Behnaz Bazmi_ international oil and gas arbitration

How Iran’s International oil and gas arbitrationfunctions, and the consequences these disputeresolutions have had on other jurisdictions.

Behnaz Bazmi

2013 - 2014

Contents

Introduction 2

Chapter one 4

The laws of arbitration; the past and the present . . . . . . . . . . . . . . . . . . . . . . . . 4The constitutional framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5Arbitration & Stabilization clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7Arbitration & Investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Chapter two 10

Case Study of Mobil Oil Iran Inc v Islamic Republic of Iran . . . . . . . . . . . . . . . . . . 10Case Study of Anglo-Iranian Oil Company (United Kingdom) v The Government of Iran . 12Case Study of Sapphire International Petroleum LTD v NIOC . . . . . . . . . . . . . . . . . 13Arbitration in other jurisdictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Conclusion 15

Bibliography 16

1

Introduction

Politics has long influenced and played an essential role in Iran’s1 economic sector. Ultimately thismeans state domination and influence in the field of oil and gas, international trades, investments,exports and disputes are high. Nevertheless we are witnessing a movement towards liberalisation inIran’s economic and legal sector2. Presently the use of arbitration, as a method of settling disputesin international agreements such as oil and gas has become a crucial element in Iran’s internationalcontracts. Arbitration is an alternative method to settling disputes without the complex, costly andlengthy litigation. Court orders are usually dealt with publicly which may damage a company’sreputation or disclose too much information; hence why arbitration is favoured amongst internationalcommercial parties who wish to resolve their disputes privately. Consequently by Iran modifying andupdating its arbitration laws it has proven to boost foreign investors in the oil and gas domain, whichbrings us to the objective of this paper; which is to examine the development of Iran’s internationaloil and gas arbitration, how the laws function and the consequences the dispute settlements have hadon both Iran and other jurisdictions.

Although in recent years the use of arbitration for international oil and gas agreements in Iran hasreduced, as a consequence of international sanctions placed upon the country. The new ExecutiveOrder passed by the US president3 furthers sanctions already on the National Iranian Oil Company4,the Naftiran Intertrade Company and the Central Bank of Iran. Section 5(a) is as follows;

’. . .The Secretary of State, is hereby authorized to impose on a person the measures described insubsection (b) of this section upon determining that the person has materially assisted, sponsored,or provided financial, material or technological suppose for, or goods or service in support of NIOC,NICO, or the Central Bank of Iran. . . ’ 5

Under section 5(b) any person that meet the criteria set in Section 5(a) will lose any property andinterest in property that they may have in the US, and possession will thereby be in the control ofAmerican Government6. As a consequence there appears to be a reduction in the volume of oil andgas purchases by foreign investors in Iran, leading to less commercial contracts being formed, andthereby fewer dispute arising, for arbitrators to deal with.

Nonetheless that is not to say that investments are not made, this dissertation aims to distinguishthose binding contracts that resulted in international oil and gas arbitration and the laws governingthem, alongside how the disputes are dealt with and the consequences. In order to organise the paper

1Islamic Republic of Iran hereafter referred to as Iran2Marossi, Ali Z, "Iran’s post-revolutionary Legal and Economic System" OGEL Vol.2 issue 4 (2004), page 23United States of America (US) president Barack Obama passed the new executive order in July 31st 20124Hereafter referred to as NIOC5Section 5(a) of the Executive Order July 31st 2012 Authorizing Additional Sanctions With Regards to Iran URL:

as stated in footnote 66Section 5(b) of the Executive Order July 31st 2012 Authorizing Additional Sanctions With Re-

spect To Iran URL: <http://www.whitehouse.gov/the-press-office/2012/07/31/executive-order-authorizing-additional-sanctions-respect-iran>

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we will divide the title into two sectors; firstly a chapter on how Iran’s international oil and gas arbit-ration works. Here we will concentrate briefly on the historical development of arbitration in Iran, wethen move on to a discussion regarding the laws and treaties surrounding oil and gas arbitration, andan evaluation on how effective these laws are. Thereafter we shall outline the crucial clause implemen-ted in most international oil and gas agreements known as stabilization clause and the role it playedduring the nationalization of Iran’s oil and gas industry with reference to cases. Additionally in orderfor a dispute to arise in the first place, a contract is needed and therefore it’s vital to discuss investorsin the Iranian oil and gas industry, and fundamentally the role arbitration plays in the agreements.Finally a brief paragraph is dedicated to proposals for further reforms, at the end of this chapter thereader should have an understanding of the relevant laws governing international arbitration in Iran,and also how these laws function in the field of oil and gas.

The second chapter of this dissertation will be focused on the effect Iran’s international oil and gasarbitration has had on other jurisdictions with reference to three case studies. The aim of the casestudies is to show how a dispute settlement in international oil and gas is reached, and how it hasaffected the states involved. It’s important to point out that the consequences arising from the disputeresolution not only affects other states, but also has an impact on Iran, therefore a case study hasbeen devoted to show a contrast of how Iran is affected in an arbitral resolution. So firstly we shall bereferring to one, from the many US-Iran Claim Tribunal case of Mobil Oil Iran Inc v Islamic Republicof Iran7 in this case a group of oil companies had come together mutually called the Consortium andthe Iranian government. The action of the arbitration was an act of the former party claiming theIranian government had wrongfully terminated their agreement. The significance of this case is that,although the tribunal found that Iran had breached the agreement and had to award damages to Con-sortium, in the long run it was the Consortium oil companies who were affected by the termination ofthe agreement. Furthermore we will look at the case of Anglo-Iranian Oil Company (United Kingdom)v The Government of Iran8 historically this case holds much political importance, between the thenUK Prime Minister W Churchill, the American President H Truman, the Shah Iran and also theIranian Prime Minister M Mossadegh9, but also the role and importance of arbitration is discoveredin this case. Finally we will discuss the case of Sapphire International Petroleum LTD v NIOC 10 herethe dispute is between a Canadian oil company (Sapphire) and the NIOC, the importance of this caseis not only the noteworthy sum of award granted to Sapphire, but also the role of the arbitrator inthis case and the choice of law.

Throughout chapter two one would be able to identify a continuing pattern linking all these casestogether. Arguably the connection is the Iranian political influence and involvement which has essen-tially brought about all three cases. Here we see the importance of the Iranian government in bothoil investments and also the disputes arising from the agreements. To conclude this chapter a briefcomparison of how other arbitrators have acted in similar cases in different countries will be conversed,and to point out similarities or differences between the resolutions in those states and Iran.

7Iran-US Claim Tribunal Mobil Oil Iran Inc v Islamic Republic of Iran AWD 311-74/76/81/ 150-38Anglo-Iranian Oil Company (United Kingdom) v The Government of Iran 19529Elm, Mostafa. Oil, power, and principle: Iran’s oil nationalization and its aftermath. Syracuse, N.Y.: Syracuse

University Press, 1992. pp248-26610Sapphire International Petroleum LTD v NIOC 1963

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Chapter one

The laws of arbitration; the past and the presentPhilosophically arbitration is not a newly born concept in the Islamic Republic, the idea of solving

disputes using a sole arbitrator or a tribunal has long been in her roots, as indicated in The Koran11:’. . . Send one arbitrator from his persons and one from hers; if they desire to set things right. . . ’ 12

Furthermore in 1901 the sixty year D’Arcy concession stated; ’. . . any dispute or differences in respectof its interpretation to the rights or responsibilities of one or the other of the parties therefrom result-ing. . . ’ should be submitted to arbitration13. Legally speaking Iran’s arbitration laws goes back toover a hundred years, with the creation of the Civil Procedure Code 1906 which was ratified; includingthe Arbitration Act of 192714. In 1939 the Iranian Civil Procedure Code provided chapter eight15on arbitration which for its time was one of the most advanced worldwide16. Later in 2001 the newCivil Procedure Code17 replaced the 1939 code, providing a deeper stepping stone for arbitration.At present Iran’s international oil and gas arbitration is governed by two key regulations; the newCPC18 and also the Law of International Commercial Arbitration 199719, these two regulations arebased on the United Nations Commission on International Trade Law20 Model law on InternationalCommercial Arbitration, with subtle differences which governs contractual disputes.

So in discussing how Iran’s international commercial oil and gas arbitration works, the fundamentalact of LICA sets out the rights and procedures given to the contracting parties. The act adminis-ters international sales and investment of oil and gas21 likewise in UNCITRAL. Article 10 of LICAmentions the numbers of arbitrators22, furthered by the appointment of arbitrators23, the determ-ination of arbitral proceedings24, the right of the commercial parties’ choice of foreign law to settle

11Gharavi, Hamid G The 1997 Iranian Law on International Commercial Arbitration: The UNCITRAL Model Law.Paris, France. A’l Iranienne, Arbitration International No 1 (1999) page 2

12The Koran Translated by Yusuf Ali, Verse 4 paragraph 35, the Koran is a primary source of law in Iran, since therevolution in 1979

13Bishop, WM JR The Anglo-Iranian oil Company Case The American Journal of International Law vol 45, no 4(1951) pp 749 footnote 3

14Later in 1928 and 193415Articles 632-676 of CPC 1939 – Seift, Jamal The New International Commercial Arbitration Act in Iran Towards

Harmony with the UNCITRAL Model Law Arbitration Centre of Iran Chamber (ACIC) 1997 page 916Article 632 of the Iranian Code of Civil Procedure of 193917Hereafter referred to as CPC - Atai, Ardeshir, Atai, Akbar Ali The international comparative legal guide to:

litigation & dispute resolution Global Legal Group CDR 2011 part 218Article 454-501 Civil Procedure Code 200019Hereafter referred to as LICA20Hereafter referred to as UNCITRAL21Article 2 of the LICA 199722Article 10 of the LICA 199723Article 11 of the LICA 199724Article 18-22 of the LICA 1997

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the dispute25, and also the granting of the award26. They are many common principles between theLICA and the UNCITRAL modern law such as the recognition of ad hoc and institutional arbitrationas set out in Article 3 of LICA and Article 3 of UNCITRAL. To some extent the LICA has provento be more modern in some aspect such as Article 11(6) which offers arbitration for multiparty andthird parties, putting this article in action, for argument sake let us assume the Mobil Oil case wasbrought about after LICA and Iran had agreed upon arbitration, this article would come of use27.On the other hand the differences which exists between the UNCITRAL and LICA is the broadersection devoted to setting aside an award granted by the arbitrator as mentioned in Article 33 ofLICA28 which implements many subsections granting the right to set aside an award. Furthermorethe definitions set in Article 1 of the LICA are very much narrow to those set in the UNCITRALwhich arguably this is a big departure from the advance system set by the Modern Law. Essentiallythis brief comparison between the two laws illustrates the maturity of the LICA in Iran, arguably forthe use of Iran LICA is seen to be advance for its time. Therefore in discussing whether the LICA iseffective in Iran’s international arbitration sector, arguably the LICA has attracted more investors inIran’s oil and gas, which was its sole purpose, as the Act to most extent mirrors the UNCITRAL it issomething investors can easily adapt to. Overall the act in conjunction with the CPA works well.

Additionally, they are two main institutions in Iran who deal with dispute resolutions; The IranianChamber of Commerce, Industry and Mines established in 2000, and the Tehran Regional ArbitrationCentre29 established in 2004 due to the high volume of trades coming into Iran’s energy sector. Thisset out the framework of the TRAC which provided support for international arbitration tribunals30.In 2001 Iran joined the 1958 New York Convention31 the liberalisation movement meant the Iraniancourts could thereby recognise and enforce awards issued overseas. The NYC also restructures theIranian governments and private parties’ rights in pursuing claims against foreign parties in othercountries. Breaching the NYC could lead to many international consequences and therefore in dis-cussing whether NYC is affective in Iran, currently the answer is yes.

The constitutional frameworkNow that we have established the laws surrounding international arbitration, it’s crucial to state the

constitutional obligations attached to the oil and gas industry when it comes to dispute resolutions.One of the biggest confusion in the Iranian economic sector is the vague boarder drawn between lawsof property, and the property right states have over the natural resources. This is the contrast between’public asset’ and the private sector who act independently without the influence of the government.The ’state-controlled economy’32 of Iran takes full force when it comes to the oil and gas domainand international arbitration. Prior to 1951 the Anglo-Iranian oil company operated Iran’s naturalresources33. In 1951 significant transformation was made by the then Iranian Prime Minister Dr MMossadegh who nationalized Iran’s oil industry, replacing the Anglo-Iranian oil company with a NIOCwho would act as an agent on behalf of the Iranian Government. To date the Iranian government holdsfull ownership of the country’s oil reserves, undoubtedly the concept of ownership and state sovereignty

25Article 27 of the LICA 199726Article 30 of the LICA 199727Gharavi, Hamid G The 1997 Iranian Law on International Commercial Arbitration: The UNCITRAL Model Law.

Paris, France. A’l Iranienne, Arbitration International No 1 (1999) p528199729Hereafter referred to as TRAC30Atai, Ardeshir, Atai, Akbar Ali The international comparative legal guide to: litigation & dispute resolution Global

Legal Group CDR 2011 part 231New York convention on recognition and enforcement of foreign arbitral award 1958 hereby referred to as NYC32Iran’s Post-revolutionary legal and economic system p3331933 Anglo-iranian contract

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over the country’s assets plays a major role. Notwithstanding, looking at the concept of sovereigntyand state ownership with reference to arbitration, in Article 139 of the Iranian constitution, it states;

’. . .The settlement of claims relating to public and state property or the referral thereof to arbitrationis in every case dependent on the approval of the Council of Ministers, and the Assembly must beinformed of these matters. In cases where one party to the dispute is a foreigner. . . ’ 34

In grasping what falls within the public property Article 45 of the constitution also clarify the assets,

’. . . Public wealth and property, such as uncultivated or abandoned land, mineral deposits. . . shall beat the disposal of the Islamic government for it to utilize in accordance with the public interest. . . ’ 35

Furthermore, in the Iranian Petroleum Act it is stated:

’. . .The petroleum resources of the country are part of the public domain. . . ’ 36

Subsequently the above articles illustrate the constitution influences on international oil and gas ar-bitration. The way it would work is as follows; if a dispute is to arise in the oil and gas contract,the Council of Minister and the Assembly (also known as Majlis) must be informed and must ap-prove to the dispute hearing. Therefore foreign investors must make sure that in their agreementwith an Iranian party (NIOC) over its oil and gas domain, the contract must comply with Article139 of the Constitution37 regarding arbitration. They are instance where unconditional consent hasbeen given; although Iran’s government has ultimate power, and can simply remove their consent38.The effect this may have on contracting parties is that the Iranian government are highly involvedin international trades and arbitration; subsequently scaring potential investors away. (Under Article268 of the constitution of Ghana, all transaction involving natural resources needs to be ratified bythe parliament first, similar to that of Iran.)39

State-ownership and entities of oil and gas is not alien worldwide, and when it comes to contractingwith private parties, states under international commercial arbitration are not deemed more sovereignto make private parties inferior. The British law on State Immunity40 ultimately declares when a stateenters an agreement with a private party and the contract includes an arbitration clause, the statewaives any right of state immunity it may have in the field of written consent for arbitration41. Underthe constitution of Iran the Council of Minister and Assembly needs to approve and be informed ofany arbitration clauses, in contrast to the State Immunity Act which declares if consent has beengiven then it cannot be withdrawn, Iran’s government is essentially involved throughout the wholecontracting relationship; before the adding of an arbitration clause, approval to arbitration, and theresolution. Meanwhile, it is an accepted principle of international commercial arbitration that statescannot use their domestic law, or sovereignty to manipulate an arbitration agreement concluded byan agent acting on behalf of that state, which in Iran is NIOC42. Therefore under International law

34Article 139 of the Islamic Republic of Iran’s Constitution – Council of ministers is referred to as the IranianParliament

35For full citation Article 45 of the Islamic Republic of Iran’s constitution36Article 2 of the Iran’s Petroleum Act37Atai, Ardeshir Journal of money laundering control: Arbitration of investment disputes under Iranian investment

treaties J.M.L.C 130 (2011), 14(2), page 438This could be done via the Vienna Convention on the Law of the Treaty - Atai, Ardeshir Journal of money laundering

control: Arbitration of investment disputes under Iranian investment treaties J.M.L.C 130 (2011), 14(2), p 439Article 268 of the Constitution of Ghana 199240State Immunity Act 1978 section 941McKendrick, Ewan Goode on Commercial Law 4th edition. London; UK Penguin Books, 2010 page 1338-134142McKendrick, Ewan Goode on Commercial Law 4th edition. London; UK Penguin Books, 2010 page page 1340 para

2, explains fully this point.

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Iran cannot act beyond their powers (ultra vires). Fundamentally, though Iran’s government do havea large influence on Iran’s foreign arbitration agreement in the field of oil and gas, nevertheless theyare bound by laws of International Commercial Arbitration, such as UNCITRL or NYC alongside thedomestic laws. Additionally if we look at the case of Societe Gatoil v National Iranian Oil Company43

here we see how the French Court denies the NIOC reliance on Article 139 of the Constitution tooverturn an agreement already entered into44. International public policy in a number of cases pro-hibited States from using their domestic law to invalidate arbitration45.

Arbitration & Stabilization clausesInternational oil and gas companies are ultimately forming a contract with the Iranian government

where risks can be high, and some may avoid an investment if they believe the host state lacks sta-bility. Therefore the stabilization clause was created to not only prevent host states from using theirstate sovereignty to take action against the international oil company but to also protect contractualagreements46. When Iran nationalised its oil and gas industry with a Single Article Act47 the roleof stabilization clauses became significant, as many oil and gas companies were affected. In the caseof Amoco International Finance48 the Arbitration Tribunal Chamber Three held that as they wereno stabilization clause expressly stating a limit on Iran’s right to nationalize, the contract could notdeclare Iran’s nationalization unlawful, and therefore compensation would be paid to Amoco a totalof ‘50% of the on-going concern value of Kharg Chemical Co’49 and the agreement would thereby be‘null and void’.50. Here we see how Iran’s nationalization of oil and gas has affected other jurisdictions,although compensation has been paid for the loss suffered, however no additional damages for futureloss51.

Furthermore another relevancy of stabilization clause in Iran’s international oil and gas arbitration isbest demonstrated in one of the three case studies; Sapphire International Petroleum Ltd v NationalIranian Oil Co52. Here the parties to the contract had not clearly stated the choice of law theywould implement, domestic or international (based on a theory of internationalization this is a bind-ing dispute resolution which is not controlled by the host state)53. So ultimately the contemporarystabilization clause was carried out by the parties in accordance with the principle of good faith good

43Societe Gatoil v National Iranian Oil Company Ct. App of Paris 1990 (1993) Arb 28044Gharavi, Hamid G The 1997 Iranian Law on International Commercial Arbitration: The UNCITRAL Model Law.

Paris, France. A’l Iranienne, Arbitration International No 1 (1999) page 645Mistelis Loukas A, Brekoulakis Stavros L (Edited by) ‘Arbitrability International & Comparative Perspectives

Publisher Wolters Kluwer Law International Chapter 3 The death of Inarbitrability Karim Youssef page 62-6346Al-Emadi, Talal A.Q. International Energy Law Review: Stabilization Clauses in International Joint Venture Agree-

ments. I.E.L.R. (2010), page 147Iran-US Claim Tribunal - Amoco International Finance Corporation v The Government of the Islamic Republic of

Iran, National Iranian Oil Company, National Petrochemical Company and Kharg Chemical Company Ltd 1987 section72 page 209

48Iran-US Claim Tribunal - Amoco International Finance Corporation v The Government of the Islamic Republic ofIran, National Iranian Oil Company, National Petrochemical Company and Kharg Chemical Company Ltd 1987

49Kosheri, Ahmed El, 13.3 International arbitration and petroleum contracts, vol IV Encyclopaedia of Hydrocarbons:economic, policies and legislation. Paris, France (2005) page 889

50Iran-US Claim Tribunal - Amoco International Finance Corporation v The Government of the Islamic Republic ofIran, National Iranian Oil Company, National Petrochemical Company and Kharg Chemical Company Ltd 1987 section74 page 210

51Kosheri, Ahmed El, 13.3 International arbitration and petroleum contracts, vol IV Encyclopaedia of Hydrocarbons:economic, policies and legislation. Paris, France (2005) page 889, Original copy Reports of Iran-US Claims Tribunal vol15 page 189

52Sapphire International Petroleum Ltd v National Iranian Oil Company 35 I.L.R. 136 (1967)53Al-Emadi, Talal A.Q. International Energy Law Review: Stabilization Clauses in International Joint Venture Agree-

ments. I.E.L.R. (2010), page 5

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will. The significant of this case is the role the arbitrator played, who applied the general principle oflaw54, rather than the Iranian Civil Law. Subsequently this case illustrated a negative choice of law(which gives arbitrators the freedom to choose the law they think fits best), which in this case turnedin Sapphire’s advantage, exemplifying the affect international oil and gas arbitration has on Iran. Therole of stabilization clause in this case demonstrates the significance of the clause, as it gave rise tothe arbitrator to adapt negative choice of law, as appose to Iran’s domestic law.

Arbitration & InvestorsHere we shall discuss the role of arbitration in investment agreements between Iran and other states.

Iran has been subject to over 50 Bilateral Investment Treaties55, which under Article 1 acknowledgesnatural resources56 a subject to investment Hence why arbitration plays a major role in these agree-ments acting as a remedy available for foreign oil and gas companies to take a dispute to internationalarbitration, and thereby protected by international law. The main treaty which governs internationalinvestors and dispute resolutions in Iran is The Foreign Investment Promotion and Protection Act200257 under Article 19 of this act58 headed Dispute Settlement gives rise to different methods of solv-ing the problem. However, this act within its self is vague as it does not expressly state arbitration asa method of dispute resolution, but yet it mentions negotiation. Although in Iran’s BIT agreementsArticle 12 is commonly devoted to arbitration as a method of dispute resolution. An example ofSouth Africa and Iran59, Article 12 states; Settlement of Disputes Between a Contracting Party andan Investor of the other Contracting Party. Article 12(4) requests a written notice and appointment ofarbitrators, and failure to agree upon an arbitrator the ICC will appoint the failing parties arbitrator.Therefore together with FIPPA and BIT arbitration is declared a method of dispute resolution in Iranfor the interest of both investors and Iran.

Moreover Iran has not signed the International Centre for Settlement of Investment Disputes60 conven-tion and therefore is subject of ad hoc arbitration rules of UNCITRAL. Nevertheless BIT agreementsalso give rise to settling disputes via institutional proceedings under ICSID or rules of InternationalChamber of Commerce61. An example can be seen in Articles between Iran and Republic of Korea62.Critically host states that enter into commercial agreements over public property similar to Iran usu-ally tend to favour institutional arbitration as appose to ad hoc63. The ad hoc approach howeverprovides maximum flexibility to contracting parties as it is solely independent from all other institu-tions. Parties have authority over the arbitrator they want to participate in the tribunal, finally thereis no review on the award by arbitral institutions64. So both methods have advantages and are bothpracticed in Iran, although ad hoc is more often favoured.

54Al-Emadi, Talal A.Q. International Energy Law Review: Stabilization Clauses in International Joint Venture Agree-ments. I.E.L.R. (2010), page 6

55Hereafter referred to as BIT’s56Model Iran BIT agreement Article 1 – South Africa and Iran 1997 BIT Article 157Hereby referred to as FIPPA58Iran’s FIPPA 2002 Article 12 URL <http://www.iranembassyjp.org/english/fippa-e.pdf>59Bilateral Investment Treaty between South Africa and Iran 1997 Article 1260Hereby referred to as ICSID61Hereby referred to as ICC- Atai, Ardeshir Journal of money laundering control: Arbitration of investment disputes

under Iranian investment treaties J.M.L.C 130 (2011), 14(2), page 1162Article 12(2)(b) and Article 12(2)(c) of Iran and The Republic of Korea BIT63Savage David J Ad Hoc v Institutional Arbitration Charles Russell 2010 para 2.1.264Savage David J Ad Hoc v Institutional Arbitration Charles Russell 2010 para 3.2.3

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Conclusively this chapter has outlined the relevant law surrounding Iran’s international commercialarbitration with focus on the oil and gas sector. In recent years Iran has tremendously modifiedlaws of international arbitration. The liberalization has increased foreign investors in the oil andgas domain. Although the laws and treaties are effective, however they still remain some room forenhancements. Further improvement could include; signing onto the ICSID, Iran would have directaccess to the convention alongside 158 other states65, rather than having to access it as a result of aBIT agreement. Secondly by stating arbitration as a method of dispute settlement under Article 19of FIPPA vagueness would be avoided. Finally by reducing the grounds to set aside arbitral awardunder Article 33 of LICA and also expanding the definition of international arbitration under Article1 LICA would make the act more affective66. Collectively Iran in recent years has tried to modify lawsrelating to arbitration, as it has acknowledged the appreciation foreign investors have for the clause,so although improvements could be done, currently the laws have been in Iran’s favour.

65ICSID List of contracting states and other signatories of the Convention URL <ht-tps://icsid.worldbank.org/ICSID/FrontServlet?requestType=ICSIDDocRH>

66Gharavi, Hamid G Update, Thoughts and Perspectives on Iran’s International Arbitration Regime. Paris, France.Swiss Arbitration Association Bulletin No 4 (2000) p727

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Chapter two

In this chapter we shall put in practice the things discussed in chapter one. We shall look at dis-putes that have arose in Iran’s international oil and gas contract, with focus on how these disputeswere dealt with and also the consequences they had on both Iran and other jurisdictions. Disputescan arise for many different reasons, such as failing to comply with the terms of the contract, delayin delivery and even nationalization of an oil company. In the on-going dispute between CrescentPetroleum and NIOC concerning a 25-year gas contract formed in 2001 Gulf News sates, the disputewas regarding NIOC technical delay in finalising the upstream facilities to deliver the gas to Dubai,meanwhile Iran argues the delay was a result of the price formula which needed revising. UAE resortedto international arbitration; the hearing was held in February 2012. This has had a knock on effect onthe Crescent clients, power cuts in parts of Shajah and although UAE is rich in its energy resources,the state relies greatly on imported gas which by the failure to fulfil the contract UAE is affected67.Subsequently all dispute settlements can be both time consuming and also affects contracting partiesinvolved.

Case Study of Mobil Oil Iran Inc v Islamic Republic of Iran68:This case is one out of the 4000 heard in the Iran-US claim Tribunal and as the case was a category

B case dealing with contractual disputes the full arbitrating tribunal was present which were made upof, three Iranian arbitrators, three American and three from a third country selected by the UNCIT-RAL Rules69. The dispute was between the state of Iran and a group of oil companies collectivelyknown as ‘Consortium’ regarding a contractual agreement reached in 1954. The contract gave right toConsortium to purchase Iranian oil at a lower price until 1979, and thereafter the option of extendingthe agreement to a further 15 years would be present70. Between 1954 and 1973 they were majordevelopments in the Middle Eastern oil industries with newly settled organizations neighbouring thePersian Gulf. The Iranian government wanted to obtain the same advantages of those countries andtherefore determined that the Consortium agreement would not extend beyond 1979 and a new agree-ment that would be more favourable to Iran needed to be considered71. Negotiation between theparties brought about an enhanced new twenty year agreement; the Sale and Purchase Act 197372

which would grant Consortium the right to buy all crude oil in the defined area in Iran excluding67Gulf News Sharjah gas supply arbitration next year by Saifur Rahman Business Editor, published on June 30, 2011

URL < http://gulfnews.com/business/oil-gas/sharjah-gas-supply-arbitration-next-year-1.830268>68Hereafter referred to as Mobil and Iran - Iran-US Claim Tribunal Mobil Oil Iran Inc v Islamic Republic of Iran

AWD 311-74/76/81/ 150-369Redfern, Alan, Hunter Martin. Law and practice of international commercial arbitration. Student ed. London:

Sweet & Maxwell, 2004 p60 para 1-10770Agreement of Mobil and Iran - Iran-US Claim Tribunal Mobil Oil Iran Inc v Islamic Republic of Iran AWD 311-

74/76/81/ 150-3 page 5 URL <http://translex.uni-koeln.de/touch/document.php?docid=232000>71The Mobil Oil Iran v Islamic Republic of Iran AWD 311-74/76/81/150-3 decision as assessed by the Tribunal page

6 point 5 URL <translex.uni-koeln.de/touch/document.php?docid=232000>72Hereby referred to as SPA

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the domestically used and quantity for NIOC export sales73. The dispute arose when Consortiumbrought a claim against Iran declaring they had wrongfully terminated the SPA74 which replacedthe agreement made in 1954. As a result of disputes amongst the parties on the grounds of price,and the assumption made by Consortium claiming they were receiving a disproportional share of theoil sector compared to previous years, therefore Consortium informed NIOC that it would terminatetheir Abadan Refinery75. After an endless negotiation with no result, in 1979 both parties mutuallycame to an agreement to terminate the SPA however negotiation could not proceed as a result of theHostage Crisis in November 1979, later in 1980 with the SAA nullifying all oil contracts, the Iraniangovernment ultimately found the SPA null and void76.

When the case was brought to arbitration the tribunal chamber three found that the general ruleof international commercial law was applicable77 thereby rejecting Iran’s claim of using its domesticlaw to govern the dispute. The tribunal after much investigation held Iran liable and compensationshould be calculated in favour of Consortium78. The tribunal also considered force majeure in Iran’sscenario with the revolution, however held that although force majeure might have been present tosome extent, however not enough to terminate the agreement, as oil export resumed (although in smal-ler quantity)79. Notwithstanding the tribunal went on declaring that NIOC act was not breachingthe 1979 agreement and the Consortium respond to the termination reached a mutual agreement80.However the tribunal did offer some compensation to Consortium on the basis of the 1973 agreementfor their investment and expenses bore. The chamber despite the mutual agreement to terminate theSPA found Consortium entitled to lost profit81. The relevance of this case to this paper is not onlythe decision made by the arbitral tribunal but more so the consequences it had. Although Iran hadto award compensation to Consortium for damages suffered, the underlying principle is the fact thatthe contract was essentially expropriated from Consortium and the SAA and revolution preventedthe company from continuing their twenty year contract. Fundamentally this is deemed to be a greateconomic consequence to another jurisdiction. So although the arbitral tribunal granted Consortiumdamages, it did not uphold a specific performance for the agreement to continue.

73The Mobil Oil Iran v Islamic Republic of Iran AWD 311-74/76/81/150-3 decision as assessed by the Tribunal page6 point 5 URL <translex.uni-koeln.de/touch/document.php?docid=232000>

74Monroe, Leigh Mobil Oil Iran Inc v Islamic Republic of Iran AWD 311-74/76/81/150-3 The American Journal ofInternational Law vol 82, No 1 (1988) p 136-137



77Monroe, Leigh Mobil Oil Iran Inc v Islamic Republic of Iran AWD 311-74/76/81/150-3 The American Journal ofInternational Law vol 82, No 1 (1988) p 138



80Kosheri, Ahmed El, 13.3 International arbitration and petroleum contracts, vol IV Encyclopaedia of Hydrocarbons:economic, policies and legislation. Paris, France (2005) pp889


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Case Study of Anglo-Iranian Oil Company (United Kingdom) vThe Government of Iran82:

This case highlights state sovereignty and the role the International Court of Justice83 has when itcomes to disputes between State and a foreign investor, the relevancy the case has to Internationaloil and gas arbitration is interesting. Essentially one of the reasons why the case ended up in ICJ wasbecause of Iran’s refusal to participate in arbitration. In 1933 an agreement was formed between theAnglo-Iranian oil company84 and the Government of Iran, where it was stated that UK will hold alarge share of the Iranian Oil stock85. The dispute was a result of the 1951 Iranian nationalizationof the Anglo-Iranian Oil Company, where UK argued that Iran was in breach of the terms of theagreement. Article 21 of the agreement was a stabilization clause which held the principle of goodwilland good faith and also stated that the concession would not be annulled by future general or speciallegislations86. Article 22 provided arbitration as a method of settling disputes, and failure for partiesto agree upon arbitrators the President of the Permanent of ICJ was to name a sole arbitrator87. Fur-thermore Article 26 specified that the concession would only come to an end if company surrendersthe agreement, or the Arbitration court declares concession null and void88. As a consequence, theAnglo-Iranian requested arbitration under Article 22 in 1951. Iran rejected the proposition and stated;nationalization of the oil industry is a right of state sovereignty and the right of the Iranian publictherefore it’s not subject to arbitration and that no international body is to investigate the matter89.It at this point when the UK government took the dispute to ICJ requesting a judgement to overturnIran’s rejection. Further for the court to order Iran to comply with Article 22 and turn to arbitration.This case is a very significant one, with many political involvements and consequences; we have onlybriefly touched upon the role arbitration plays in the case. ICJ reached the decisions by nine votesto five, that it lacked jurisdictions to deal with the dispute90. Under international law ICJ is a courtintending to solve problems amongst states, and as the dispute was between Iran and the foreigninvestor Anglo-Iranian this meant UK had no say as it was not party to the contract. Consequently,we have witnessed the importance of arbitration and the extent it could reach, from a private methodof dispute resolution to getting States involved in order to reach justice even if it leads to the inter-national courts. This is a prime example of the consequences Iran’s government and the decision overits oil industry has had on another jurisdiction. The mere fact that the UK brought the claim forwardshows the impact and consequences the decision had.

82Hereafter referred to as UK and Iran - United Kingdom v Government of Iran 195283Hereby referred to as ICJ84Hereafter referred to as Anglo-Iranian85Bishop, WM JR The Anglo-Iranian oil Company Case The American Journal of International Law vol 45, no 4

(1951) pp 74986Bishop, WM JR The Anglo-Iranian oil Company Case The American Journal of International Law vol 45, no 4


(1951) pp 750-75188Bishop, WM JR The Anglo-Iranian oil Company Case The American Journal of International Law vol 45, no 4


(1951) pp 75290The Summary of the International Court of Justice judgment. URL <http://www.icj-cij.org/docket>

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Case Study of Sapphire International Petroleum LTD v NIOC91:As mentioned at the beginning of the paper, a case study would be devoted to illustrate the effect

dispute resolutions have had on Iran. The chosen case is regarding a Canadian petroleum companyand the NIOC. Although in the long run Sapphire was affected as a result of the nullification ofthe contractual agreement, however the decision made by the sole arbitrator found Iran in breach ofcontract and full compensation was paid to Sapphire as a result92. The dispute came about in 1958between NIOC and Sapphire who had mutually set up a joint stock company93 known as IranianCanada Oil Company94. Sapphire started work on the designated area and wanted reimbursementfor the expenses undertook. NIOC refused to pay the sums arguing Sapphire breached Article 12 ofthe agreement where it was stated, NIOC should be consulted with before any expenses incurred.Failure to consult would mean NIOC is had the ability to refuse payment of the expenses95. However,Article 10 of the agreement gave right to Sapphire to have ’. . . full exclusive and effective managementand control...’ 96 additionally the non-payment of expenses from NIOC prevented Sapphire from per-forming the drilling obligations which was to be done within six months after the date of contract.This had a domino effect which resulted in NIOC repudiating the contract, further NIOC cashed the£350,000 indemnity deposit from Sapphire. Sapphire referred the issue to arbitration, which NIOCrefused. Relying on Article 41 of the contract Sapphire requested a sole arbitrator from the Presidentof the Swiss Federal Court. The court appointed Judge Cavin. As discussed in chapter one, becausethe parties had not chosen a specific law to apply, the Swedish arbitrator applied the general principleof law to some extent protecting the foreign investor Sapphire from the host states domestic legal sys-tem97. Similarly the case Aramco v Saudi Arabia adapted a similar approach. The tribunal appliedthe English and the Swiss conflict-of-law system which was determined the closest and most effectivelaw related to the contractual parties98. It was said that refusal of one party to perform their side ofthe contract (NIOC paying the expenses) releases the other party from their obligation and gives riseto pecuniary compensation99.

Sapphires brought about four claims; firstly expenses incurred before the contract, secondly expensesincurred after the contract had been formed, thirdly the loss of profit and finally a refund of the$350,000 indemnity money. Here the arbitrator tried to put Sapphire in a position as though thecontract had taken place, essentially pre-contractual agreements are excluded from award initiallydismissing the first claim made100. Judge Cavin found that NIOC refusal to collaborate with Sap-phire was breaching the rule of ’pacta sunt servanda’ 101 and therefore Sapphire is entitled to both’damnum emergens’ (loss suffered) and ’lucrum emergens’ (loss of profit)102. The arbitrator used

91Hereby referred to as Sapphire and NIOC – Sapphire International Petroleum LTD v National Iranian Oil Company1963

92Ripinsky Sergey, Williams Kevin Damages in International Investment Law Published by British Institute of Inter-national and Comparative law Charles Clore House (2008) page 105-106

93Ripinsky Sergey, Williams Kevin Damages in International Investment Law Published by British Institute of Inter-national and Comparative law Charles Clore House (2008) summary of Sapphire v Iran URL: <www.biicl.org/files/3940_1963 _sapphire _v _nioc.pdf> page 2

94Hereby referred to as IRCAN95Sapphire International Petroleum LTD v National Iranian Oil Company Arbitral award page 17696Sapphire International Petroleum LTD v National Iranian Oil Company Arbitral award page 17797Kosheri, Ahmed El, 13.3 International arbitration and petroleum contracts, vol IV Encyclopaedia of Hydrocarbons:

economic, policies and legislation. Paris, France (2005) pp88298Kosheri, Ahmed El, 13.3 International arbitration and petroleum contracts, vol IV Encyclopaedia of Hydrocarbons:

economic, policies and legislation. Paris, France (2005) pp881-88299Sapphire International Petroleum LTD v National Iranian Oil Company Arbitral award page 182

100Rinsky Sergey, Williams Kevin Damages in International Investment Law Published by British Institute of Interna-tional and Comparative law Charles Clore House (2008) summary of Sapphire v Iran URL: <www.biicl.org/files/3940_1963 _sapphire _v _nioc.pdf> page 7101Literal meaning ’Agreement must be kept’102Kosheri, Ahmed El, 13.3 International arbitration and petroleum contracts, vol IV Encyclopaedia of Hydrocarbons:

economic, policies and legislation. Paris, France (2005) pp883

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the principle of ’ex aequo et bono’ 103 by considering all circumstances to calculate the amount tobe paid for loss of profit. As a result of the dispute settlement, Iran was ordered to pay a sum of$650,874 for expenses incurred after the contract had been formed, an additional $2,000,000 for loss ofprofit104 and a refund of the indemnity105. Consequently this case illustrates how Iran is affected byan arbitral decision and the loss it faced. Additionally this case sets an example for future agreementshighlighting the importance of ‘choice of law’.

Arbitration in other jurisdictionsSubsequently this chapter has mentioned three cases were arbitration was the method of settling a

dispute. The judgements have both affected Iran and other jurisdictions in different ways, for Iran ithas mainly been financial loss, as for other states it has been the right to operate and invest in Iran’soil and gas industry. In comparison to what has been discussed we shall look at two Libyan arbitrationcases which took place in 1973-1977. In these two cases both companies refused arbitration, alike tothe Iranian cases above. Firstly we look at the case of Texaco v Libya106 similar to Anglo-Iraniancase, here Libya nationalized all properties, rights and assets of companies including oil and gas andtransferred it to the Libyan public107. The ICJ rejected Libya’s argument of state sovereignty108 andappointed a French Arbitrator109 who chose to apply international law to govern the dispute. Parallelto Anglo-Iranian, Dupuy flagged clause 16 of the agreement between Texaco and Libya which was astabilization clause. The clause deprived the state from acting unilaterally from amending the termsof the contract. The decision differed from the above case studies as it was held that the Libyangovernment was in breach of the deeds of concession, and that they were bound to perform the deedsaccording to their terms110. On the other hand, similarly to the case of Sapphire were the host statewere ordered to pay compensation to the foreign investor we have the case of LIAMCO v Libya111.Here the sole Lebanese arbitrator112 elected by the ICJ held that unlike Texaco the nationalizationof the assists were deemed lawful, however compensation was awarded to LIAMCO based on twogrounds. Correspondingly to Sapphire firstly the value of the physical assets were taken into account,secondly the loss of profit113. Overall these cases are all illustration on how the arbitration tribunalreaches their decisions and the consequences these decisions have on contracting parties.

103Literal meaning ‘from equity and conscious’ or ‘according to the rights and goods’104Sapphire International Petroleum LTD v National Iranian Oil Company Arbitral award page 190105Rinsky Sergey, Williams Kevin Damages in International Investment Law Published by British Institute of Interna-

tional and Comparative law Charles Clore House (2008) summary of Sapphire v Iran URL: <www.biicl.org/files/3940_1963 _sapphire _v _nioc.pdf> page 8106Texaco Overseas Petroleum co v Libya 104 J. Droit Int’l 350 (1977) Arbitration by Professor Rene-Jean Dupuy107Kosheri, Ahmed El, 13.3 International arbitration and petroleum contracts, vol IV Encyclopaedia of Hydrocarbons:

economic, policies and legislation. Paris, France (2005) p884108Summary of the Texaco v Libya 1977 case; URL <https://www.quimbee.com/cases/texaco-overseas-petroleum-co-

v-libya>109Professor Rene-Jean Dupuy hereby referred to as Dupuy110Summary of the Texaco v Libya 1977 case; URL <https://www.quimbee.com/cases/texaco-overseas-petroleum-co-

v-libya>111Libyan American Oil Company v The Libyan Arab Republic (1977)112Dr Sohbi Mahmassani113Rinsky Sergey, Williams Kevin Damages in International Investment Law Published by British Institute of Inter-

national and Comparative law Charles Clore House (2008) page 291

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Conclusion

Essentially in Iran’s international oil and gas disputes there is a high degree of political and gov-ernmental influence, resulting to many international oil and gas disputes. Firstly, the nationalizationof the oil industry in 1951 which brought about the Anglo-Iranian case and political tension betweenUK and Iran. Later in 1979 the Islamic Republic revolution brought about the Single Article Actwhich determined foreign petroleum contracts null and void, having a domino effect on investors andcontracts made in Iran’s international oil and gas. Furthermore the American hostage scenario wasat the time of the Mobil Oil case which brought about many of Iran-US Claim Tribunal cases andmore tension between Iran and another western state. Finally, the mere fact that Article 139 of theconstitution states parliamentary approval is needed in order for arbitration to be used indicates thelevel of influence and involvement the Iranian government have in international oil and gas arbitration.Subsequently affecting other jurisdictions that form a binding oil and gas contract with Iran. Onecould argue the level of governmental influence in the field of arbitration is unorthodox, this leadsus back to the idea of; law of property. Ultimately we see a dynamic approach to arbitration whichis somewhat unique to other jurisdictions. This could be a result of Iran’s heavy reliance on her oiland gas industry as a main provider of international economic revenue, therefore one cannot expect acountry which is rich in natural resources to act privately without any governmental authorisations.When the issue of arbitration is involved it ultimately means if the arbitrator does not vote in thestates favour, it could result in the government having to award a foreign investor a large sum ofmoney.

Moreover, we also looked at the laws surrounding arbitration in Iran, and the way they function.It goes without doubt that LICA has brought about tremendous modification in the Iranian law ofdispute settlement. Furthermore by joining the NYC Iran has opened doors which were closed for along time. A future reform as already discussed, is by Iran signing onto the ICSID. Although FIPPAis offering dispute settlement as a way of resolution, it remains vague as to whether these resolutionswould be subject to modification. Undeniably sanctions upon Iran are crippling the system and thevolume of investment coming into Iran. One could argue that modification have not taken place be-cause arbitration is not a crucial issue at the moment, since it has been proven hard to bring investorsin the country in the first place. Having said that, some improvement has been made between Iranand its relationship with the west in the year 2015. This could eventually mean that more businessesand investments could be seen between Iran and other jurisdictions. Especially in the internationalenergy sector.

To conclude, the objective of this paper was to bring together all relevant international arbitrationlaws in Iran with focus on the oil and gas domain and to briefly indicate their roles and purposes;the theoretical standpoint. Later in chapter two the aim was to illustrate the practical adaptation ofinternational oil and gas arbitration, with focus on the consequences dispute settlements have. Lastlyon the authors perspective, liberalisation in the Iranian arbitration has extended immensely. Withoutdoubt many reforms are yet needed to better the system, however presently the laws surroundingIran’s international oil and gas arbitration are advanced and improvements is still to come.

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[15] Savage David J Ad Hoc v Institutional Arbitration. Charles Russell. 2010. www.charlesrussell.co.uk

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[27] Crescent Petroleum and Iranian National Oil Company.

[28] Iran & South Africa Bilateral Investment Treaty. 1997.

[29] Mobil Oil Iran Inc v Islamic Republic of Iran AWD 311-74/76/81.

[30] Sapphire International Petroleum LTD v National Iranian Oil Company. 1963.

[31] Societe Gatoil v National Iranian Oil Company Ct. App of Paris 1990 (1993) Arb 280.

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Legislations

[32] Arbitration Act. UK. 1996.

[33] Foreign Investment Promotion and Protection Act. FIPPA. 2002.

[34] Iran’s International Commercial Arbitration Act. 1997.

[35] Iranian Petroleum Act.

[36] The Islamic Republic of Iran Constitution (amended 1989).

[37] The Law on International Commercial Arbitration. Iran. 1997.

[38] The New York Arbitration Convention.

[39] United Nation Commission On International Trade Law. UNCITRAL

Newspapers links

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[41] Crescent Petroleum and Iranian National Oil Company: Khaleejt Times, Crescent SeeksArbitration on gas Supply deal with Iran. Published on July 2009. Retrieved on 21/12/12.URL: http://www.khaleejtimes.com/DisplayArticle.asp?xfile=data/business/2009/July/business_July546.xml&section=business&col

[42] Crescent Petroleum and Iranian National Oil Company: Platts, UAE’s Dana Gas inks deals withSharjah, Ajman to develop offshore gas field. Published on November 2012. Retrieved on 21/12/12.URL: http://www.platts.com/RSSFeedDetailedNews/RSSFeed/NaturalGas/8936405

[43] US sanctions on Iran: The nation Us extends exemptions for Asian powers to Iran oil sanctions.Published on December 2012 by AFP. Retrieved on 09/12/12.URL: http://www.nation.com.pk/pakistan-news-newspaper-daily-english-online/business/09-Dec-2012/us-extends-exemptions-for-asian-powers-to-iran-oil-sanctions

Websites

[44] Crescent Petroleum news website. Retrieved on 21/12/12.URL: http://www.crescent.ae/html/news.html

[45] ICSID parties to the contract. Retrieved on 27/12/2012.URL: https://icsid.worldbank.org/ICSID/FrontServlet?requestType=ICSIDDocRH&actionVal=Contractingstates&ReqFrom=Main

[46] International Centre for Settlement of Investment Disputes. Retrieved on 14/12/2012.URL: https://icsid.worldbank.org/ICSID/Index.jsp

[47] Iran’s legislation sources. Retrieved on 10/12/12.URL: http://www.lexadin.nl/wlg/legis/nofr/oeur/lxweira.htm

[48] Latest information regarding the oil sector in Iran. Retrieved on 05/12/2012.URL: http://www.mop.ir/Portal/Home/Default.aspx

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[49] Mobil Iran Oil v Islamic Republic of Iran Trans-lex report. Retrieved on 06/12/12.URL: http://www.trans-lex.org/232000

[50] Mohamedi, Fareed. The oil and gas industry. Retrieved on 20/10/2012.URL: http://iranprimer.usip.org/resource/oil-and-gas-industry

[51] The Iranian Petroleum Act. Retrieved on 05/12/2012.URL: http://www.alaviandassociates.com/documents/petroleum.pdf

[52] The Iranian Ministry of Economic Affairs and Finance: Bilateral Investment Treaties. Retrievedon on 10/11/2012.URL: http://www.investiniran.ir/en/investmenguide

[53] White House, the Executive Order. Retrieved on 14/12/12.URL: http://www.whitehouse.gov/the-press-office/2012/07/31/executive-order-authorizing-additional-sanctions-respect-iranURL: http://www.whitehouse.gov/the-press-office/2012/07/31/fact-sheet-sanctions-related-iran

[54] World’s oil reserves. Retrieved on 09/12/12.URL: http://www.opec.org/opec _web/en/data _graphs/330.htm

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Behnaz Bazmi_ international oil and gas arbitration

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