Doing Business with Iran - Some Advice on Contract Drafting

Now that an agreement has been reached in the nuclear dispute, a removal of the sanctions against Iran is imminent. If all goes according to plan, the sanctions will be lifted - gradually - in the first quarter of 2016. This opens up excellent opportunities for German companies in the areas of infrastructure, plant engineering, consumer goods and in the petrochemical industry. Iran has a lot of catching up to do. With its relatively large, affluent and well educated population (compared to other countries in the region), Iran is an attractive market.

Is it all Sharia?

No! The Iranian civil and business law is based largely on European models.

Indeed, after the Islamic Revolution (1979), a Council of Guardians made up of Islamic scholars was set up, ensuring that all laws are compatible with the sharia (Islamic law). However, in commercial law, these islamization efforts only had very marginal effects. Moreover, Iranian legislators introduced a variety of measures over the past years to reform the legal system. For instance, a new arbitration law was passed in 1997, and a new investment law in 2002. Since 2005, there has been an investment protection treaty with Germany. A new commercial code was debated in parliament last year. The legal framework for business transactions with and in Iran is thus better than one might expect. In addition, there is a western-oriented middle class and an economic elite.

Nevertheless, certain peculiarities of Iranian law must be taken into account when drafting contracts.

Choice of Law

Iranian law allows for free choice of law only if the contract was signed abroad and the laws in effect at the place of signing permit a choice of law (Art. 968 Civil Code). If the contract is signed in Iran, it will be mandatorily governed by Iranian law.

Even where a choice of law is permitted, an Iranian court will always apply the mandatory provisions of Iranian law, regardless whether the parties have chosen foreign law. This includes, for instance, provisions under public business law regulating the import of goods or pharmaceutical products, but also mandatory contractual provisions. The latter also provide for a prohibition of "ursury" (or ribâ), a principle under Islamic law that is also rooted in the Iranian constitution (Art. 43 (5) of the Constitution of the Islamic Republic of Iran of 1979). However, in Iranian legal practice, the view prevails that this prohibition only relates to interest that is referred to as such. "Fees" charged by a bank in a loan agreement, or liquidated damages in case of default, are permitted.

Arbitration Clauses

Under Iranian law, an arbitration clause can be agreed as part of a commercial contract. It can be included in the contract itself, or set forth in a separate document. It is advisable for the arbitration clause to reference internationally accepted arbitration rules (ICC, Swiss Rules or DIS).

For contracts with public entities, arbitration clauses are subject to an important restriction. Art. 139 of the Iranian constitution provides that arbitration proceedings by a foreign company against an Iranian state entity are permitted only with the approval of parliament.  According to a ruling of the Iranian supreme administrative court, such approval must be obtained prior to entering into a contract. The arbitration clause cannot be approved retroactively. In the absence of the respective approval, the arbitration clause will be considered invalid in Iran. While this may not necessarily be binding on an international arbitration tribunal, an arbitration award obtained will not be enforceable in Iran.

Force Majeure

Force majeure is a classic topic in German-Iranian legal matters. The Islamic Revolution of 1979 made the performance of many contracts impossible (and the decision of the Federal Court of Justice regarding the slaughterhouse in Mahabad from 1982 [BGHZ 83, 197 et seqq.] is still, until this day, part of the standard repertoire in legal studies). These times are long gone. In more recent years, most cases involved sanctions.

Under Iranian law, force majeure requires there to be (i) an unavoidable event (ii) that could not be foreseen by the parties and (iii) that is outside of their control. This is largely in line with the international understanding of "force majeure".

However, questions related to force majeure continue to merit further attention, even after (or especially after) removal of the sanctions because under the existing agreement with Iran, the sanctions will come back into force if Iran fails to comply with its obligations. As a result, there is a risk that the sanctions will be revived, making the fulfilment of contracts impossible. This question should be clarified in unambiguous terms in the contract - especially since even well-intended observers agree that such a risk cannot be ruled out. Therefore, one cannot really argue that the risk of sanctions would not have been foreseeable.

Recognition and Enforcement of Foreign Decisions

In the past, the Iranian courts have recognized German rulings in civil matters in several cases. It is thus fundamentally possible - albeit onerous and time-consuming - to enforce a German civil ruling in Iran. Conversely, this means that - in view of the "principle of reciprocity" in German procedural law (Section 328 of the German rules of civil procedure (ZPO)) - claims against a German company arising from a judgment rendered in Iran can also be enforced in Germany.

Iran is a signatory of the New York Convention (1958), the foremost Convention on the Recognition and Enforcement of Foreign Arbitral Awards in international legal transactions. In 2011, an Iranian court for the first time upheld an arbitral award of a Germany-based arbitration tribunal and declared it enforceable under the Convention. Accordingly, it is definitely possible to agree on an arbitration location in Germany in a contract with an Iranian party.

Dr. Kilian Bälz, LL.M. (London) is a lawyer and partner at Amereller Legal Consultants. He has been advising Germany companies in transactions with Iranian business partners for many years. Contact: kb@amereller.com.

Amereller Legal Consultants has had a presence in Teheran through an associate firm since 2012. With offices in Kairo, Dubai, Tripoli, Bagdad and Erbil, Amereller Legal Consultants advises international corporations on all aspects of Middle Eastern business law.