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

Nasim Gheidi & Parham ZahediGheidi & Associates

(See Part 1 and Part 2 of this post here and here)

Iran’s Bilateral Investment Treaties (BITs)

Iran has signed more than 100 BITs (More than 50 of which are in force) with capital-exporting and neighboring countries for the reciprocal promotion and protection of foreign investment in Iran. The purpose behind these BITs are to guarantee foreign investments’ all necessary permits for the realization of an investment, monetary transfer, full legal protection, compensation for expropriation, observation of commitments (umbrella clause), access to international arbitration and a fair and equitable treatment standard (FET).

The obligations granted by the FET are predictability, transparency, certainty and stability of the legal system of the host state and most important of all principle of due process. An investor must have access to the courts, fair hearings and the right of appeal. Furthermore, it shall be noted that only investors who have been approved and registered by the Organization for Investment, Economic and Technical Assistance of Iran (OIETAI) can enjoy abovementioned substantive investment protection standards. Therefore, foreign investors must obtain an investment license to benefit from those protections.

With regards to dispute settlement, methods of dispute resolution in most of the Iran’s BITs are similar to each other. Iran’s model BIT contains 15 articles and a preamble. Article 12 and 13 are dealing with methods of settlement of potential disputes between the contracting parties or investor of one of the contracting parties. Under Iran’s model BIT, these methods can be categorized into two groups. One is when the contracting parties disagree on the interpretation or application of the BIT and the other is in cases in which a dispute between a contracting party and an investor of the other contracting party arises.

According to the BITs, if any dispute arises between a contracting party and an investor of the other contracting party with respect to an investment, in this case, each party has to wait six months “from the date of notification of the claim by one party to the other.” This intervening period allows parties to negotiate their legal claims and possibly reach an amicable settlement. If a dispute refers to the tribunal prior to the six months, then the dispute is rejected based on admissibility ground and not on jurisdiction. In case they fail to resolve their dispute amicably through negotiation and consultation, they shall either refer their dispute to the competent national court of the host country or arbitration.

The award shall be final and binding on both parties to the dispute. In any circumstances no party can use both methods simultaneously. For instance, if the dispute is referred to national courts, then in that case, only by the consent of both parties, the dispute can be referred to arbitration. In return, national courts shall not have jurisdiction over any dispute referred to arbitration. However, these provisions do not bar the winning party to seek for the enforcement of the arbitral award before national courts.

Under BITs the investor at his choice, may choose to submit its dispute to an ad hoc Arbitral Tribunal in compliance with UNCITRAL rules or refer the dispute to an arbitration institution. Interestingly, in some of the concluded BIT’s, with Austria, Greece, Sweden, Cyprus, France, Venezuela, Malaysia and Spain parties have different choice of institutions to refer their arbitration to. For example, in some of them Parties can either refer their disputes to International Chambers of Commerce (ICC) or International Center for Settlement of Investment Dispute (ICSID) and in some to Stockholm Chambers of Commerce (SCC). However, in some other BITs parties’ choices are limited to only an ad hoc Arbitral Tribunal other than national courts, like China, South Africa, and Switzerland.

With respect to disputes between contracting parties concerning the interpretation or application of the BITs, they shall, in the first place, try to settle their dispute amicably. The period of negotiations defer between two to six months. If no settlement can be reached then the contracting parties are allowed to initiate arbitration proceeding.  The negotiation period is mandatory and in case of non-compliance, the dispute might be rejected by tribunal. The arbitral tribunal shall consist of three arbitrators. Each party has the right to choose one and the chosen arbitrators shall choose the third who will be the chairman.

In case one of the contracting parties fail to choose an arbitrator or the chosen arbitrators fail to choose the third, then either contracting party may invite the president of the International Court of Justice to make any necessary appointment. According to the provisions of BITs, the arbitral tribunal shall reach its decision by a majority of votes. The decision of the tribunal shall be final and binding on both contracting parties.

As previously discussed in the last article[1], requirements of Article 139 of Iranian constitutional Law is a major obstacle to recourse to arbitration in Iran.  Due to this requirement in some Iranian BITs, in the arbitration clause there is a phrase, which might be inserted due to this Constitution obstacle. Paragraph 2 of Article 12 of Iranian Model BIT states:

“…either of them may refer the dispute to the competent courts of the host Contracting Party or with due regard to their own laws and regulations to an arbitral tribunal of three members referred to paragraph 5 below.

As it can be seen a systematic reservation has been directly or indirectly made to Iran BITs regarding referring the dispute to arbitration. The Iranian Government may invoke the constitutional prohibition as an objection to the jurisdiction of the arbitration tribunal in the case of investment disputes.

In a dispute between Iran Ministry of Health and a British Company before Swiss Court of Appeal, Cementation International Ltd v. Republique Islamique d’Iran, the court held that parties could not invoke their constitutional provision in order to set aside the arbitration clause. This is because parties to the contract have implicitly waived their right to invoke all internal conflicting provisions by referring their dispute to arbitration. Moreover, it can be argued that whenever a State with knowledge and intent, consents to arbitration and later tries to nullify it with invocation of its internal law and raise the jurisdictional objection, its objection shall be denied, because it is in contrary with international public order.

However, one shall bear in mind that enforcement of such award cannot be guaranteed in national courts of Iran due to their tendency to comply with public order of the nation.


[1] Gheidi, N. and Zahedi, P. 2017. Arbitration in Iran: With Focus on International Commercial Arbitration (Part II). EFILA Blog

 

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.

Iran’s Accession to ICSID: What to Expect?

by Shiva Ghahremani (Konrad & Partners), Amirhossein Tanhaei (CMS)

The signing of the Joint Comprehensive Plan of Action (JCPOA) in July 2015 and subsequently the lifting of the sanctions imposed on Iran, reintroduced the Iranian economy to the international trade and investment, leading Iran to return to the commercial mainstream. Just a few days ago, Tehran signed a $16.6 billion deal for 80 Boeing passenger jets and according to Iranian media, agreements have been concluded for the purchase of dozens more Airbus planes, forming the biggest package of commercial contracts with western companies since Iran’s Islamic revolution in 1979. The lifting of the banking sanctions also means that Iran – despite technical difficulties – is reconnected to the world financial network.

With a population of almost 80 million, most of whom are young and highly educated people, Iran is an attractive hub for investors. Iran has the 26th largest economy in the world with a GDP of $ 425, 3 billion in 2016, and is amongst the largest economies in the Middle East and North Africa region. Besides, Iran ranks second in the world in natural gas reserves and fourth in proven crude oil reserves.  The Iranian sixth ‘Five-Year Development Plan’ for the 2016-2021 period comprises of development plans to envisage an annual economic growth rate of 8%.

In such circumstances, direct foreign investments make essential accompaniments to Iran’s economic development efforts, by contributing toward Iran’s economic growth and development over the long term. Foreign investments can potentially create jobs, build up competitiveness and productivity and transfer knowledge and technology. However, a key issue is to build necessary conditions to facilitate the investment flows. In October 2014, Iran ranked 130th out of 189 countries in the World Bank’s Doing Business Report, which further illustrates that Iran should make efforts to achieve a more transparent, secure and foreseeable investment environment to attract more foreign direct investments. This will be feasible by, amongst other things, offering a reliable, efficient and internationally accepted investment dispute settlement mechanism.

In this respect, the International Centre for Settlement of Investment Disputes (ICSID) provides a platform outside the domestic legal systems, which offers the foreign investors the guarantee that they can take the disputes to a facility which is not part of the legal system of the country in which they are suing. Commentators and investment scholars cite many benefits for the accession of states to the ICSID Convention, including that ICSID provides ‘additional protection’ to the investors abroad by allowing them to provide for recourse to arbitration using ICSID arbitral rules in their contracts with foreign states. Further, ICSID membership would contribute to reinforcing countries’ images as being investment friendly. According to the report published by the United Nations Conference on Trade and Development (UNCTAD), the majority of international investment disputes between UNCTAD members are settled through ICSID. In this regard, as an UNCTAD member, Iran can provide Iranian investors with the opportunity of settling their disputes with foreign governments without the need of direct involvement of the Iranian government by accession to the ICSID.

Iran has developed its domestic laws during the recent years to pave the way for the facilitation of foreign investments. For instance, the enactment of the Law Concerning International Commercial Arbitration was one of the important initiations taken by Iran as a step towards making it a more arbitration-friendly country. In addition, Iran sought to take a noticeable step towards joining the international investment world by enacting Iran’s Foreign Investment Promotion and Protection Act (FIPPA) in 2002. This Act introduces an alternative method for dispute settlement for the Parties other than the exclusive referral to domestic courts, if provided by the Bilateral Investment Agreement. The establishment of the Tehran Regional Arbitration Centre, as well as the Iranian accession to the New York Convention, further highlight Iran’s readiness to adopt international developments in alternative dispute resolution methods. Iran has also frequently had recourse to arbitration over the past decades. For instance, the Iran-United States Claims Tribunal which was established in 1981 to resolve certain claims has finalized over 3,900 cases to date.

However, Iran is not a member state to the ICSID Convention. Despite the long standing discussions in respect to Iran’s becoming an ICSID member, one should bear in mind that in practice there are features in Iran’s jurisdiction which put limitations on Iran from being subject to ICSID arbitrations. Iran’s Constitution places a strict condition on foreign investments in Iran. In particular, Article 81 of the Constitutional Law of the Islamic Republic of Iran states that it is “absolutely forbidden” to give foreigners the right to establish companies in commercial, industrial, and other fields and in the service sector.

However, having passed the Law of Permitting Registration of Branches and Representatives Offices of Foreign Companies in 1997, Iran sought to facilitate the flow of foreign investments and business activities, by recognizing that foreign companies may – under certain circumstances – set up branches and representative offices in Iran to carry out the businesses authorized by the government of Islamic Republic of Iran in due compliance with the Laws of Iran. In addition, Article 139 of said Constitutional Law has conditioned the subjective arbitrability of public and State properties to the approval of the Council of Ministers, and a two-leveled approval system “in cases where the party to the dispute is a foreigner and in important internal cases, it must also be approved by the Assembly”. Therefore, the Iranian accession to the ICSID will have technical complications from the perspective of its Constitution, as it limits the State power to access the ICSID’s arbitration process.

Joining the ICSID will enhance international perceptions of Iran as a welcoming country to invest. Iranian companies and individuals, on the other hand, will also enjoy the protection of their investments abroad, if Iran joins the Convention. Iran has entered into almost 70 BITs with other countries, many of which contain clauses to submit the disputes to the ICSID, ‘if or as soon as both contracting parties have acceded to it’. The inclusion of such clauses in the BITs entered into by Iran demonstrates that the possibility of the Iranian accession to ICSID Convention in the future has been considered by the Iranian government.

 

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.