Dubai Court Weighs in on U.S.-Iran Sanctions

“DIFC” by Miguel Librero (CC BY-NC-ND 2.0)

Subject to certain exceptions, current U.S. sanctions law prohibits U.S. persons from supplying goods, technology, or services to Iran or its government. Consistent with these laws, U.S. insurers and reinsurers often include in their policies a Sanctions Clause, specifying they will not pay out on policies if doing so would violate U.S. sanctions laws.

Such provisions could theoretically come before U.S. courts or arbitration panels adjudicating disputes over reinsurance policies, but apparently there are no published opinions interpreting certain sanctions provisions.  In September, however, the issue came before the Court of Appeal of the Dubai International Financial Center (“DIFC”), which has issued the first-ever judicial interpretation of certain U.S. regulations governing sanctions against Iran.  The case, American International Group Ltd., et al v. Qatar Insurance Co., [2024] DIFC CA 008, illustrates the sometimes blurry line between public and private law in international commercial disputes, the emerging influence of international commercial courts in developing substantive law, and the role of these courts’ traveling judges in bringing expertise and legitimacy to these courts’ rulings.

The Dubai International Financial Centre (DIFC) Courts in Context

For the past two decades, international commercial courts—chambers and divisions within domestic courts dedicated to international commercial disputes—have been popping up all over the world, from European cities to special economic zones (SEZs) in China, the Middle East, and Kazakhstan. Anticipating significant legal disputes, several SEZs have established common-law jurisdictions and hired foreign judges—often retired judges from England or other common law jurisdictions like Australia—sometimes to sit alongside local judges.

The DIFC is the oldest of these common-law SEZs. Dubai has a robust economy, drawing business from around the region and the world. Its courts have a sizeable caseload. These cases typically have some connection to Dubai and involve international parties. The law applied by the DIFC courts is DIFC law—which is based on DIFC legislation and its courts’ common law decisions. Like other international commercial courts in SEZs, DIFC law explicitly incorporates the common law of England and Wales to cover issues on which DIFC statutes are silent. The DIFC’s incorporation of English common law, known for its predictability and familiarity to commercial parties, is designed to render the DIFC friendly to international commercial disputes. DIFC law also explicitly permits parties to agree on the jurisdiction whose law will govern their dispute, and this choice will be honored by the DIFC courts.

American International Group Ltd. v. Qatar Insurance Co.

The background of this case goes back to 2015, when employees of a Dubai-based bank fraudulently withdrew large sums belonging to a Hong Kong-incorporated bank client owned by Iranian nationals. The employees were convicted on criminal charges, and the bank client sued the Dubai bank for its losses. The parties settled the claim in 2017 for 38.5M AED (roughly $10M USD).

The Dubai bank sought to recover those losses from its Qatari insurer, whose reinsurance policy was underwritten by a group of European-based reinsurers, some of whom included UK-based reinsurance companies ultimately owned by U.S.-based parent companies. The non-U.S. companies paid, but the U.S.-owned reinsurers sought a declaratory judgment in the DIFC that they need not pay the claim because the reinsurance policy’s sanctions clause provided that the reinsurers would not be liable to the extent the provision of coverage would violate the sanctions laws of the EU, United Kingdom, or United States. They argued that payment on the policy would violate U.S. sanctions against Iran because the claim was ultimately for benefits provided to an Iranian-owned company.

The question before the DIFC trial court and ultimately on appeal, therefore, was whether paying this reinsurance policy would violate U.S. sanctions law. In the absence of a choice of law clause, the law governing the reinsurance contract was DIFC law. The trial court heard expert opinion testimony from each party’s U.S. sanctions law expert on whether the policy violated U.S.-Iran sanctions. Justice Lord Angus Glennie, a retired Scottish jurist, ultimately held that the insurers were liable under the reinsurance policy, finding that the policy did not violate U.S.-Iran sanctions law. While Justice Glennie denied the request for appeal, then-Chief Justice Zaki Akmi, the former Chief Justice of Malaysia, permitted the appeal because of the importance of the issues raised.

Justice Michael Black, a retired judge from Australia, authored the opinion on appeal, joined by Justice Azmi and current Chief Justice Wayner Martin, also of Australia. As a threshold matter, the court first adopted the UK approach that foreign law questions in the DIFC are questions of fact “of a peculiar kind” and are reviewed de novo on appeal, following the UK Court of Appeals decision in MCC Proceeds Inc. v Bishopsgate Investment Trust plc & Ors [1999] CLC 417. In the United Kingdom, when the foreign law at issue resembles English law, judges may apply their knowledge of common law and statutory interpretation principles to determine the meaning of foreign law, taking into account terms with special meanings or other appropriate sources. The DIFC also adopted an “international approach” to questions of foreign law, which encourages the parties to submit expert legal briefs on foreign law questions. This approach resembles U.S. law as stated in Fed. R. Civ. P. 44.1, which allows courts to “consider any relevant material or source” when determining questions of foreign law and treats the court’s determination “as a ruling on a question of law.”

As for the reinsurers’ arguments that the Iranian Transactions and Sanctions Regulations (“ISTR”), 31 C.F.R. §§ 560.204, 560.208, barred them from paying the claims, the appeals court affirmed the trial court’s determination that the reinsurance policy did not constitute a direct provision of services to Iran “undertaken with knowledge or reason to know that” they are intended to be used to provide services in Iran. Interpreting the standard for liability under ISTR § 560.204, without the benefit of any U.S. court decisions, the DIFC court held that the regulation’s requirement that the U.S. company must have “knowledge or reason to know” that the services provided would be used in Iran implies a higher standard of notice than merely “ought to have known.” It required, the court said, that there be some kind of “red flag” that would put a U.S. company on notice that its services may be used in Iran. But here, the court found, there was no evidence that the reinsurers had been on notice that the policy would violate U.S. sanctions: the reinsurers did not know the ultimate recipient of all insurance funds they reinsured, and the policy did not require them to make such an inquiry in order to exempt the reinsurers from liability. Placing such a requirement on global reinsurers, the court reasoned, would render the whole industry unworkable.

The court further held that even if there were a red flag that would put the reinsurers on notice, the reinsurance policy did not constitute a “direct” provision of services to Iran because the reinsurance policy insured against losses by the Dubai bank, not by the bank’s customers. The court noted that funds stolen from the Iranian company’s account were the bank’s liability, and that the insurance and reinsurance policies were not providing property insurance to the bank’s customers. Thus, even if the reinsurers were aware that one of the Dubai bank’s customers was an Iranian-owned company, the reinsurance policy would not constitute a direct provision of services to Iran.

The court also held that the reinsurance policy did not constitute an “indirect” provision of services to Iran in violation of ISTR § 560.204. Again, the service provided was insurance coverage to benefit the Dubai bank, not insurance services to the Iranian-owned company. Even granting that the Iranian-owned company would ultimately benefit from the fact that the Dubai bank had obtained insurance, the court observed that because money is fungible, it would be impossible to know whether the funds paid by the Dubai bank to the Iranian-owned company were the same funds paid out under its insurance policy. Thus, the court held, there had been no “indirect” provision of services to Iran.

Under ISTR § 560.208, U.S. persons are also prohibited from facilitating any transaction by a foreign person where that transaction would violate sanctions if performed by a U.S. person. Again, the DIFC court held that providing reinsurance here did not fit the bill. Here, the appeals court differed from the trial court, which had interpreted “facilitate” as requiring a “deliberate act.” The appeals court found no support for reading an intent requirement into the meaning of “facilitate.” Instead, it read “facilitation” to mean “to enable or make easier.” Thus, if the provision of reinsurance to the Qatari insurance company helped enable or made easier the provision of banking services to the Iranian-owned company, then the sanctions regulation would be implicated. Here, however, the reinsurers had provided no evidence that the Dubai bank would not have been able to acquire insurance absent the reinsurance policy, nor that the Dubai bank would not have provided banking services to the Iranian-owned company without insurance. Without such a showing, the court held, the reinsurers could not be held liable under the “facilitation” sanctions regulation.

Takeaways

The court’s construction of U.S.-Iran sanctions, holding that there must be a “red flag” before a company is subject to liability, appears to impose a scienter requirement before an organization can be held to have violated the sanctions law. The “red flag” requirement may serve as reassurance to compliance leaders across a wide variety of industries, as well as a defensive tool for entities facing sanctions enforcement actions. The DIFC courts’ adherence to established UK interpretation methods—albeit when interpreting U.S. law—may also provide some assurance. And the court may have gotten the answer right, given the attenuated connections between the reinsurance policy and the Iranian-owned company whose losses originally triggered the cascading set of events that set this particular litigation into motion.

The case is also indicative of the growing significance of international commercial courts like those in the DIFC.  Disputes that have historically stayed in arbitration are making their way to these courts. As international commercial courts become an increasingly attractive alternative to private arbitration, these courts and their international judges may more frequently be called upon to interpret and apply the laws of foreign jurisdictions.

The case also exemplifies how cross-border disputes like this one often intersect with foreign relations and geopolitics. The United States has an interest in having its own courts interpret its laws, especially where they deal with internationally sensitive foreign sanctions. Indeed, the DIFC court itself recognized that U.S. courts rarely are involved in sanctions disputes because the government typically resolves them by settling with those potentially subject to sanctions. Yet here, the DIFC provided a narrow construction of U.S. sanctions which, while it may provide some confidence for organizations doing business with indirect ties to Iran, may not necessarily align with the views of the U.S. Treasury Department, which enforces the U.S.-Iran sanctions regime. As the number and variety of cases being litigated in international commercial courts continue to grow, these disputes will likely test traditional notions of sovereignty, extraterritoriality, and foreign relations.