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International Sanctions as Instances of Force Majeure from Iranian Law Perspective

Guiding Principle

Iran is under several international sanctions over its refusal to suspend uranium enrichment. These sanctions have considerable influence on the Iranian business of those foreign establishments, which are registered in Iran and/or conduct financial transaction with the Iranian market. While these economic sanctions may be recognized as force majeure in general international commercial practice, they may not necessarily be treated as such under the Iranian law.

A. International Sanctions against Iran

Iran is under several international sanctions over its refusal to suspend uranium enrichment. The United States, Europe and Israel fear that Iran wants to use nuclear technology to build a bomb but Tehran insists that its program is a peaceful drive to produce civilian energy. Sanctions against Iran notably bar nuclear, missile and many military exports to Iran and target investments in oil, gas and petrochemicals, exports of refined petroleum products, as well as the Iranian Republican Guard Corps, banks, insurance, financial transactions and shipping.

Sanctions against Iran have been imposed by the following bodies:

  • UN sanctions against Iran: United Nations Security Council has passed four Resolutions against Iran for failing to stop its uranium enrichment program since December 2006.
  • Multinational sanctions against Iran: European Union sanctions are the most important multinational sanctions against Iran. These sanctions have been strengthened lately on 27 October 2010 by the EU Council under Council Regulation (EU) No. 961 of 2010.
  • National sanctions against Iran: One of the most important national sanctions against Iran include an embargo on dealings with Iran by the United States, and a ban on selling aircraft and repair parts to Iranian aviation companies. Since July 2010, Canada, Australia, South Korea and Japan have also set unilateral sanctions against Iran.

These sanctions have considerable influence on the Iranian business of those foreign establishments, which are registered in Iran and/or conduct financial transaction with the Iranian market. Many foreign establishments have suspended their transaction with Iran and some of them proceed to close down their legal companies, branch or rep. offices in Iran. While economic sanctions may be recognized as force majeure in general international commercial practice, they may not necessarily be treated as such under the Iranian law.

B. Force Majeure under Iranian Law

Force majeure is a common clause in contracts that essentially frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties, such as a war, strike, riot, crime, or an event described by the legal term “act of God” (such as flooding, earthquake, or volcanic eruption), prevents one or both parties from fulfilling their obligations under the contract. Force majeure events normally suspend performance unless the event continues for a long period of time and/or is incapable of remedy by one of the parties in which case the contract comes to an end.

While the Civil Code of Iran does not expressly mention the doctrine of force majeure, it is considered as a valid claim in the Iranian Civil Code (abbrev. IR-CC). Art. 227 and Art. 229 IR-CC contain provisions embodying certain characteristics of force majeure doctrine.

Art. 227 IR-CC provides that a party in breach of a contractual obligation would only be required to pay compensation when it cannot be established that the non-performance was as a result of an external cause that cannot be attributed to the non-performing party.

Furthermore, Art. 229 IR-CC states that if a party becomes unable to carry out any duty or obligation due to an event that the affected party cannot avoid, then the party will not be held liable to pay compensation to the other party for any loss or damages.

According to the Iranian doctrine, for an event to be considered as force majeure, the following elements shall be established:

  1. Externality: The event must be beyond the control of the defaulting party and shall not have been caused by its act or omission. In other words, the defaulting party must have nothing to do with the event’s happening. Clearly, no private party can be expected to have controlled the imposition of sanctions against Iran. Therefore, this element is likely to be easily satisfied.
  2. Unpredictability: Predictability has been variously construed by different Iranian courts and jurists. According to the predominant view, a force majeure event is deemed unforeseeable when it can be shown that it was “unexpected” and “beyond reasonable foresight and skill”. If the event could be foreseen, the defaulting party is obligated to have prepared for it. With regard to the unpredictability of sanctions, generally speaking, force majeure would be difficult to establish when a foreign company was warned by the government of their country of origin or the Iranian government of potential risks that exist in relation to investment in Iran but proceeded with the project nonetheless. This is particularly important considering that the first round of UN sanctions was imposed against on Iran in December 2006. Ever since, it has become a common practice by Iranian entities to warn foreign companies during negotiations that they would accept no liability for loss or damages that the foreign party may incur as a result of sanctions against Iran. Furthermore, some contracts go even further to expressly provide for warranties by the foreign party. In the event that the performance of contractual obligations becomes impossible due to sanctions or other forms of business restriction, the foreign party would have to compensate the Iranian party for any damages and loss that it might have suffered as a result of the non-performance of contractual obligations by the foreign party. Therefore, for those contracts which have been concluded after December 2006, it could be argued that the sanctions will not be attributed to force majeure and therefore the foreign party will not be excused from performance.
  3. Irresistibility: The consequences of the event must have been unpreventable. The Iranian jurists are of the opinion that the irresistibility should be absolute impossible, not relative or subjective. Therefore, if any country is able to prevent the consequence of sanctions, the other countries could not refer to the irresistibility element of sanction. For example, despite of the existing sanctions, a country like China, still fulfills its contractual commitments towards Iran, on the other hands, some European countries, which are members of European Union, still perform their obligations through other channels (e.g. substitution of the work to the companies, located in countries which are not the party of EU). According to the above, the sanctions are less likely to satisfy this element.

C. Conclusion

International sanctions are not likely to be considered as a case of force majeure under the Iranian legal system. Even if the international contracts be concluded before imposing the first round of UN sanctions in December 2006 and therefore the foreign party refers that the sanctions was not predictable at the time of conclusion of the contract, the sanctions still cannot be regarded as a case of force majeure because of non-existence of the other element which is “irresistibility”. The reasons are that the force majeure accident is defined as the inability to implement the commitment by everyone, not just because of lack of facilities and possibilities for a group of persons.

However, there are various approaches to the principle of foreseeability and irresistibility depending on the circumstances as well as on terms and conditions of the contract. This could provide the space to develop alternative arguments that are more favourable to foreign parties involved in such disputes. It is advisable when a foreign partner could not fulfil its commitment due to the consequences of the international sanctions, inform the Iranian partner instantly and both parties try to solve the problem through amicable negotiation and find other alternatives.

July, 2011 Zahra Tahsili, LL.M.
Meyer-Reumann & Partners – Tehran
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