THE AUTHORS:
Behnam Khatami, Partner, Sabeti & Khatami
Niloofar Massihi, Senior Associate, Sabeti & Khatami
Nima Shojaei, Associate, Sabeti & Khatami
There are many reasons why parties to commercial agreements may agree on arbitration in anticipation of a dispute. The most common reason is to ensure access to an independent, neutral, and commercially competent forum, and avoid local bias. The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 was signed to promote international arbitration, making it easier to enforce awards all over the world. This Convention requires the contracting states to recognize and enforce arbitration agreements and awards, subject to compliance with other provisions of the Convention.
Iran acceded to the New York Convention in 2001 and since then, requests for recognition and enforcement of foreign awards in Iran can be made under this convention. Foreign awards can be defined as awards issued in an arbitration seated outside Iran (see Article I of the New York Convention). Article II of the New York Convention further encourages the recognition of arbitration agreements. Pursuant to Article II(3) of the Convention, the court of a contracting state, when seized of an action in a matter in respect of which the parties have made an arbitration agreement, shall, at the request of one of the parties, refer the parties to arbitration.
Nevertheless, there are grounds based on which an arbitration agreement may be found invalid, or an arbitration award refused enforcement. Such invalidity can result in a waste of time and expenses, and create uncertainties for resolution of the dispute. One exception for recognition of arbitration agreements under the New York Convention is when a court finds that an agreement is “null and void, inoperative or incapable of being performed” (Article II(3) of the New York Convention). Such a finding may be based on the ground that the agreement is contrary to the ‘mandatory rules’ under the applicable law. At the enforcement stage, when an application for enforcement is submitted to Iranian courts, the award-debtor may oppose the enforcement by invoking the defenses enumerated in Article V of the New York Convention. For instance, the award-debtor may contend that the arbitration agreement “is not valid under the law to which the parties have subjected it” or that “the recognition or enforcement of the award would be contrary to public policy.”
The ‘mandatory rules’ or ‘public policy’ grounds are perhaps two of the most frequently raised defenses before Iranian courts to avoid the enforcement of awards, or recognition of arbitration agreements. At the same time, the scope of public policy and mandatory rules remain controversial and cannot be precisely defined and this article does not aim to dive into them. However, they are not the only grounds based on which local courts may refuse enforcement of arbitration awards. Another significant ground for refusal is when the party against whom the award is invoked demonstrates that it “was not given proper notice of the appointment of the arbitrator or of the arbitration proceedings” (Article V(1)(b) of the New York Convention).
This article provides some examples from our experience on the above grounds used by the parties in practice to defend enforcement of awards, or claim invalidity of an arbitration agreement. We further provide some guidance on the available solutions to overcome potential obstacles.
Grounds for Refusing to Arbitrate or Against Enforcement of Awards in Iran
Invalidity of the Arbitration Agreement
Although the parties have autonomy in choosing the dispute resolution forum and the law applicable to their agreements, their autonomy is subject to certain limitations. The most important exception to the parties’ freedom can be the mandatory requirements of law which affect the validity or enforceability of their agreement. These mandatory requirements cannot be exhaustively listed, but one example can be found in Article 456 of the Civil Procedure Code of Iran 2000 (CPC), which prohibits Iranian parties from agreeing in advance to arbitration with arbitrators of the same nationality as a foreign counterparty. For example, suppose an Iranian person enters a sales contract with an Austrian person. In that case, they cannot agree to refer future disputes to an Austrian arbitrator before a dispute arises. Under the relevant part of Article 456 of the CPC, “any contract or agreement that contradicts this legal prohibition shall be invalid and unenforceable”.
We recently encountered a case where a party attempted to bypass arbitration. An Iranian company initially agreed to arbitrate disputes at an Austrian institution with an Austrian company. The arbitration agreement did not mention the nationality of the arbitrators, but it did plan for the arbitration to take place in Austria, which was the country of the nationality of the counterparty of an Iranian party. In this case, disregarding the arbitration agreement, the Iranian company initiated a claim before the courts of Iran. When the Austrian company requested the dismissal of the claim by invoking the arbitration agreement, the Iranian side challenged its validity, relying on Article 456 of the CPC. The Iranian court accepted the Iranian party’s lecture of Article 456 and found the arbitration agreement invalid.
A similar issue can arise at the enforcement stage, where the party defending enforcement may seek to prove that the arbitration agreement was not valid based on Article 456 of the CPC and then rely on Article V(1)(a) of the New York Convention to request the court to refuse enforcement. Alternatively, they may rely on Article V(2)(b) of the Convention by arguing that Article 456 of the CPC constitutes a mandatory requirement reflecting the public policy under Iranian law.
However, in one of our experiences, a court reached a different conclusion in applying Article 456 of the CPC. In this case, the award-debtor defended enforcement of an arbitration award on the grounds that the arbitration agreement was invalid because it provided for arbitration by a Korean institution and the agreement was between a Korean and Iranian party. However, the court rejected this argument. It decided to examine the ‘nationality of arbitrator’ – which was not Korean – instead of looking at the location of the ‘arbitration institution’ and accepted the request for enforcement of the award.
It must be noted that court decisions in Iran do not set a binding precedent (unless the Supreme Court hands down a unified overarching judgment on a matter which, until now, has not been the case in relation to this Article). Nevertheless, the parties should bear this issue in mind when drafting arbitration agreements to avoid an unfavourable outcome.
Refusing Enforcement on the Basis of Failure to Receive Proper Notice
One of the common problems when dealing with proceedings relating to Iran is the delivery and service of documents to addresses inside Iran. International courier companies have ceased providing services to Iran due to international sanctions. This can complicate the situation and create uncertainties where physical service of documents is required, including for calculating time limits. For example, a valid notice is required for notifying the parties of the initiation of the proceedings, the appointment of arbitrator(s), or the final arbitral award.
Although using electronic means of communication is common practice in the contemporary era of international business, it is not always the case that electronic communication is readily accessible for the purpose of notifications. For example, this is the case when the parties have not designated an email address for notices under the contract and when there are doubts as to which email address can be used for a valid service of notices. It can even be the case that one party refuses to cooperate to agree on a method of notification to further complicate the proceedings. This can also complicate the matter further down the line where enforcement of an arbitral award is sought. The party against whom enforcement is sought can rely on Article V(1)(b) of the New York Convention to request the court to refuse enforcement on the basis that they were “not given proper notice of the appointment of the arbitrator or of the arbitration proceedings” or were “otherwise unable to present [their] case”.
There are certain suggestions which may help to avoid these complications. First, the parties can designate an email address in their agreement that can be used for the purpose of all notices related to the proceedings. Second, if the arbitration rules applicable to the relevant case permit it – and subject to specific circumstances in each case – services may be made through a local counsel in Iran. Such notification by the local counsel can be made by serving a ‘legal notice’ through the judiciary on the addressee. Legal notices served through the judiciary are a reliable means of notice and leave a record that will be beneficial for evidentiary purposes.
ABOUT THE AUTHORS:
Behnam Khatami is a Partner of Sabeti & Khatami. Behnam has a wealth of experience in disputes and has successfully advised and assisted clients on their contentious matters before Iranian courts and arbitral tribunals as well as for the enforcement of foreign arbitral awards. He is a member of the Iranian Central Bar Association since 2006. He is listed as a Band 1 Lawyer for Iran in the Chambers guide.
Niloofar Massihi is a Senior Associate at Sabeti & Khatami and advises clients on various dispute, corporate and contract matters. She is experienced in advising clients in disputes with a cross-border element, including disputes arising out of contracts of sale and distribution, joint ventures, and non-performance due to sanctions. She has been admitted to the Iranian Central Bar Association in 2019 and is qualified as an English solicitor since 2023.
Nima Shojaei is an Associate at Sabeti & Khatami and assists on various corporate and dispute matters. He received his LLB from Allameh Tabataba’i University, where he participated in the Philip C Jessup moot court. He also has an LLM in international commercial law from Beheshti University, where he participated in the Willem C VisMoot. Nima was admitted to the Iranian Central Bar Association in 2022 and is currently completing his formal training.
