, held that “clear words would be required to establish a common intention” which then entitles the insurer to decline payment of an otherwise valid claim “when there was merely a risk that payment might be considered to be prohibited” and “would incur a sanction, … without having to show that payment was prohibited as a matter of law.”

As to the EU sanctions, the Judge held that the provision of the cover was not prohibited by EU law because the relevant prohibition was lifted on Implementation Day under the JCPOA arrangements. Furthermore, the fact that the relevant authorities have failed and / or refused to confirm that payment of a claim can safely be made, cannot “expose” the insurer to sanctions on proper construction of the Sanction Clause, because payment of the claim in question was not prohibited by EU law. Mr Justice Teare rejected the defendant insurers’ argument that once the Sanction Clause was triggered, their liability to pay a claim extinguished. In his view, there was nothing in the Sanction Clause which aimed to extinguish a claim and in fact the proper meaning of the Sanction Clause suggested “that for as long as payment would expose the insurer to sanction, the insurer is not liable to pay.” He concluded that the insurers’ liability was suspended in the meantime but was not extinguished.

The claimant also sought to rely on the EU Blocking Statute as an alternative case and submitted that the defendants’ reliance on the Sanction Clause would be compliance with the US sanction and therefore a breach of Article 5 of Blocking Statute and consequently in breach of English criminal law. The claimant also submitted that the US sanctions were unlawful under the Blocking Statute and that enforcement of the Sanction Clause would be illegal or contrary to public policy. However, the Judge did not need to decide on this very important aspect due to the case being ruled under the first submission of the claimant.

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