If the UN punishes Iran for its nuclear activities, UK firms out there could suffer. Here's how to limit the damage

Iran's intention to continue its uranium enrichment programme has raised concerns that international sanctions may be imposed on it by the UN's Security Council. Sanctions, if passed, are likely to be some time away. UK businesses operating in Iran however could face serious financial risks under contracts and bank guarantees if they are introduced. Such businesses need to act now to minimise the potential damage.

Sanctions can take many forms, from political and diplomatic to financial and commercial.

Until the UN decides on whether to impose sanctions, it cannot be known for certain exactly what the scope and type of restrictions will be. It is commonly believed, however, that they would be similar to those imposed on Iraq in 1990.

If that were to be the case, the restrictions on doing business in Iran would prevent the involvement of British citizens and UK companies in large-scale construction projects in Iran. Given the level of British involvement in the country, particularly in the petrochemical industry, a large number of UK companies would be affected.

Aside from the loss of commercially valuable contracts, there are two specific risks that could arise from the imposition of sanctions:

  • Actions against UK companies for breach of contract
  • The payment of bank guarantees given by UK companies

Breach of contract

In the event that sanctions were brought against Iran, many British companies with contracts in Iran could be prevented from performing them by UK law. On the face of it those UK companies would then be in breach of their contractual obligations.

But, closer attention needs to be paid to the terms of the contract under which the UK company is performing in Iran. It is wise to seek professional advice in order to avoid liability, for example by arguing that the contract is frustrated by the sanctions legislation. Companies should also think about whether there is a force majeure clause in the contract that may assist them.

In this context, companies also need to take advice on the law that governs the contract, and on which courts or arbitration procedures will be called upon to rule on any breach. Companies should also think about what assets they have in Iran against which judgments or awards might be enforceable. All of these variables will affect the level of risk of an action for breach of contract.

The restrictions on doing business in Iran would prevent the involvement of British citizens and UK companies in large-scale construction projects

If a contract as drafted does not give UK firms the protection they need in the event of sanctions, companies should consider the possibility of varying contracts or entering into side agreements as a precautionary measure.

Unless action is taken now in these respects, the potential for significant awards to be made against UK companies for failing to perform their contractual obligations cannot be ruled out.

Bank guarantees

Many UK companies have given bank guarantees regarding their performance of contracts in Iran. Those could be at risk on the imposition of sanctions.

UK companies need to seek advice on how they can prevent the loss of bank guarantees after demands from their Iranian business partners.

In particular the exact wording of guarantees and the possibility of injuncting banks from paying under them needs to be considered. In addition, guarantees could be restructured in order to provide maximum protection.

UK companies should also judge whether it is sensible to use foreign banks for the giving of bank guarantees and also whether they should avoid giving guarantees to UK subsidiaries of Iranian companies.

Insurance protection

One final option that British companies trading in Iran would be well advised to consider is to seek insurance protection. They should certainly consult their insurance brokers to discuss whether or not they have any political risk or other insurance that might provide protection against any losses incurred from the imposition of sanctions.

In the event that there is no such cover, companies should assess whether purchasing such a policy would be a sensible precaution to take, considering the rapidly increasing tensions in Iran and the obvious risks to their businesses.