DVB Bank SE v (Shere Shipping Company Ltd & Ors

EU sanctions freezing designated persons’ funds and economic resources do not, without more, freeze or discharge their contractual liabilities. A contractual repayment obligation is not itself a frozen economic resource. Where the applicable derogation permits a competent authority to authorise payment under a pre-designation contract, a party relying on illegality or frustration must show that authorisation was unobtainable, or that reasonable efforts to obtain it failed.

Repayment of a secured loan is not ordinarily the making of funds or economic resources available to the debtor. If performance were permanently impossible, the result would be frustration rather than indefinite suspension, with the consequences provided by the Law Reform (Frustrated Contracts) Act 1943. Contractual guarantees may exclude reliance on unfair prejudice, subject to bad faith and other recognised exceptions.

DVB Bank SE, Melli Bank Plc and Persia International Bank Plc sought summary judgment against four shipowning borrowers for unpaid syndicated-loan instalments. DVB also sought judgment against the borrowers’ guarantors, Woking Shipping Investments Ltd and Islamic Republic of Iran Shipping Lines Ltd.

The defendants relied on EU sanctions regulations affecting Iranian entities. They argued that the loan and guarantee obligations were frozen, unenforceable, frustrated or suspended, and that payment would breach the asset-freeze provisions. The guarantors additionally relied on unfair prejudice and restrictions on claims connected with affected contracts. The central questions were whether the defences had a real prospect of success and whether a trial or European reference was required.

1. Summary judgment. The court applied the principles summarised in Easyair Limited v Opal Telecom Limited [2009] EWHC 339 (Ch). A court should not conduct a mini-trial, but should decide a short point of law or construction where the evidence is sufficient and the parties have had a proper opportunity to address it. The defendants’ late application for a European reference was refused.
2. Asset freeze and repayment. Article 23 of Regulation 267/2012 froze the designated persons’ funds and economic resources, not the discharge of their liabilities. The loan agreement was not itself a frozen economic resource. Repayment to a creditor did not make funds or economic resources available to the borrower. The suggestion that repayment increased the borrower’s equity in the ships was commercially unrealistic and ignored the corresponding reduction in cash.
3. Authorisation and frustration. Article 25 left to the competent authority the determination whether authorised payment would breach Article 23(3). Previous authorisations had been obtained, and the defendants had not applied for further authorisation or shown that an application would necessarily fail. The illegality defence therefore had no real prospect of success. If, contrary to that conclusion, performance had become permanently impossible, the contract would be frustrated rather than suspended; section 1 of the Law Reform (Frustrated Contracts) Act 1943 would then entitle the lenders to recover the loans.
4. Guarantees. The guarantees’ provisions treating the guarantors as principal and independent debtors, and excluding ordinary surety defences, precluded an unfair-prejudice defence short of bad faith. The alleged conduct did not amount to bad faith. The same reasoning defeated the guarantors’ illegality arguments. Article 38 did not bar DVB’s claim as security trustee because the claim arose under the contract’s acceleration provisions, not from the sanctions measures.
5. Disposition. The borrowers and guarantors had no real prospect of success. Summary judgment was entered for DVB and Melli Bank/PIB against the borrowers, and for DVB against the guarantors. The form of order was left for further argument.