Islamic Republic of Iran Shipping Lines v Steamship Mutual Underwriting Association (Bermuda) Ltd (Rev 1)

A licence permitting an insurer to continue providing insurance cover required by the Bunkers Convention may preserve indemnity cover for the assured, even where other risks under a wider policy have become unlawful. The licence must be construed according to its language and context. A contract is not frustrated merely because performance of most insured risks becomes unlawful. The court must consider the contract as a whole, the allocation of risk, the nature of the supervening event, the parties’ objectively ascertainable assumptions, and the demands of justice. Where the lawful part of the contract remains performable, is not dependent on the prohibited part, and continues to make commercial sense, that part may remain in force.

Islamic Republic of Iran Shipping Lines was insured by Steamship Mutual Underwriting Association under a mutual protection and indemnity policy. Following the making of the Financial Restrictions (Iran) Order 2009 under the Counter-Terrorism Act 2008, HM Treasury issued a licence permitting the Club to continue providing insurance cover in accordance with Blue Cards issued in respect of IRISL’s ships for three months.

The Club treated the wider insurance contract as discharged by frustration or supervening illegality after 30 October 2009. The central questions were whether the licence preserved cover for bunker oil pollution liabilities, whether the insurance contract was frustrated, and whether IRISL or the Club was entitled to indemnification in relation to the resulting casualty.

1. Construction of the licence. Paragraph 6 of the 30 October Licence permitted the Club to continue providing IRISL with insurance cover for the risks required by Article 7 of the Bunkers Convention. The phrase “insurance cover” retained its ordinary meaning and did not exclude indemnity cover for the assured. The licence also permitted the Club to meet all claims arising under that cover, not merely direct claims by third parties under Article 7(10).
2. The reference to Blue Cards identified the scope of the permitted cover. It did not convert the cover into a guarantee solely for third parties. The Convention included preventive measures and reinstatement costs, which could be incurred by the shipowner as well as by third parties.
3. Frustration. Applying the multi-factorial approach to frustration, the court considered the contractual terms, context, parties’ knowledge and objectively ascertainable assumptions, the supervening statutory restrictions, the remaining lawful performance, and the demands of justice. The parties had not provided for the particular statutory measures, and the Blue Cards did not waive the Club’s contractual right to terminate.
4. Nevertheless, the contract had not become radically different. Its nature remained indemnity insurance on a mutual basis. Cover required by the Bunkers Convention remained lawful and materially unchanged. The restrictions on payment did not frustrate the contract, since payments to and from IRISL remained permitted within the licensing arrangements.
5. A finding of frustration would give the Club a windfall, defeat the apparent purpose of the licence, and excuse performance of an obligation that had remained lawful and unaltered. The insurance contract therefore continued in force to the extent of the permitted cover.
6. IRISL was entitled to indemnification for its costs and liabilities arising from the casualty. The Club was not entitled to indemnity or reimbursement from IRISL for liabilities incurred to third parties under Article 7(10) of the Bunkers Convention.

First-instance proceedings in the Commercial Court. The judgment records that related proceedings challenging the Order and Licence under section 63 of the Counter-Terrorism Act 2008 had been stayed before Gross J.