What are the circumstances in which acting in breach of EU sanctions will kill a claim?

21 March 2019. Published by Andy McGregor, Head of Civil Fraud and Christopher Whitehouse, Senior Associate

An Iranian oil company was defrauded in a failed attempt to circumvent EU sanctions - does its claim survive the Patel v Mirza illegality test?

The transaction

The claimant, Iranian Offshore Engineering and Construction Company or IOEC, was a contractor in the offshore oil and gas sector.  In 2012, to purchase an oil rig it paid US$87 million to a company established in the BVI and controlled by one of the defendants ("Dean").  Arrangements had been made for Dean to acquire the relevant oil rig from a Maltese subsidiary of the Romanian company Grup Servicii Petroliere SA ("GSP").  Ultimately Dean failed to acquire the relevant oil rig from GSP and IOEC's payment was misappropriated by several of the defendants including IOEC's managing Director at the time, Dr Taheri. As a result, IOEC brought proceedings for breach of fiduciary duty, knowing receipt, dishonest assistance, conspiracy and deceit.

The judge found in favour or IOEC in almost all respects. Dr Taheri had been central to the fraud and the other defendants in the proceedings had provided wide-ranging assistance.

Role of sanctions in the defence


As a final line of defence, some of the defendants argued that IOEC should not succeed due to the sanctions on trading with Iran in place at the time.  They ran the argument that IOEC's claim arose from a contract which was prohibited by the regulation imposing the EU Iran sanctions regime (Regulation EU/267/2012, "the Regulation") in which IOEC was specifically identified (although it ceased to be a sanctioned entity by the time it issued proceedings).  The effect of that regulation was for it to be prohibited for any person subject to it to sell, supply, transfer or export drilling equipment to IOEC. The defendants contended that the entire set of arrangements taken together was entered into for the purpose of circumventing the sanctions regime.

The judge found that the use of BVI-based Dean as an intermediary was an attempt to circumvent the sanctions regime so as to allow an EU company (GSP) to sell to a sanctioned Iranian entity.  This brought into play considerations of illegality and of public policy, and required the court to ask itself whether such considerations defeated the otherwise good claims brought by IOEC.

To determine this, the court applied the test in the Supreme Court case of Patel v Mirza.  That test requires the court to consider whether it would be contrary to the public interest to enforce a claim if to do so would be harmful to the integrity of the legal system. In assessing if the public interest would be harmed, the must court consider;

    •   the underlying purpose of the prohibition that has been breached,
    •   the relevant public policy on which the denial of the claim may have an impact and
    •   whether denial of an otherwise valid claim would be a proportionate response to the illegality.

On the basis of the points above and applying the criteria set out in Patel v Mirza, the judge considered that it would not be contrary to the public interest to enforce IOEC's relevant claims.  The denial of those claims:

    •   would not enhance the purpose of the sanctions, given that enforcement of the claims would not provide IOEC with a rig, and the purpose of the prohibition was never to prevent the recovery of money obtained by fraud
    •   would adversely impact the public policy of preventing and deterring fraud and that of the victims of fraud being able to take steps to recover money and property of which they have been defrauded; and
    •   would be a disproportionate response to any illegality involved.

The following factors were at the heart of the judge's assessment:

    a)  IOEC's claims were not to enforce the sale agreement with Dean and IOEC did not and would not actually obtain the GSP Fortuna
    b)  IOEC was not, by the date of issue of proceedings, a sanctioned entity and had the transaction taken place at the date it would not have involved a breach of the sanctions regime
    c)  IOEC's complaints related to serious wrongs, which were independent of the intended breach of the sanctions regime, which only provided the opportunity for them to take place.

Accordingly, IOEC's otherwise successful claims succeeded.

Comment

This case provides an interesting example of the extent to which entities complicit in the breach of EU sanctions are still able to bring legal proceedings relating to matters arising out of those breaches.  However, it is difficult to draw any broad principles from this case given the specific factual circumstances.

Of particular interest is the judge's analysis that it was considered material that the relevant activity breaching sanctions at the time was no longer prohibited.  This reasoning might be criticised in so far as it seems odd to evaluate the severity of illegality in retrospect rather than at the time it was committed.  It is also curious that the judge omits explicit consideration in the judgment of the public interest in ensuring that EU sanctions are enforced.