Arbitration in Iran: With Focus on International Commercial Arbitration

 

Nasim Gheidi & Parham Zahedi, Gheidi & Associates*

Part one – Historical Background

Following the historic deal known as the Joint Comprehensive Plan of Action (JCPOA) between Iran and five permanent members of the Security Council plus Germany, Iran is again at the center of companies’ attention from all over the world. Iran, with vast area of land and extremely rich natural and human resources, undoubtedly stands as a major target for sustainable foreign investment. Despite being enthusiastic for doing business in Iran, companies may still remain baffled as to legal implications and consequences of their entering into the market, in particular, as to the efficiency of the dispute settlement system.

Investors have always preferred arbitration to national courts so that a fair and professional trial is ensured. The question, however, arises as to whether Iran’s legal system guarantees resorting to such internationally recognized and renowned method.

The Iranian legal system is based on Sharia, which is derived from the religious precepts of Islam, particularly the Quran and the Hadith, so that every code will be in compliance with Sharia. The perennial question as to emergence of each legal institution is whether it could be adopted by Sharia. As regards dispute settlement, arbitration is suggested by Quran in family disputes under Nesa Surah Verse 35 and by various Hadiths in business affairs.  Therefore, this is certainly a consensus between Islamic law experts that disputes can be referred to arbitration rather than to the courts.

Arbitration laws are adopted by Iranian legislative powers since the beginning of new legislation era as part of procedural law first and then as a separate law governing arbitration independently. After the Islamic revolution and further challenges and developments with regard to legislation, the Law on International Commercial Arbitration (“LICA”) enacted in 1997 and Civil Procedure Law (“CPL”), last modified in 2001, are the latest applicable laws governing international commercial disputes and local disputes respectively.

Chapter 7 of the CPL deals with arbitration. The provisions of this chapter is applicable only to arbitration where both parties to the dispute have Iranian nationality. In 1997, in order to harmonize and facilitate the provisions of the arbitration with international practice, the parliament passed the LICA, which is largely based on the UNCITRAL Model Law on “International Commercial Arbitration”. According to Art 1 (B) of LICA, “International arbitration is in the case where one of the parties, at the time of conclusion of the arbitration agreement, is not a national of Iran under the Iranian laws.” LICA applies to arbitration in international commercial relationships including, inter alia, sales of goods and services, transportation, insurance, financial matters, consulting, investment, technical cooperation, representation, factoring or similar activities as per Art 2 (1).

LICA recognizes the autonomy of the parties to organize the arbitral proceedings e.g. the right to appoint arbitrators, choose the applicable law, location and language of arbitration proceedings. Other features of LICA to be noted are competence of arbitral tribunal to rule on its jurisdiction, non-intervention of Iranian courts in the proceedings, severability of the arbitration clause, power of the arbitral tribunal to take provisional measures and above all recognition of institutional arbitration, allowing the parties to refer subject matter of their dispute to arbitration institutions.

The major (and the most active) arbitration institutions in Iran are Arbitration Center of Iran Chamber (“ACIC”) and Tehran Regional Arbitration Center (TRAC), which provide an immune and secure environment for conducting arbitration proceedings. As cited in their websites, ACIC was established in 3 February 2002 by virtue of a specific piece of law called “The Law on Articles of Association of ACIC” approved by the parliament of Iran. ACIC is organized as an affiliate to the Iran Chamber of Commerce but enjoys independent legal personality. ACIC is the first Iranian independent arbitration institution established for the purpose of settlement of both domestic and international disputes through arbitration or conciliation. Tehran Regional Arbitration Centre (TRAC) is an independent international organization under the auspice of the Asian-African Legal Consultative Organization (“AALCO”). TRAC has been established pursuant to the Agreement signed on 3 May 1997, between the Islamic Republic of Iran and ALLCO. TRAC enjoys the necessary privileges and immunities provided for an international organization. The TRAC Rules of Arbitration (the “Rules”) are essentially based on the UNCITRAL Rules of Arbitration.

In subsequent years to the enactment of LICA, in 2001, Iran ratified the United Nations Convention on Recognition and Enforcement of Foreign Arbitral Awards (the “NY Convention”) to take a notable further step to be known as a suitable country for foreign investment. The accession to the NYC has paved the way for foreign investors to refer their disputes to international arbitration outside of Iran as foreign arbitral awards are recognized and can be enforced in the country as long as there is no ground for refusal in accordance with Article V of NY Convention.

The above-mentioned developments, including enactment of LICA based on UNICTRAL Model Law, accession to the NY Convention, establishment of international arbitration institutions and above all organizing and conducting training and commercial seminars for students, lawyers and businessmen have opened up novel convenient avenues for the development of international arbitration as one of the prerequisite for foreign investment promotion and protection in Iran.

In addition, Iran has signed more than 60 Bilateral Investment Treaties (52 of them are in force) with capital-exporting and neighboring countries to encourage and attract foreign investments. Under all these BITs, International arbitration is allowed in the event of investment disputes, which is a key protection and promotion for foreign investment.

However, despite all these valuable developments, Iran as a developing country is still struggling with some ambiguities in its legal system especially when it comes to recognition, enforcement or annulment of arbitral awards. Some conflicts exist between laws and practice and some improper judicial precedents are in place. The role of legal scholars and professionals in the country is to attune special attention to the challenges and obstacles so that a more favorable environment is provided for international arbitration and foreign investment in general.

In this first article of our upcoming series, we tried to give a historical introduction about arbitration in Iran. We will further discuss the potentials to be realized and developed as well as obstacles and barriers to be tackled. In the next article the focus will be laid on Principle 139 of Iranian Constitutional Law, which challenges arbitrability of the disputes where public or governmental properties are involved and the conflicts therewith arisen with BITs that Iran has made with other states. In the end, possible solutions will be presented for the purpose of foreign investor’s protection.

 

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