Arbitration in Iran: With Focus on International Commercial Arbitration (Part II)

Nasim Gheidi & Parham ZahediGheidi & Associates

(See Part 1 of this post here)

Part two – Article 139 of Iranian Constitutional Law, a fundamental challenge in arbitrability

In case the national law of the place of arbitration or the law of the state where award enforcement is being sought imposes a restriction on referring to arbitration either regarding the subject matter of the dispute or against a party, it is quite likely that an award would be vacated by the national court on the grounds that the dispute was not capable of arbitrability in the first place. Courts often refer to “public policy” as the basis of such restriction. Thus, the issue of arbitrability is of great importance in determining whether to refer a dispute to arbitration from the beginning stage of contract execution.

In this regard Iranian law is faced with some ambiguous provisions, requirements of which might be quite discouraging for foreign companies hoping to invest in Iran as most of them are more willing to refer their disputes to arbitration rather than Iranian domestic courts. A very fundamental challenge in arbitrability lies in Article 139 of the Iranian Constitution Law that mandates as follow:

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

In line with above-said Article 139, Iranian Civil Procedural Law establishes the exactly same restriction in terms of arbitrability.  Legal scholars and professionals with their interpretation are trying to limit the applicability scope of above-said provisions.

In this article first a distinction line will be drawn between state entities and the properties belonging to those entities and then we will discuss which properties are considered as public and state property under Iran legal system.

One shall differ between subjective arbitrability and objective arbitrability. Subjective arbitrability refers to the restrictions relating to the parties to the dispute. For example, in some jurisdictions, states or state entities may not be allowed to enter into arbitration agreements at all or may require a special permission.  However, objective arbitrability restrictions, which are based on the limitations imposed on subject matter of the dispute are even more challenging. In other words, certain subject matters may have the potentials to threaten public policy or national interest so that they should be dealt only by national courts or be referred to arbitration under certain conditions. The restriction that Art. 139 imposes on the arbitrability is of the objective nature and applies to the subject matter of the dispute not the parties to the dispute. Therefore, it could be said that Iranian state entities can be a party to an arbitration proceeding without a need to obtain approval from the Board of Ministers or the Parliament as far as the dispute is not related to or arising out of state or public properties.

Despite the fact that state and public properties are referred to under Iranian Constitutional Law, and Civil Procedural Law, they are not yet subject of a Parliamentary enacted provision. Hence, to reach a definition on the terms public or state properties under Iranian legal system, we must refer to some executive bylaws and commentaries. Based on some Iranian scholars’ opinion, public properties are owned by the entire people and they do not have a specific owner and can be utilized by the entire people. Furthermore, they cannot be sold or seized by an order, judgment or award. They include mineral resources, jungles, mountains, roads, bridges, etc. Also it should be noted that public properties are ruled by the state to be used as public good. Therefore, such properties cannot be either owned or notarized.

The Executive Bylaw on State-Owned Properties adopted in 1993 and adjusted in 1995 by the Council of Ministers defines state properties as “those which are bought by ministries and the state-agencies or possessed by the state through any other legally permitted manner”. Accordingly, in contrast to public properties, state-owned properties can be sold, rented out or mortgaged. However, in order to determine the scope of this definition of state properties according to one interpretation, it shall be distinguished between the properties that the state is possessing in its sovereign capacity or in its contractual capacity. Based on this doctrine, which was first proposed by French scholars, only properties in possession of government in its sovereign capacity shall be considered as state properties. In fact, when state-owned entities are acting in their contractual capacities, they shall be treated like any other private entities running their businesses.

Iranian courts have different opinions in this regard. However, there is a positive trend to limit the scope of state properties definition. According to a verdict of a branch in Tehran Public Court, “properties that are subject of Art. 139 of Constitutional Law are confined to the properties that the government has possessed while acting in its sovereign capacity, like properties of national army or , rather than properties that the government has possessed in its contractual capacity. In general, actions undertaken by the government in its contractual capacity and the properties thereof like those of national Shipping Company are out of the scope of article 139 of Constitutional Law.”

Furthermore, in an arbitration proceeding in Arbitration Center of Iran Chamber (“ACIC”), a private company, the claimant, resorted to arbitration to force the defendant, which was a State-owned company, to compensate the loss of claimant due to non-conformity of the goods with the contract. The defendant argued that since it is a state-owned company and its properties are subject of Art 139 of Constitutional Law, the permission of the Board of Ministers should have been obtained, otherwise arbitral tribunal has no jurisdiction. The arbitral tribunal based on below reasoning found that conditions of Art 130 of Constitutional Law are not applicable here.

“Art. 139 of Constitutional Law is not in principle an obstacle to the jurisdiction of the tribunal in a commercial dispute that a state-owned company is a party of the dispute since the properties that are subject of the dispute are considered private properties and are being possessed by the defendant in its contractual and commercial capacity.”

In conclusion, by adopting these interpretations we can limit the scope of Art. 139 Constitutional Law, removing major obstacle to recourse to arbitration in Iran. In fact, the requirements of Article 139 of Constitutional Law, if otherwise treated and interpreted, will be inconsistent with the principle of rapidity in international commercial trade and also in contrary with good faith. Foreign investors expect from the host government to ensure the implementation of the agreement and arbitration clause rather than disregarding the investor’s rights and hampering the arbitration process. Moreover, laws and regulations must not be interpreted in a way that allows state-owned entities to be unilaterally relieved from their contractual commitments. Therefore, differentiation between the properties possessed by the government in its sovereign capacity and in its contractual capacity is a key point to resolve this problem. Having discussed the applicability of Art. 139 of Iran Constitutional Law, in the next article we will provide an overview regarding various dispute settlement mechanisms as per determined in BIT(s) concluded between Iran and other countries. Moreover, we will see how requirements of Art. 139 may affect arbitration as a major dispute settlement method under such BITs.