EU measures against Iran - Council Decision

Dear Sir/Madam,

The following Frequently Asked Questions has been issued by all International Group Clubs on the above matter.

New European Union Measures against Iran  - Council Decision

2012/35 dated 23 January 2012  - Frequently Asked Questions  –

issued on 8 February 2012

Background

On 23 January 2012 The European Union Foreign Affairs Council agreed to

introduce further measures impacting on trade that would or could support the

furtherance of the Government of Iran’s nuclear aspirations. Specifically the Council

has introduced new measures to prohibit the trade and transportation of crude oil,

petroleum products and petrochemical products. The new measures are set out in

Council Decision 2012/35 on Iran and it is anticipated will be incorporated in a

Council Regulation.

The International Group has met and is engaging with the European Commission

Service for Foreign Policy Instruments (ECSFPI) in relation to issues arising out of

the potential application of the provisions of the Decision on shipowners and clubs.

ECSFPI is the Commission body which will be engaged in the drafting of the

Regulation which will be presented to the Council for discussion and finalisation. In

addition, the Group has met and is engaging with the UK Treasury on a similar basis.

The application, or potential application, of the provisions of the Decision has led to a

number of questions from shipowners and clubs on various issues relating to the

extent of the prohibitions and impact on insurance and reinsurance cover

arrangements which are addressed so far as possible below. The position in relation

to these and other issues arising will be kept under continuing review pending the

finalisation of the Council Regulation and the FAQs will be updated and republished

to reflect any further clarification obtained and new issues arising..

The FAQs which follow cover the following current issues;

 The legal Status of EU Council Decision 2012/35;

 The likely timing and effect of the amending Regulation;

 The geographical scope of the Decision;

 The range of entities that are covered by the Decision;

 The effect of the "grace periods";

 Ancilliary contracts provisions; 2

 The impact on P&I  cover and renewals;

 “Blue Card” exposure;

 The impact on bunkering activities;

 Trans-shipment and loading outside Iran.

1. What is the legal status of the Decision pending the publication of the

Regulation?

Whilst the Decision has immediate effect on EU Member States, it will not be binding

on individuals and corporations (including shipowners and clubs who may be subject

to the terms of the Decision) until the Council Regulation has been issued. There is

no current date set for the issue of the Regulation, but the indications are that this is

unlikely to be published before early March. By way of historical background, Council

Regulation 961/2010 on restrictive measures against Iran issued on 25 October

2010 implemented the measures contained in Council Decision 2010/413/CF SP

issued almost three months earlier on 26 July 2010.

2. Will the implementing Regulation have retrospective effect in  relation to

shipping and insurance activities between the date of the Decision and the

date of the Regulation?

The usual procedure is for a Regulation to enter into force on the day of its

publication in the Official Journal of the European Union. Normally this is up to one

or two days after the Regulation is signed off by the Council. Until the Regulation is

published it is not possible to assess what retrospective effect this might have.

The practice in relation to previous Decisions and Regulations does not provide any

clear guidance on whether the Regulation will have retrospective application.  

Pending entry into force of the Regulation, it would be prudent to assume that the

prohibitions (and any relevant exemptions therefrom) will be effective from the date

of the Decision, rather than the later date of the Regulation.

3. To whom does the Decision apply?

The Decision does not contain specific scope of application provisions. It does

however make amendments to Decision 2010/413 the provisions of which were

implemented in Regulation 961/2010. The new measures proposed in the Decision

will be implemented by  way of amendment to Regulation 961/2010 which currently

contains in Article 39 scope of application provisions as below;

This Regulation shall apply: 3

(a) within the territory of the Union, including its airspace;

(b) on board any aircraft or any vessel under the jurisdiction of a Member State;

(c) to any person inside or outside the territory of the Union who is a national of a

Member State;

(d) to any legal person, entity or body which is incorporated or constituted under the

law of a Member State;

(e) to any legal person, entity or body in respect of any business done in whole or in

part within the Union.

It is not anticipated that these scope of application provisions will change when the

amended Regulation incorporating the measures contained in Decision 2012/35 is

issued.

In the context of shipping activity, the scope of application will include shipowners

incorporated, domiciled or regulated within an EU Member State, vessels registered

in and/or flying the flag of an EU Member State and vessels regardless of ownership

or flag which trade to ports in EU Member States. The Decision does not specifically

address the position of charterers, but the broad wording of the prohibition in relation

to “import” and “transport” may well extend to the charterers of a vessel undertaking

a voyage which contravenes the prohibitions. Further clarification will be sought on

this issue but pending such clarification it would be prudent to assume that

charterers, as well as shipowners, will be subject to the scope of the prohibitions.

In the context of insurance cover provided to shipowners and charterers, the scope

of application will extend to cover insurers (including clubs) and reinsurers

incorporated, domiciled or regulated within an EU Member State and may also

extend to cover non-EU insurers and reinsurers in respect of cover provided for

vessels trading to ports within the EU Member States. (See also FAQ 9 below.).

4. What is the geographical scope of the words "import" and "transport" in the

Articles 3a and 3b.?

The Decision does not contain any definition of these terms. Absent any stipulated

geographical constraint, and in the context of the objective of the Regulation, the

consistent interpretation is that "import" means import into an EU member state and

"transport" means transport to states either within or outside the EU i.e. worldwide.

This point was raised with the UK Treasury at a meeting on 25 January 2012 at

which they indicated that they shared this interpretation. Similar confirmation has

been received from ECSFPI.

As a consequence, in the case of (i) shipowners incorporated, domiciled or regulated

within an EU Member State, and (ii) vessels registered in and/or flying the flag of an

EU Member State carriage of the prescribed cargoes will be prohibited regardless of

whether the destination is within or outside the EU. In the case of shipowners

incorporated, domiciled or regulated outside an EU member state and vessels 4

registered in and/or flying non-EU flags they will also be prohibited from transporting

prescribed cargoes to EU Member States but not to non-EU member states.

(However see FAQ 9 below).

5. Effect of the "grace periods" provided for in Articles 3c and 3d in the

Decision.

The Decision makes provision for two "grace periods” which relate only to the

performance of contracts which were concluded prior to 23 January 2012:

(i) For petro-chemical products, until 1 May 2012, and

(ii) For crude and petroleum products, until1 July 2012.

It is understood that the reasoning behind these " grace periods " is that these are

intended to allow certain EU member states which are currently significantly

dependent on Iranian oil supplies to put in place alternative supply arrangements

without any immediate disruption to their current arrangements.

ECSFPI has confirmed that the continuing performance (until 1  May or 1 July as

appropriate) of obligations in trade contracts concluded prior to 23 January 2012 and

ancillary contracts necessary for their execution, is not prohibited by Articles 3a or

3b, by virtue of articles 3c and 3d.

6. What types of contract could constitute "contracts concluded  before 23

January 2012" the purposes of Articles 3c and 3d?

The Decision does not contain any definition of the contracts envisaged and absent

any restrictive wording in the Decision it could reasonably be assumed that these will

include, amongst others, cargo sale/supply contracts, contracts of affreightment, time

and voyage charterparties, bunkering contracts and insurance contracts including

the annual cover provided by clubs for the 2011/12 policy year.

7. What types of contract would constitute "ancillary contracts"

Article 3c (relating to crude oil and petroleum products) of the Decision provides that:

"The prohibitions set out in Article 3a shall be without prejudice to the execution, until

1 July 2012 of contracts concluded before 23 January 2012 or ancillary contracts

necessary for the execution of such contracts, to be concluded and executed not

later than 1 July 2012."

Article 3d (relating to Petro-chemical products) mirrors this wording except for the

earlier cut-off date of 1 May 2012.5

"Ancillary contracts" are not further defined in the Decision. Applying a standard

dictionary definition of the word ancillary, coupled with the qualification that such

contracts should be "necessary for the execution" of the pre-23 January 2012

contracts, and against the background of the apparent underlying intention of the

"periods of grace" provided for in the  Articles in relation to pre-23 January 2012

contracts, it would be reasonable to assume that "ancillary contracts" could include

contracts (such as charterparties) relating to the carriage of and the insurance of

cargoes shipped during the “periods of grace”, and the insurance (including Hull and

Machinery, War risks and P&I) of vessels carrying such cargoes during such periods.

Pending possible further clarification in the Regulation, in the meantime ECSFPI has

confirmed that transport and insurance contracts would be deemed "ancillary"

contracts.

8. Must "ancillary contracts" have been concluded prior to 23 January 2012 or

can they be entered into after that date?

The only time requirement in the Decision wording on "ancillary contracts" is that

they  must be concluded and executed not later than 1 July 2012 (crude oil and

petroleum) or 1 May 2012 (petro-chemical products). The decision does not provide

that they must have been concluded before 23 January 2012. Again, against the

background of the underlying intention of the "grace period" provisions, it would be

reasonable to assume that "ancillary contracts" may be entered into after 23 January

2012 provided that they are concluded and executed by not later than 1 July 2012 or

1 May 2012 as applicable.

ECSFPI has confirmed that it is correct that the ancillary contracts would not have to

have been concluded prior to 23 January 2012.They simply have to be necessary for

the execution of obligations under trade contacts which were concluded prior to 23

January. It is envisaged by the Commission, as noted above, that the Regulation will

clarify that transportation and insurance contracts amongst others will be considered

as "ancilliary" contracts. At this stage this confirmation should be treated as nonbinding guidance pending entry into force of the final Regulation.

9. How will the Decision impact on the P&I cover provided by clubs?

(a) Trading prohibitions

The relevant wording proposed in Article 3a and article 3b prohibits the provision,

directly or indirectly, of insurance and reinsurance related to the import, purchase or

transport of Iranian crude oil, petroleum products and petro-chemical products.

These prohibitions are therefore specific to the prescribed cargoes and do not

purport, or operate, to interfere with insurance cover arrangements in respect of the

import or transport of other cargoes. However shipowners should always check to 6

determine if other sanctions (whether imposed by EU Member States or other

countries) apply to specific cargoes or entities or individuals.

All International Group clubs have included within their rules, in one form or another,

either express sanctions cover termination or exclusion provisions or imprudent or

improper trading cover exclusion provisions. The effect of those rules is will be to

withdraw or exclude insurance cover in relation to sanctions or prohibition offending

voyages. To the extent that a shipowner undertakes such a voyage, his liabilities will

not be insured by his International Group Club.

(b) Insurance and reinsurance prohibitions

Not all International Group clubs are incorporated, domiciled or regulated within the

EU.

(i) EU regulated clubs

An issue may arise where the performance of a voyage carrying a prohibited cargo

does not place the shipowner in breach of the prohibition (e.g. a voyage by a non-EU

incorporated domiciled or regulated shipowner/vessel to a port outside the EU), but

would place an EU regulated club in breach of the prohibition against the provision of

insurance coverby virtue of the club’s incorporation, domicile or regulation within an

EU Member State It is quite likely that the club would be unaware of the voyage and

of its consequent potential breach of the insurance cover prohibition contained in

Article 3. All International Group clubs which are subject to EU regulation however,

have provisions in their rules which would operate to automatically exclude cover or

rights of recovery from the club in such circumstances.

(ii) Non-EU regulated clubs

The International Group clubs which are not EU regulated will not be subject to the

insurance prohibitions contained in the Regulation, except possibly (and depending

on the final scope of application provisions of the Regulation) in relation to (i) cover

provided to EU owned or flagged vessels, or (ii) in the case of a voyage by a non-EU

owned or flagged vessel carrying a prohibited cargo to an EU destination. However,

even if non-EU regulated clubs are not directly subject to prohibition on providing

cover in relation to a particular voyage, rights of recovery under the International

Group pooling arrangements from clubs which are EU regulated will be affected, and

under the International Group Reinsurance Contract and other reinsurances taken

out for the benefit of the clubs members, may be affected. The non-EU regulated

International Group clubs have however incorporated provisions in their rules to

exclude cover where, as a result of sanctions measures, the pool and/or reinsurers

are themselves subject to prohibitions on cover/payment.

It should also be borne in mind that there may be circumstances where such clubs

may not be subject to the prohibitions contained in the EU  Decision, but may

nevertheless be subject to other applicable sanctions legislation or regulation.

Shipowners should always check to determine if other sanctions (whether imposed 7

by EU Member States or other countries) apply to specific cargoes or entities or

individuals.

10. Will the Decision impact on renewal of annual P&I cover from 20 February

2012?

The cover provided by clubs for the current policy year from 20 February 2011 to

February 20, 2012 would constitute contracts concluded before 23 January 2012

As noted under 7 above, the prohibitions in relation to transportation and insurance

are trade specific and do not impact on the carriage and insurance arrangements of

other trades/cargoes. There is no blanket prohibition on cover and consequently no

general reason why annual cover may not be renewed. Possible exceptions to this

general proposition might arise where a vessel is at the date of renewal performing a

voyage which exposes the shipowner and/or the club to prohibition under article 3

which would effectively prevent renewal so long as that voyage was being

performed, or in an extreme case where a vessel or fleet is exclusively engaged in

lawful trading with prohibited cargoes (voyages by a non-EU incorporated domiciled

or regulated shipowner/vessel to ports outside the EU) but in respect of which the

insurance prohibition applies. In this event again the cover could not be renewed.

ECSFPI has confirmed as "sensible" that in the context of the annual cover provided

by clubs, the approach that the insurance prohibitions would only apply to cover for

the offending voyage but not for all other non-offending voyages.

11. How do the prohibitions impact on clubs’ potential liabilities under "Blue

Cards"?

Following a termination or cesser of cover, where clubs have issued "Blue Cards"

pursuant to CLC or the Bunker Convention, clubs will have a residual direct action

exposure for up to three months following notification of the cover termination or

cesser to the relevant Flag State. In such circumstances payment of liabilities

pursuant to the relevant Convention would be caught by the insurance prohibitions in

the Decision.

The issue of Club's exposure under "Blue Cards" has been raised with the EU

Commission and the UK Treasury on numerous occasions since the implementation

of initial measures against Iran in 2009. The dilemma faced by clubs as a result of

conflicts between EU and national sanctions measures and the International

Convention regime is appreciated and understood by regulators. Whilst the relevant

Decisions and Regulations do not provide an exemption in respect of clubs’

exposure under "Blue Cards", such exposure and payments may be authorised by

licences on a case-by-case basis.

12. Will the Decision impact on bunkering from Iranian suppliers/sources?8

It is the practice for some vessels (including non-tankers) trading to ports within the

Arabian Gulf (both Iranian and non-Iranian ports) to load bunker fuel by

barge/lightering vessels from Iranian suppliers off the Iranian port of Bandar Abbas

and elsewhere in the Arabian Gulf region. The Decision does not expressly address

bunkering activity but it is likely that the supply of Iranian bunker fuel would fall within

the “purchase” prohibition in the proposed Article 3a so that shipowners who are

subject to the decision/regulation would be prohibited from purchasing bunker fuel of

Iranian origin.

ECSFPI has confirmed that it considers that this analysis is correct.

13. Will the Decision impact on trans-shipment cargoes or Iranian  cargoes

loaded outside Iran?

The wording of the relevant sections of the Decision are not restricted to prohibited

cargoes loaded in Iran and on a straight reading include trans-shipment cargoes or

cargoes originating from Iran but loaded outside Iran. Shipowners may be asked to

carry, and insurers to insure, cargoes and/or vessels carrying such cargoes, loaded

at ports or places outside Iran but which originate from Iran. Clearly if the shipowner

or insurer knows the origin of the cargo then they would be aware of the sanctions

impact, but it may well be that they will not be aware of the cargo origin.

Regulation 961/2010 on restrictive measures against Iran contains in Article 32 (2) a

provision which provides as follows;

"The prohibitions set out in the present Regulation shall not give rise to liability of any

kind on the part of the natural or legal persons or entities concerned, if they did not

know, and had no reasonable cause to suspect, that their actions would infringe

these prohibitions."

ECSFPI has confirmed that the Regulation relating to the present Decision will

contain a similar exempting provision. They have further commented that a person

who has conducted all reasonable enquiries, and in light of them, has no reason to

suspect that  their actions would infringe the prohibitions would be covered by the

exemption.

14. Further Developments

The Group will continue to engage with ECSFPI and the UK Treasury with regard to

further clarification on the scope of application of the Decision and the final form of

the Regulation, and in relation to specific new issues arising. The FAQs will be

periodically updated to reflect further clarifications and guidance received. Until the

entry into force of the Regulation, the guidance set out in the FAQs is advisory only

and will be monitored on a continuing basis. Shipowners are strongly recommended

to consult with their clubs in relation to any queries arising out of the potential

application of the provisions of the Decision to their current or anticipated trading or

associated activities to the extent that these may be impacted by the provisions of

the Decision.