Royston Deitch
Executive Representative, Head of IG Matters/General Manager of Underwriting Administration Dept. (Solicitor)

This article is for general information only. Specific situations will need specific legal advice from suitably-qualified Counsel.

There have been US sanctions against Iran since the hostage crisis in 1979 but the most recent story begins in 2015 with the Joint Comprehensive Plan of Action (JCPOA). Under the JCPOA, the five permanent members of the UN Security Council plus Germany and the EU on the one side, and Iran on the other, agreed that various US and EU sanctions against Iran would be lifted in return for Iran stopping its military nuclear programme.

Donald Trump criticised the JCPOA during the 2016 US Presidential Election campaign and, having become President, on 8 May 2018 announced US withdrawal from it. 5 November 2018 thus brought “snapback”, a full re-imposition of sanctions lifted under JCPOA, and the restoration of secondary sanctions against non-US persons. Transactions involving crude oil and petroleum products, including transport and insurance, were targeted. US sanctions escalated on 8 May 2019 with the President’s Executive Order 13871 targeting Iran’s metals sector.

Penalties for breaching sanctions are severe. The US’s OFAC (Office of Foreign Assets Control) imposes civil fines of the higher of USD 295,141 or twice the value of the transaction for each violation. There may be criminal penalties too, from the Dept. of Justice : fines of up to USD 1 million and 20 years in prison. In addition, assets may be blocked and a person added to the list of Specially Designated Nationals (SDNs).

Shipowners negotiating a fixture and worried about instructions to go to Iran should ensure the charter allows them to refuse to comply with sanctions-related voyage orders. The BIMCO Sanctions Clause for Time Charter Parties gives owners this right. An express exclusion of Iran in the charter as a destination would also be good for owners.

If the charter does not expressly exclude Iran, it may be possible to argue that an order to sail there is illegal as the vessel is only permitted to carry lawful merchandise in lawful trades. Under English law, it may be possible to claim that the charter contract has been terminated due to frustration. Frustration discharges both parties from contractual obligations where, through no fault of either party, performance of the contract has become either impossible or radically different. Here, a ship owner would argue that the contract was frustrated as an order which could result in a breach of sanctions would mean performance “radically different” to what was intended.

A cause of frustration recognised by courts is supervening illegality: basically, since the contract was made, a new law has made performance of it illegal. However, it would be difficult to argue supervening illegality if owners accepted charters or voyage orders after 5 November 2018, as the sanctions situation should have been known then. So frustration may not be relevant and it is always difficult to prove in court anyway.

6 August 2018 brought the EU’s Blocking Regulation, a response to the “snapback” of US sanctions. The purpose of the Regulation was to show EU support for the JCPOA. It forbids EU persons from complying with US Iran sanctions, unless authorised. However, the threat of EU action is unlikely to protect EU businesses against action by US authorities for breaching US sanctions. Because of this, banks in the EU will not remit funds, which could be hire, premiums, claims etc., which are in some way related to Iran.

[The interaction between sanctions and IG Club P&I cover]

The Rules of all of the IG Clubs:

1. contain a cesser or non-insurance rule, under which the Member has no P&I cover in respect of activities or liabilities which expose the Club to sanctions or to the risk of sanctions; and
2. prohibit or limit (reduce) a Member’s right of recovery from its club if, because of the application of sanctions, there is a shortfall in the club’s reinsurance (which includes any shortfall under the IG Pooling Agreement, General Excess of Loss programme or any other reinsurance arrangement).