In its judgment in Arash Shipping v Groupama Transport  EWCA Civ 620, the Court of Appeal has considered how Regulation 961, an automatic renewal clause and a sanctions clause interact.
The contract of insurance was a composite policy of marine insurance covering hull and machinery risks on the NITC fleet of Iranian oil tankers, and the co-assured included a Cypriot operating company, Arash Shipping Enterprises Co. Ltd, which was owned or controlled by Iranian nationals. The policy incepted in May 2010, before the imposition of EU sanctions.
The policy contained an Iran Sanctions clause, which gave insurers a discretionary right of cancellation “… in circumstances where the Assured has exposed or may, in the opinion of the Insurer, expose the Insurer to the risk of being or becoming subject to any sanction prohibition, regulation or adverse action in any form whatsoever against or in respect of Iran promulgated by ... the European Union ...”. The clause was slightly (but not materially) amended for the Lloyd’s and IUA markets.
The policy also contained a Review Clause, which stated that the insurers would extend the policy period by 12 months, on an unaltered basis, provided the loss ratio at a specific date did not exceed 50%.
In the light of Regulation 961, in December 2010 certain insurers gave prospective notice of cancellation on expiry under the sanctions clause. Discussions ensued. In January 2011, Insurers subsequently withdrew the notice of cancellation (without prejudice to their rights).
In February 2011, the insured’s solicitors obtained advice from HM Treasury’s Asset Freezing Unit to the effect that it did not consider automatic renewal to be permitted under Article 26(4). This ran contrary to the advice the insured had obtained from its QC, and in March 2011 the insured’s solicitors wrote to the European Commission seeking its views. Certain insurers then re-tendered notice of cancellation in April 2011.
The insured sought to challenge the validity of the re-tendered notice of cancellation on various grounds, including that the notice was premature on the basis of the Review Clause and unreasonable because there was no risk of sanctions being imposed, since Article 26(4) of Regulation 961 did not prohibit the automatic extension of the policy.
On 20 April 2011, the High Court decided that on balance the Regulation should be interpreted as prohibiting the automatic extension of the policy and that the notice of cancellation was valid and effective. On 6 May, the Court of Appeal heard and dismissed the insured’s expedited appeal, delivering a reasoned judgment on 25 May 2011.
The Court of Appeal confirmed that the insurers' notice of cancellation of the policy on expiry of the policy year was valid under the clause and exercised in good faith; it was reasonable in light of the risk of sanctions being imposed by Article 26 of Regulation 961. The wording of the clause did not require an act or omission by the insured to trigger insurers’ rights, rather the trigger was that the insured had become an entity with whom any further dealing by the insurers might expose those insurers to the risk of being in breach of the relevant sanctions.
The Court’s decision on this narrow issue meant that it did not need to decide whether Article 26(4) of Regulation 961 prohibited the automatic extension of the policy. However the Court of Appeal offered the view that the decision of the High Court was “plainly correct”.