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12 December 2018
The High Court recently considered the wording "exposure to sanctions" and ruled that the underwriters of a marine insurance policy could not rely on that wording to avoid a claim on the basis of a "risk of exposure" to the US-Iran sanctions.(1) Rather, for underwriters to do so, there would need to be an actual prohibition on paying the claim in question. As with any clause that exempts a party from what would otherwise be its contractual obligations, sanctions exclusion clauses must be clearly worded and provide for the consequences of a breach.
This judgment deals with a number of key points for drafting effective sanctions exclusion clauses in commercial maritime agreements.
The case concerned whether the defendant underwriters could avoid a claim made by Mamancochet Mining Ltd on the basis of a sanctions exclusion clause.
The claimant was the assigned beneficiary of a marine cargo insurance policy. The policy included cover for theft. In August 2012 two cargoes of steel billets, valued at approximately $3.8 million, were stolen from bonded storage in Iran, following a fraudulent presentation of documents.
An insurance claim was made in March 2013. While the underwriters accepted that the claim was of a type and nature covered by the policy, payment was resisted on the basis of the following wording in the sanctions clause of the policy: "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 sanctions clause contained the standard wording for the London market developed by the Joint Hull Committee. However, this wording is uncommon in other contracts. The key question was whether 'exposure' to sanctions in that clause meant:
The court found that the first interpretation was correct. This interpretation is consistent with other cases dealing with contractual interpretation. The English courts are generally reluctant to stretch the ordinary meaning of a negotiated clause. This is especially so when it comes to broadening an exclusion of contractual liability. It was open to the parties to provide for the risk of sanctions, but they did not do so. Accordingly, the court followed the ordinary meaning of the sanctions clause.
There was also a question of the impact and duration of the sanctions clause. If triggered, would the clause suspend obligations that would otherwise arise under the policy (ie, prevent payment of the claim until such time as the sanctions were lifted) or would it extinguish them (ie, allow the marine insurers to avoid the claim entirely)? Again, absent wording to the contrary, the court found that 'to the extent' meant that the claim was suspended rather than extinguished. This accords with typical advice on drafting sanctions provisions, which is that the consequences of breach must be clearly specified by, for example, providing a termination right or provision for alternative performance (eg, a change in the payment currency).
The court distinguished exposure to sanctions and exposure to the risk of sanctions. This is an easy point to clarify in contractual clauses if the wider effect is intended. Marine insurers and brokers in particular should not rely on old contract templates and should instead ensure that new policies both have a broad scope and contain specific consequences. For example, insurers and brokers could include the phrasing 'exposure to the risk of being sanctioned' or refer to 'conduct which the relevant authority may consider to be prohibited or sanctionable'. Plainly, this will be a matter for negotiation. A more balanced clause would include bespoke limitations, including that the party benefiting from the clause should act reasonably and on the basis of cogent information.
The case is a reminder of the importance of precise contract drafting, even if it is time consuming. Drafting sanctions clauses carefully is especially important for long-term contracts in countries or with counterparties associated with a high sanctions risk, where the sanctions landscape (and language) can change dramatically over the course of a contract. It is sensible to review the interplay of the sanctions clause with other relevant provisions, including force majeure, payment currency and termination. There will also be special considerations for particular types of contract. For example, long-term commodities trading contracts may need provisions that deal with the effect of sanctions on both individual deliveries and on the contract as a whole, and contracts of affreightment would need similar provisions for individual voyages. Both trading contracts and charterparties may need to include provisions dealing with alternative destinations for unloading cargoes or alternative currencies in the event of sanctions, together with related costs and delays.
It is important to keep in mind that this is a first-instance judgment and may be reviewed by the Court of Appeal or the Supreme Court.
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