Ministry of Defence & Support for Armed Forces of the Islamic Republic of Iran v International Military Services Ltd

Article 38 of Council Regulation (EU) No 267/2012 can bar satisfaction of only the part of a contractual claim whose existence or content results directly or indirectly from sanctions. Where sanctions prevent payment of an existing award and thereby increase the interest due, the prohibition applies to interest accruing during the sanctions period, but not to the unaffected principal or earlier interest.

An arbitration award is not itself a “contract or transaction”. A claim to enforce an award may nevertheless be connected with the underlying contracts. The no-claims provision permanently protects counterparties from liabilities caused by sanctions, subject to the Regulation’s express scheme for payments into frozen accounts.

An arbitral tribunal awarded the Iranian Ministry of Defence substantial sums and interest against International Military Services Ltd under contracts for military equipment. The awards pre-dated the Ministry’s designation under the European Union sanctions regime, but sanctions prevented payment from 24 June 2008.

Phillips J, in [2019] EWHC 1994 (Comm), held that article 38 of Council Regulation (EU) No 267/2012 prevented enforcement of interest accruing during the sanctions period. The Ministry appealed. The central issue was whether article 38 deprived it of post-award interest accruing while sanctions prevented payment, although liability for the principal and earlier interest was unaffected.

1. Appeal dismissed. Article 38 of Council Regulation (EU) No 267/2012 barred enforcement of the award to the extent that it represented interest accruing after the appellant became designated on 24 June 2008. Newey LJ gave the leading judgment. Males and Moylan LJJ agreed.

2. Article 38 serves the specific and permanent purpose of protecting counterparties against claims arising from non-performance caused by sanctions. It allocates the resulting burden to designated persons. Article 29 does not undermine that purpose: where payment can be made into a qualifying frozen account, the counterparty can stop further interest and needs no equivalent protection. The appellant had no such account.

3. An arbitration award is not naturally a “contract or transaction” within article 1(d). It is neither made between the parties nor conventionally described as having an applicable law. Article 1(c)(v) includes enforcement of judgments and awards because such enforcement may pursue a claim connected with a separate contract or transaction, not because the judgment or award is itself a transaction.

4. The enforcement application was nevertheless a claim connected with the original supply contracts. Article 38(2) is a deeming provision. It directs attention to whether the existence or content of the claim results directly or indirectly from the sanctions, rather than to whether obligations under the underlying contracts remain executory. Sanctions increased the interest component because they prevented payment. Article 38 can apply to part of a claim and therefore barred only the sanctions-period interest, not the principal or earlier interest.

5. This construction was proportionate and consistent with the right to property and legal certainty. The EU legislature had broad discretion in making the relevant political, economic and social choices. Article 38 was intended to have confiscatory consequences within its field, and its language was sufficiently clear despite possible borderline cases.

6. Males LJ explained that English law treats an agreement to arbitrate as containing a contractual promise to perform the award. Nevertheless, he rejected the respondent’s alternative argument based on that promise. A purposive interpretation of EU legislation could not sensibly make sanctions-period interest depend on whether the creditor had obtained an award rather than a judgment. Moylan LJ agreed with both judgments.

7. The correct interpretation was sufficiently clear. A reference to the Court of Justice of the European Union was therefore unnecessary.

1. Court of Appeal (Civil Division): The appeal was dismissed. The court upheld the order excluding interest accruing during the sanctions period, although it adopted different reasoning on whether the award itself was a transaction: [2020] EWCA Civ 145.
2. Commercial Court: Phillips J held that article 38 of Council Regulation (EU) No 267/2012 precluded enforcement of the interest component for the sanctions period and directed recalculation of the sum due: [2019] EWHC 1994 (Comm).