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The Enforcement of the International Arbitral Awards in the Legal System of the Islamic Republic of Iran – Part II

Guiding Principle

Under private law the Iranian arbitration law permits a dispute be filed before Iranian or international arbitration forums instead of public courts. In 2001, Iran became a member of the New York UN Convention of 10 June 1958 on the Recognition and Enforcement of Foreign Arbitral Awards. Therefore, foreign arbitral awards can also be enforced in Iran as far as they pertain to commercial matters. A few particularities must be taken into account, however, meaning that ultimately even a foreign arbitral award may not be enforceable in Iran. It should always be kept in mind that in accordance with Article 139 of the Iranian Constitution, arbitral decisions of a foreign party with the Iranian government or a governmental company always require the explicit consent of the parliament.

A.  Introduction

This article regarding the arbitration system of Iran is Part 2 and a continuation of the article published as Part 1 in our lex arabiae April Edition 2013. Below, we will examine the difficulties resulted from Article 139 of the Iranian Constitution, when a foreign investor is involved in a dispute with the IranianState or an Iranian governmental company. So far, this issue has been at the center of a fierce controversy when foreign investors are negotiating their contracts with the IranianState.

B.  Capacity of the IranianState to Enter into Arbitration Agreements

I.    Article 139 of the Iranian Constitution

The Islamic Consultative Assembly’s (Parliament) express reservation to Article 139 of the Iranian Constitution brings hesitation for those investors who plan to enter into contracts with the IranianState. Article 139 states:

“The settlement of claims relating to public and state property or the referral thereof to arbitration is in every case dependent on the approval of the Council of Ministers, and the Assembly must be informed of these matters. In cases where one party to the dispute is a foreigner, as well as in important cases that are purely domestic, the approval of the Assembly must also be obtained. Law will specify the important cases intended here.”

According to the above, investors wishing to settle disputes arising out of contracts entered into with the Iranian State by arbitration must obtain the Iranian Parliament’s approval, which is a mandatory provision of the Iranian legal system. Yet such approval has often been sought and indeed obtained in the past. Further, this is not a peculiarity of the Iranian system but a policy followed, under various forms, by a number of other countries.

In order to illustrate the issue, we would like to bring a case study as an example. A joint venture company established between (x) being a public company wholly owned by the Government of Iran with 51% of shareholding and a foreign investor company (y) with 49% of shareholding. They concluded a shareholder agreement governed by the Iranian Law with the Arbitration Clause in which any raised disputes would be referred to ICC arbitration in Paris. In case (x) is involved in a dispute with (y), the reference to arbitration of such dispute would be subject to Article 139 of the Constitution.

In order to settle a dispute by arbitration, the issue should be first referred to the Council of Ministers for approval. In case of obtaining an approval, the Council of Ministers will submit the request to the Parliament. The Parliament’s decision will be referred to the Guardian Council.[1]

It should be noted that if (x) were a company wholly owned by the private sector, from the legal point of view, for referring any raised dispute to ICC arbitration, fulfilment the conditions of Article 139 (i.e. Obtaining the approval from the Council of Ministers and Parliament and the Guardian Council) would not be required.

II.  Bilateral Investment Treaties (BITs)

Another possible avenue for foreign investors would be to qualify as an «investor» under one of the Bilateral Investment Treaties (BITs) entered into by Iran providing for the settlement of investment disputes between a contracting party and an investor of the other contracting party by arbitration. Iran has entered into a number of these treaties with Afghanistan, Albania, Algeria, Armenia, Austria, Azerbaijan, Bahrain, Bangladesh, Belarus, Bosnia & Herzegovina, Bulgaria, China, Croatia, Cyprus, Djibouti, Egypt, Ethiopia, Finland, France, Gambia, Georgia, Germany, Greece, Indonesia, Italy, Jordan, Kazakhstan, Kenya, Kuwait, Kyrgyzstan, Lebanon, Libyan Arab Jamahiriya, Macedonia, Malaysia, Moldova, Morocco, North Korea, Oman, Pakistan, Philippines, Poland, Qatar, Romania, Russia, Serbia, South Africa, South Korea, Spain, Sri Lanka, Sudan, Sweden, Switzerland, Syria, Tajikistan, Tunisia, Turkey, Turkmenistan, Ukraine, Uzbekistan, Venezuela, Vietnam, Yemen, Zimbabwe.

Generally speaking, in order for the foreign investors to benefit from the protection of BIT entered into by Iran, the following requirements should be fulfilled:

a)    They should be “investor” within the meaning of the BIT[2];

b)    They has made an “investment” in Iran as defined under the BIT[3]; and

c)    Their investment received the approval of the competent authority in Iran (The Organization for Investment, Economic and Technical assistance of Iran).

BITs play an important role for the disputes arising out of expropriation or nationalization and etc. However, there is a Note in some of the BITs stipulating that: “Observance of Article 139 of the Constitution of the Islamic Republic of Iran in relation to referral to arbitration by the Government of the Islamic Republic of Iran is compulsory”.

With regard to the value of International treaties by comparison of the Constitution, it is worth noting the following special features of BITs Arbitrations as an International Treaty, which distinguish them from the classical contracts based arbitration typically dealt with through an international arbitral tribunal for example the ICC arbitration:

  • Bilateral investment treaties are binding international law agreements entered into between States to provide international law rights that private investors can enforce against their host State. Therefore, they allow an aggrieved investor to directly bring claims against the host State on international law grounds and before an international panel of arbitrators;
  • Claims brought in BIT Arbitration are distinct from claims that can be brought pursuant to a contract. Generally, tribunals in BIT Arbitrations will not have jurisdiction to hear purely contractual claims (e.g. delays, unpaid invoices etc.) unless such contractual breaches constitute concurrently violations of a certain substantive provision of the BIT (e.g. discrimination or expropriation and etc.).
  • Claims in BIT Arbitration are governed by international law, national law and the treaty provisions. In contrast, an ICC Arbitration would be exclusively governed by the governing law of the contracts concluded between the parties (In most cases, where IranianState is one of the contracting party the Iranian law is the governing law); and
  • BIT Arbitration would involve claims made by the foreign investor against the host State (Iran) for violations of such State’s substantive obligations pursuant to the BIT, which may cause damages to its investment.

III. Concluding an Arbitration Agreement with the IranianState

In general, in order to enter into valid and binding arbitration agreement with Iranian State or any Iranian governmental company, it would be sufficient to include an unconditional arbitration clause into the relevant agreement. For example it could be included that referral of matters in dispute to arbitration by any party shall, if necessary, be subject to the obtaining of the approval of the competence authorities of the Party making such referral, but without prejudice to the referral of any matter in dispute to arbitration by any other Party.

However, some Iranian juries, believing that the provisions of Article 139 of the Constitution being among the mandatory rules of the Iranian law and having a character of the Domestic Public Order, the Iranian Party is under obligation to seek such an approval at the stage of the entry into the agreement rather than at every referee and when the disputes arise.

The Iranian governmental entities have found recently a formula to render inoperative the arbitration clause. The formula which is usually proposed to the Foreign Contracting parties is as follows:

“… In the event that the appropriate authorizations(s) pursuant to Principle 139 of the Constitution of the Islamic Republic of Iran are not granted by the relevant authorities, the parties’ agreement to resolve their disputes through arbitration pursuant to this article shall be considered null and void, the Courts of Iran shall be solely competent to hear and determine any dispute concerning this Agreement.”

This kind of reservation will make the arbitration conditional and in the absence of the required approval, some arbitral tribunals have rendered an award, while they have no jurisdiction over the disputes.

A final possibility, albeit risky, would be for investors to enter into an arbitration agreement with the Iranian State not with standing the Iranian constitutional requirement. This option might be considered in situations in which Iranian courts are unlikely to interfere in the arbitral process, such as when the venue of arbitration is outside Iran and enforcement of the resulting award is unlikely to be sought in Iran. A number of international arbitration tribunals and national courts have held that a State cannot rely on its internal law to invalidate an arbitration agreement into which it has entered.

There do exist several arbitral precedents that have not paid attention to not complying with the terms of Article 139 like NIOC v. Gatoil (Revue de L’arbitrage, 1993); ELF Aquitaine v. NIOC (Revue de L’arbitrage, 1984); Framatome v. Atomic Energy Organization ofIran (VIII Yearbook, 1983) all decided outside Iran.

July, 2013 Zahra Tahsili
Meyer-Reumann & Partners, Tehran Office

 


[1] The Guardians Council was constituted in accordance with Article 91 of the Constitution of Iran with a view toward safeguarding the Islamic ordinances and the Constitution and examining the compatibility of legislation passed by the Parliament with Islam.

[2] The term “investor” with regard to either Contracting Party refers to the following persons who invest in the territory of the other Contracting Party:

(a)   Natural persons who, according to the laws of that Contracting Party, are considered to be its nationals;

(b)   Corporations, firms or business associations incorporated and constituted under the law in force of either of the Contracting Parties and having their headquarter, seat and real economic activities in the territory of that Party, on the condition that they are approved by the competent authorities of the host Contracting Party.”

[3] The term “investment”, refers to every kind of property or asset, invested by the investors of one Contracting Party in the territory of the other Contracting Party in accordance with the laws and regulations of the other Contracting Party (hereinafter referred to as the host Contracting Party) and particularly, but not exclusively, including:

(a)   Movable and immovable property, as well as rights related thereto;

(b)   Shares, stocks or any kind of participation in companies,

(c)   Returns reinvested, title to money or to any performance related to an investment having an economic value, Industrial and intellectual property rights such as patent, utility models, industrial designs or models, trade marks and names, know-how and goodwill, and

(d)   Rights to search for, extract and exploit natural resources.

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