Public Policy Exception: A Bar to Enforcement of Foreign Arbitral Awards in Iran

Keywords: public policy, enforcement, Iran, arbitral award

Introduction

By developing international commercial arbitration in Iran, one of the most critical issues, which grabs arbitrators and practitioners’ attention, is the public policy exception. Article 34(2) of the Iranian Law on International Commercial Arbitration (“LICA”) provides that “the arbitrator award is basically void and unenforceable if the provisions of the award are contrary to public policy or good morals of the State, or imperative rules of this Act.” However, there is no provision in the LICA expressly shedding further light on the content of the term public policy. This lack of definition for public policy has opened the door for diverse interpretations.

Moreover, according to Article 5(2)(b) of the New York Convention, the dynamic and flexible concept of public policy gives the national courts this chance to use such an exception as a tool to monitor international commercial arbitration awards and prevent intrusion into their legal systems of awards they consider irreconcilable with the public interest.

This paper aims to discuss the definition, types, and examples of the Iranian version of public policy with due attention to precedents and doctrines.

Definition of Public Policy under Iranian Law

It is challenging to offer a precise definition of public policy. In this regard, referring to an English judge’s skeptical following comments is of importance, “It is never argued at all but where other points fail.” [1] Based on their interests and inclinations, Iranian legal scholars have defined and classified public policy divergently.

The most straightforward meaning of public policy under Iranian Law is a collection of legal rules binding on individuals and cannot be derogated by their contracts. [2] Iranian public policy has two subdivisions: 1) Mandatory Rules, 2) Code of Morality and Shari’a Principles.

Mandatory Rules

The interpretation of public policy as mandatory rules gradually emerged from Iranian courts’ practice after the Islamic revolution of 1979. This interpretation is the most pervasive interpretation among Iranian legal scholars, which also has spread and flourished in various jurisdictions. As per such interpretation, mandatory rules are legal and binding rules which cannot be violated by agreement between the parties concerned. If parties attempt to override or modify these rules, the mandatory rules still will be enacted. [3] These rules concern issues of Private Law, such as status or capacity, and also can concern issues of Public Law, more particularly, Administrative Law and Criminal Law. [4]

Contradiction with mandatory rules has not been considered as a ground for refusing the enforcement of a foreign arbitral award under the New York Convention. Nonetheless, as the philosophy underlying both public policy and mandatory rules is maintaining the public interest, it would be justifiable if the mandatory rules also perform the same function as the public policy. Therefore, if a foreign arbitral award is qualified as contrary to the mentioned rules, it would also be contrary to public policy, and the Iranian courts may refuse the enforcement, while the reverse is not valid.

There are some examples in which Iranian courts refused enforcement of a foreign award based on its contradiction with the mandatory rules. In Nakhl Baran vs. Islamic Republic of Iran Shipping Lines, [5] when the respondent applied for enforcement of the award in Iran’s territory, the claimant contended that the main contract is contrary to Iran’s public policy. It reasoned that while the contract has been concluded in Iran, article 19 of the main contract referred to English Law as the governing law. Hence, the contract contradicts article 968 [6] of the Iranian Civil Code, stipulating that obligations arising out of an agreement subject to the laws of the place of conclusion of the contract. The Tehran court of appeal refused the application of enforcement, finding that since the tribunal based its decision and reasons on the English Law, the enforcement of such an award, according to Articles 5 [7], 968, and 976 [8] of the Civil Code, would violate the public policy of Iran.

This judgment has been severely criticized for the last decade. The author is of the opinion that it is doubtful whether article 968 was intended to be mandatory, considering the rationale for imposing this restriction is to avoid the foreign party’s abuse of foreign law that the Iranian party may lack knowledge about that law. However, article 1(2) of LICA, which was approved after the Civil Code, permits Iranian people to conclude a contract with a foreign party and freely choose the governing law of their arbitration agreement. As a result, it goes without saying that in case two Iranian people or corporations would like to conclude a contract, they also have this autonomy.

Another example of the mandatory rules is the one dealt with under Article 971 of the Civil Code. The latter provides that “…the fact that the same case or claim is already being decided by a foreign court cannot nullify the competency of the Iranian court.” In case KH vs. M and N, branch 199 of the Tehran General Court started a new proceeding without any regard to the main contract’s arbitration clause and the arbitral award rendered by the London Chamber of Commerce. The court held that “even though the tribunal issued a binding and final award, the award is in contradiction with Public Policy.” It argued that this dispute also belongs to the domain of the Iranian courts and, based on Article 971 of the Iranian Civil Code, the decision of the tribunal cannot nullify the competency of the courts.” [9]

The Iranian Supreme Court revoked the judgment and considered the award as an enforceable one. It held that, as the parties agreed to submit all disputes arising out of or in connection with the present contract to arbitration under the London Chamber of Commerce, this dispute initially shall be settled under auspices of the said rules by arbitration. It added that in case the appointed arbitrator could not conduct the arbitral proceeding or issue an enforceable award, in accordance with Article 639 of the Iranian Code of Civil Procedure, the parties can bring their disputes before the Iranian courts. [10]

In some cases, the Iranian courts may take into account the Constitution of the Islamic Republic of Iran in the conflictual reasoning. To illustrate, in Jahan Profil vs. Ascotec Steel, the respondent attempted to enforce an arbitral award rendered by the London Chamber of Commerce in Iran. Tehran’s appeal court, branch 15, confirmed the judgment of the first instance court and held that enforcement of the award would be refused on the ground that it was contrary to the public policy of Iran. The court argued that submitting the dispute in this case to arbitration is a violation of article 139 [11] of the Constitution. [12]

The Iranian supreme court followed the same approach in a decision rendered in 1987. It confirmed that, according to article 139 of the Constitution, Iranian state-owned companies could not attend arbitration, and it remains for the competent court to deal with the dispute. [13]

Code of Morality and Shari’a Principles

Some other scholars have widened the scope of the public policy concept. As under some Iranian laws, the terms “code of morality” and “public policy” have been used beside each other, they consider two expressions as synonymous. However, nowadays, it is accepted that the concept of public policy has a broader scope compared to the code of morality, and the former also includes the latter. In other words, using a “code of morality” following “public policy” is an instance of specific coming after a general. “The relationship between these two terms means that if anything opposes the code of morality, it would be in contradiction with the public policy as well and not vice versa.” [14]

Predicated on this assumption, the Iranian courts shall also consider the Shari’a Principles emerged from the Quran and other Islamic sources as the public policy. [15] For instance, in Hamel vs. Dal and Bonyad, the Tehran Court of Appeal found a part of the award unenforceable as the tribunal ordered a losing party to pay usury. It held that usury is prohibited under the code of morality and Shari’a Principles; thus, the award contradicts Iran’s public policy. [16]

Conclusion

To recapitulate this paper’s findings, it seems that the public policy exception has a prominent role in the Iranian judicial system when the courts deal with the applications for enforcement of a foreign arbitral award. It is generally true that maintaining the public interests is at the bottom of considering public policy by the Iranian courts for granting or refusing the enforcement of a foreign award. The mandatory rules create a bulky proportion of the Iranian domestic public policy. Iranian public policy also incorporates codes of morality and Shari’a Principles.

From the author’s point of view, in comparison to the past, nowadays, Iranian courts have changed their approach regarding the public policy exception. Iranian courts have come to the conclusion that the New York Convention aims to provide a simple and more effective method for recognition and enforcement of the arbitral award. Therefore, public policy as a ground for refusing the enforcement should not reduce the Convention’s efficiency, and the “pro-enforcement bias” of the New York Convention should be faithfully observed.

ENDNOTES

[1] Richardson v. Mellish [1824] 2 Bing 119, 152 per Burrough J. cited in A Redfern, M Hunter, N Blackaby & C Partaside, Redfern and Hunter on International Commercial Arbitration (Oxford University Press, 2009), 10.85.

[2] Mohamad, Nasiri, Hoghough Beynolmelal Khosusi [Private International Law], (2nd edn, Agah Publication 2018), 188.

[3] Mehrzad, Abdali, Comparative Study of Public policy and Code of Morality in Laws of France, England, and Iran, Research Magazine of Humanities, International University of Imam Khomeini, 3rd year, No.3 & 4, (2006).

[4] Almasi, Nejad Ali, Hoghough Beynolmelal Khosusi [Private International Law], (3rd edn, Mizan Publication 2017), 182.

[5] Nakhl Baran v. Islamic Republic of Iran Shipping Lines [2005], Tehran Court of Appeal, Branch 12, No. 612-614

[6] The Civil Code of The Islamic Republic of Iran 1928, Art 968 – Obligation arising out of contracts subject to the laws of the place of the conclusion of the transaction except in cases where the parties to the contract are both foreign nationals and have explicitly or implicitly declared the transaction to be subject to the laws of another country.

[7] ibid, Art 5 – All inhabitants of Iran, whether of Iranian or of foreign nationality, shall be subject to the laws of Iran except in cases which the law has excepted.

[8] ibid, Art 976 – The following persons are considered to be Iranian subjects 1 – All persons residing in Iran except those whose foreign nationality is established; the foreign nationality of such persons is considered to be established if their documents of nationality have not been objected to by the Iranian Government. 2- Those born in Iran or outside whose fathers are Iranian. 3 – Those born in Iran of unknown parentage. 4 – Persons born in Iran of foreign parents, one of whom was also born in Iran. 5 – Persons born in Iran of a father of foreign nationality who has resided at least one more year in Iran immediately after reaching the full age of 18; in other cases, their 94 naturalizations as Iranian subjects will be subject to the stipulations for Iranian naturalization laid down by the law. 6 – Every woman of foreign nationality who marries an Iranian husband. 7- Every foreigner who has obtained Iranian nationality. Note – Children born of foreign diplomatic and consular representatives are not affected by Clause 4 and 5 of this Article.

[9] KH v. M and N [2003], Tehran Court, Branch199, No. 412-523.

[10] The Judgment No. 6/89 [1998], Iranian Supreme Court Branch 6.

[11] Constitution of the Islamic Republic of Iran 1989, Art 139 – 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 shall also be obtained. The Law will specify the important cases intended here.

[12] Jahan Profil v. Ascotec Steal [2014], Tehran Court of Appeal, Branch 12, No. 543.

[13] The Judgment No. 1366/03/09-146 [1986], Iranian Supreme Court Branch 21.

[14] Seyyed Hussein, Safai, Dore Moghadamti Hoghough Madani [Eelementry Course of Civil Code, General Rules of Contracts], [Mizan Publication 2004], vol. 4, 32.

[15] Katooziyan, Naser, Ghavaede Omoomie Gharardadha [General Rules of Contracts], (Behnashr Publication 1990), 165.

[16] Hamel v. Dal and Bonyad [2005], Tehran Court of Appeal Branch 19, No. 599.

Reza Shahrokhi is an LL.M. Candidate in International Commercial Arbitration Law at Stockholm University. As the most recent professional experience, he has commenced work as a legal assistant at the National Iranian Gas Company.

The views and opinions expressed in the article are those of the author(s) solely and do not reflect the official position of the institution(s) with which the author(s) is /are affiliated. Further, the statements of the author(s) produced herein should not be construed as legal advice.