EU and US legislation lifting or waiving current sanctions applicable to the Iranian market will be without prejudice to the reintroduction of restrictive measures in the event of significant non-performance by Iran of its commitments under the JCPOA (Joint Comprehensive Plan of Action).
Taking these "snap back" provisions into account, finance documentation underlying future Iranian deals will require careful drafting of termination and mandatory repayment clauses, mirroring the applicability of the EU grace period or alternatively the absence of US grandfathering should sanctions indeed "snap back".
On 18 October 2015, the European Union adopted framework legislation in order to terminate its nuclear-related economic and financial sanctions against Iran (Council Regulation (EU) 2015/1861, Council Implementing Regulation (EU) 2015/1862 and Council Decision (CFSP) 2015-1863). This framework legislation will amend the existing nuclear-related sanctions towards Iran and related entities and persons under Council Regulation (EU) 267/2012 and come into force on implementation day, following which a number of the existing EU sanctions measures will be lifted. The United States government also issued certain sanction waivers on 18 October 2015, which will come into effect on implementation day. Finally the Swiss government, announced on 21 October 2015 that it would also ease its sanctions measures on implementation day, in line with the EU/UN.
The EU legislation provides, however, that its commitment to lift current sanctions is without prejudice to the reintroduction of restrictive measures in the event of significant non-performance by Iran of its commitments under the JCPOA (Joint Comprehensive Plan of Action). These so called "snap back" provisions would be reintroduced in accordance with normal sanction procedures, following Iran breaking the provisions of the JCPOA. As with the EU sanctions, if Iran violates the JCPOA, U.S. sanctions may also “snap back” into effect and apply in the same manner as they applied before the JCPOA.
A significant difference between the "snap back" of EU and U.S. sanction provisions is however, that Regulation 2015/1861 provides that, in the event that sanctions are reintroduced, adequate protection will be provided for the execution of contracts concluded whilst the sanctions were lifted. The U.S. government has, however, indicated that it will not “grandfather” Iran-related agreements entered into between implementation day and the moment snap back of U.S. sanctions is effective. Thus, Iran-related activities pursued after the reinstatement of U.S. sanctions could potentially be sanctionable following the moment of snap back, while EU sanctions allow for a grace period.
In either case, companies signing deals with Iran after implementation day should carefully determine the wording of the termination clauses in their contracts with Iran, providing that the contract could be terminated in the event sanctions were snapped back. Companies only subject to EU sanctions could mirror their termination clauses to the current "breach of sanction" provisions commonly found in Dutch law governed finance documentation, which provisions allow for a mandatory prepayment or event of default following a breach of sanctions (e.g. following a snap back). The mandatory prepayment of outstanding commitments would in itself be permitted, provided such prepayment takes place during the grace period and constitutes an adequate protection in accordance with Regulation 2015/1861. Companies also, or only, subject to U.S. sanctions may, however, not be as lucky given the absence of any grandfathering and the seemingly impossibility of getting prepaid by a sanction party that was perfectly acceptable a day earlier.
It will prove interesting to see if and how Dutch law governed finance documentation will tackle these termination clauses and the effects of snap back sanctions, not only because institutions such as the LMA have thus far not yet shown a great inclination to establish standardized sanction wording, let alone wording appropriate for snap back of such sanctions, but even more so because the burden costs of such termination would fall with the Iranian counterparty. The latter may prove the biggest hurdle of them all, as rumor has it that Iranian contract law does not recognize the imposition of sanctions as a force majeure event.
This article was published in the Banking and Finance Update of December 2015.