REUTERS | Amir Cohen

When arbitration, politics and sanctions collide: The Iranian Ministry of Defence and Support for Armed Forces Logistics v International Military Services

There are few arbitration cases which, whilst starting off as a contractual dispute, over time morph into a symbol of something else entirely. The case of The Iranian Ministry of Defence and Support for Armed Forces Logistics (MODSAF) v International Military Services is one such case.

What started off as a contractual dispute now concerns issues of political sensitivity given the current strained relations between the UK and Iran.

The arbitration

The dispute between the parties arose out of two contracts entered into in the 1970s, pursuant to which International Military Services (IMS) agreed to supply chieftain tanks and armoured recovery vehicles to MODSAF. The contracts were terminated on 6 February 1979, following the Iranian revolution. This in turn led to a dispute between IMS and MODSAF under the contracts.

Two related ICC arbitrations were commenced in the 1990s; one was commenced by MODSAF in 1990 (the 7071 claim) and the other by IMS in 1996 (the 9268 claim). The tribunal rendered final awards in both arbitrations in May 2001 (the awards).

With regard to the 7071 claim, the tribunal found that IMS was liable to pay MODSAF just over £140 million for the termination of the contracts, together with interest from 28 July 1984 to payment at a rate of +0.5% and MODSAF’s costs. The tribunal dismissed the 9268 claim, and also ordered IMS to pay MODSAF’s costs in that arbitration.

In July 2001, MODSAF applied to the English High Court for, and was granted leave to enforce, the awards pursuant to section 101 of the Arbitration Act 1996 (AA 1996), subject to the provision that the awards were not to be enforced until after any application to set aside the awards was finally disposed of.

In August 2001, IMS applied to the court to set aside or adjourn MODSAF’s enforcement proceedings, in light of IMS’ challenge to the awards before the Dutch courts. In December 2002, the parties agreed by a consent order that the enforcement proceedings would be adjourned pending the final resolution of IMS’s challenge. Under the terms of the consent order, the adjournment was conditional upon IMS paying £382,500,000 into court as security in respect of any sums that might ultimately be due to MODSAF. With the accrual of interest, that sum has increased to just over £500 million.

In December 2006, the Court of Appeal in The Hague partially set aside the award in the 7071 claim and reduced IMS’s liability to MODSAF to just over £127 million, but the awards were otherwise upheld. An appeal to the Supreme Court of the Netherlands was dismissed in April 2009.

However, in June 2008 MODSAF had been added to the list of entities subject to sanctions imposed against Iran by EU Council Regulation 423/2007 (now EU Council Regulation 267/2012 (Regulation 267)).

MODSAF agrees that, as a result of Regulation 267, the sums due under the awards cannot currently be paid to MODSAF. However, it was and is of the view that this is not an impediment to the court entering judgment in terms of the awards under the AA 1996. On this basis, in September 2012 it applied to the court to seek judgment in terms of the awards, and a declaration that the funds held by the High Court were held for the benefit of MODSAF (2012 application).

The 2012 application is still being heard in full. However, in May 2019, Moulder J determined that a number of issues should be determined before any such full hearing of the 2012 application, including whether the court should:

“… refuse enforcement of any post-award interest element of the Awards pursuant to Articles 42 and/or Article 38 of the Regulation 267 and/or s. 103(3) of the 1996 Act in relation to the period since MODSAF became a designated entity (it being agreed that IMS is and has been unable to make payment to MODSAF since MODSAF was designated as a specific target of EU sanctions on 24 June 2008) (‘the interest during the sanctions period issue’)?”

Moulder J directed that those issues should be heard before Phillips J on 21 and 22 May 2019 (the May 2019 hearing).

The sanctions issue

The relevant sanctions here are contained in Regulation 267. The parties were agreed that IMS has been unable to make payment of the sums due under the awards to MODSAF since MODSAF became a sanctioned entity in June 2008.

The main question for the court to consider at the May 2019 hearing was whether MODSAF was entitled to enforce the interest component of the award in the 7071 claim against IMS during the time that MODSAF was and is subject to sanctions. IMS argued that MODSAF was not so entitled, because during the sanctions period, IMS has been prevented from making payments to MODSAF to discharge its liability under the awards. IMS relied on Articles 38 and 42 of Regulation 267.

MODSAF’s position was that since the Central Bank of Iran (CBI) has been delisted as a sanctioned entity under Regulation 267, this provided a licensing route pursuant to which it could procure that IMS can make payment of the awards to the CBI. However, Phillips J was not asked to determine whether this licensing route was open to MODSAF in the May 2019 hearing. This post considers only the application of Article 38 of Regulation 267, as Phillips J found that Article 42 was not applicable in this case.

Ultimately, Phillips J found that Article 38 of Regulation 267 precluded the enforcement of the interest element of the award of the 7071 claim, insofar as it concerns the period during which MODSAF was a sanctioned entity. Phillips J came to this decision both on the language and purpose of Article 38.

The language of Article 38

Phillips J agreed with counsel for IMS that the language of Article 38 of Regulation 267 consists of five material components: (i) no claims; (ii) in connection with any contract or transaction; (iii) the performance of which has been affected, directly or indirectly, in whole or in part, by the measures imposed under this Regulation; (iv) shall be satisfied; (v) if they are made by designated persons, entities or bodies listed in Annexes VIII and IX.

“No claims”

As to the first component, Phillips J found that the relevant claim here was MODSAF’s application for judgment to be entered in terms of the awards. The term “claim” is defined in Article 1(c) of Regulation 267 as:

“… any claim, whether asserted by legal proceedings or not, made before or after the date of entry into force of this Regulation, under or in connection with a contract or transaction, and includes in particular:


(v) a claim for the recognition or enforcement, including by the procedure of exequatur, of a judgment, an arbitration award or an equivalent decision, wherever made or given.”

MODSAF’s application is a claim for the recognition or enforcement of an arbitration award and, therefore, falls within the scope of Article 1(c).

“In connection with any contract or transaction”

Phillips J also found that this component was satisfied. The relevant transactions are the awards. This decision was based on the fact that:

  • Regulation 267 defines the term “transaction” broadly.
  • The term transaction is defined in Article 1(d) with the introductory phrase “any transaction of whatever form and whatever the applicable law”.
  • In Article 1(c), the term “claim” is defined as “any claim… under or in connection with a contract or transaction, and includes in particular… (v) a claim for the recognition or enforcement… of a judgment an arbitration award or an equivalent decision”.

“The performance of which has been affected, directly or indirectly, in whole or in part, by the measures imposed under this Regulation”

In respect of the third component, Article 38 contemplates that the performance of the transaction may be affected “in whole or in part” by Regulation 267. Furthermore, Article 38(2) clarifies that the performance of a contract or transaction shall be regarded as having been affected by the measures imposed by the Regulation where “the existence or content of the claim results directly or indirectly from those measures”.

On the issue of the interest during the sanctions period, Phillips J found that the relevant “claim” is MODSAF’s application to enforce the interest component of the award in the 7071 claim in respect of the sanctions period. Whilst the existence of the claim may not have been based on Regulation 267 since it existed prior to MODSAF becoming a sanctioned entity, its content (in respect of the interest during the sanctions period) did result from Regulation 267. If MODSAF seeks interest from IMS in respect of the sanctions period, it is seeking to enforce a liability of IMS whose content “results directly or indirectly from” Regulation 267.

“Shall be satisfied; if they are made by designated persons, entities or bodies listed in Annexes VIII and IX.”

The fourth component sets out that the consequence of the other components of Article 38(1) being satisfied is that the claim shall not be satisfied. The fifth component was satisfied, as it was common ground that during the relevant period MODSAF was listed as a designated entity in Annex IX of Regulation 267.

The purpose of Article 38

Phillips J considered that the purpose of Article 38 is to prevent civil claims being brought against a party due to the fact that their performance of a contract or transaction was impeded by the operation of Regulation 267.

Therefore, Phillips J found that both on its language and purpose, Article 38 of Regulation 267 precluded MODSAF from enforcing the interest element of the award in the 7071 claim in respect of the sanctions period.

The politics

This matter has also become one of political sensitivity. Press reports have suggested that the Foreign Office had made a request to the Ministry of Defence to release payment of the awards. The inference is that this would more likely lead to the release of British-Iranian citizen Nazanin Zaghari-Ratcliffe. The UK government, however, as well as lawyers acting for IMS, has denied that there is a connection between the payment of the awards and the case of Ms Zaghari-Ratcliffe.

Although initially the enforcement proceedings were confidential, due to press interest and the intervention by The Times newspaper, Phillips J decided to make the judgment of the May 2019 Hearing public. This was in order to emphasise that the May 2019 hearing was solely concerned with the issue of quantum of the awards.

The release of the May 2019 hearing judgment also comes at a time when relations between Iran and the UK are further strained due to the seizing of oil tankers by the UK in Gibraltar and by Iran in the Strait of Hormuz in recent weeks.

No doubt it is the legal issues in this case that should be the focus, given that there is little case law interpreting the provisions of Article 38 of Regulation 267 as it applies to arbitration awards. However, given the parties and the sums involved, as well as the current political climate, it is perhaps no surprise that rather than the legal issues, what has gained more attention is speculation about how this case may or may not have an impact on the peripheral political atmosphere.

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