DIFC Court of Appeal upholds judgment on US Iranian sanctions issue

Charles Fussell & Co LLP, in conjunction with Zoe O’Sullivan KC of Serle Court, represented the successful respondent, Qatar Insurance Company (“QIC”), in an appeal against a decision of the DIFC Court on the applicability of a sanctions exclusion clause brought by a number of US owned reinsurers.  The DIFC Court of Appeal’s judgment, which was handed down on 20 September 2024, can be found here. 

The issue raised on appeal by the reinsurers concerned the application of a sanctions limitation and exclusion clause (the “Sanctions Clause”) contained in a number of reinsurance contracts and in particular whether the reinsurers could avail themselves of the exclusion by virtue of the US Iranian Transactions and Sanctions Regulations (“ITSR”) and avoid paying out under the contracts. 

QIC had sought to reinsure its obligations with the reinsurers arising under an insurance policy QIC had entered into with a UAE based bank.  One of the bank’s customers, a Hong Kong based entity, which was wholly owned by three Iranian nationals, was defrauded to the tune of AED 36.5 million, by one of the bank’s employees.  The bank re-imbursed its customer in full and made a claim against QIC under the insurance policy which has also been paid in full.  QIC sought reimbursement under the reinsurance contracts and whilst the non-US reinsurers paid out, the US owned reinsurers sought to invoke the Sanctions Clause on the basis of the bank’s customer’s ownership by Iranian nationals.  The reinsurers issued proceedings in the DIFC Court seeking a declaration of non-liability.  The DIFC Court (Justice Lord Angus Glennie) dismissed the reinsurers claim and granted QIC’s counterclaim for damages in the sum of the reinsurance monies owed in a judgment handed down on 26 February 2024. 

The issues in the appeal included (a) the proper meaning and effect of the Sanctions Clause and (b) whether, as a matter of US law, the provision of cover or payment under the reinsurance contracts would expose the reinsurers to any sanction, prohibition or restriction under ITSR.

The DIFC Court of Appeal, Michael Black KC giving the leading judgment, upheld the Judge’s ruling and dismissed the appeal. A central issue addressed by the Court was whether it could be said that sanctioned persons, namely the bank’s customer’s owners, have benefitted directly or indirectly from the reinsurance cover or the payment of it.  The Court rejected the reinsurers’ arguments and held that the Sanctions Clause was not engaged.  The Court followed the judgment of Teare J in Mamancochet Mining Limited v Aegis Managing Agency Ltd & ors [2018] EWHC 2643 (Comm) in determining that the words “would expose” (as found in the Sanctions Clause) meant that the risk of sanctions would need to be concrete rather than just a possibility.

In summary, the Court held that on the evidence before the court it could not be said that the reinsurance cover or the payment of reinsuruance to the insurer pursuant to the reinsurance contracts amounted to the provision of services or a payment to a sanctioned person within the meaning of the ITSR.