Arbitration: An Introduction and the Iranian Context

  1. What is arbitration?

Arbitration is the use of a neutral third party or parties to listen to evidence and argument, usually in a confidential proceeding, and decide on a binding award generally not reviewable upon appeal. It may be initiated by one party or parties to an agreement, usually under a provision that requires disputes to be resolved by arbitration. Parties can also agree to arbitrate their disputes regardless of any contractual obligation, barring a provision that denies the use of arbitration.

  1. What are the benefits of arbitration?

There are certain benefits to arbitration over litigation and these should be thoroughly evaluated before adding or revising an arbitration clause to an agreement. Arbitration proceedings typically are private and therefore are not in public records, which is favorable for parties seeking to preserve and protect confidential, proprietary and other sensitive information. In arbitration, discovery generally is limited as compared to litigation, particularly litigation in common law jurisdictions, and thus reduces the cost and duration of an arbitration proceeding. However, this expediency may be reduced if the rules of the proceeding allow litigation-style discovery.

As compared to litigation, the higher burden required to invalidate or set aside an arbitral award generally results in greater certainty of the result of the proceeding. Under most circumstances, arbitration awards are final and binding on the parties, and the grounds upon which a court can review an arbitral award are extremely limited. These grounds include undisclosed bias or conflict of interest on the part of the arbitrator(s), an error in the calculation of the award which is apparent from the face of the award itself, or a manifest disregard of the law. Although these grounds appear to be broad, they are not, and courts have held that even where an arbitrator incorrectly applies the law, or disregards certain evidence in coming to a conclusion, the court will not disturb the arbitrator’s opinion and overturn an award. Thus, once the arbitrator issues an award, it is generally binding on the parties.

Arbitration also is less expensive in general than litigation, although costs can vary based on the complexity of a matter, and the extent of discovery or other litigation-style rules. Importantly, arbitration is customizable, allowing parties to an agreement to set the terms on selection of the arbitrator(s) (including the number and expertise of the arbitrators), the arbitration institution, venue, and the rules that will govern the proceeding. Arbitration also may be less formal than litigation, as many proceedings are held in conference rooms rather than courtrooms.

  1. What are the potential drawbacks of arbitration?

Certain drawbacks of arbitration include the limited review of decisions, and the potential for high expenses, particularly if not accounted for during arbitration clause drafting. Many parties turn to arbitration because of the ability to source arbitrators with expertise in particularly complex subject matter. This aspect of arbitration means that some disputes will be more costly by virtue of their complexity. In addition, there may be difficulties in initiating arbitration proceedings where an arbitration clause is vague or a party to an agreement is non-cooperative.

Further, in arbitration, arbitrator(s), rather than a jury, hear the case and issue an award. Depending on the nature of the matter, some parties may believe that juries, properly instructed by a court, will provide a more fair and just resolution to a dispute, and that it is easier to convince a jury to issue a higher award than it would be to convince an arbitrator to issue a similar award. Thus, parties should closely examine the considerations involved in foregoing the option to have a matter heard by a jury.

One of the most significant concerns with respect to arbitration involves post-judgment enforcement, which largely turns on the location of assets and the degree to which judges in national court systems may review arbitral awards. The ability to enforce an arbitral award often necessitates that the national courts where the assets are located also afford deference to the award. Parties may seek to set aside or invalidate an arbitral award in national courts, and depending on the degree of autonomy in the judicial system, the potential for misuse exists.

  1. Are Iranian entities familiar with arbitration clauses?

Yes, arbitration has had a long history in Iran. Informally, local custom employed the use of village elders who acted as arbitrators in the resolution of local disputes. Formally, arbitration was enshrined in the original Iranian Code of Civil Procedure 1911, which allowed referrals to arbitration as a method of resolving disputes. Iran also has employed various arbitration clauses in its bilateral investment treaties, which often invoke application of the United Nations Commission on International Trade Law (UNCITRAL) rules. Generally speaking, arbitration has become a preferred method of resolving disputes, particularly in relation to international commercial disputes. Parties to an agreement often are most concerned with having a neutral third party or parties hear all the evidence relating to their claim and determine the outcome of a proceeding. Because the large majority of arbitrators are well-regarded experts in their respective fields, and strive to render fair, just, and equitable decisions based on applicable law and the facts, parties have become increasingly comfortable with arbitration.

  1. Which law governs international arbitration in Iran and what does it include?

The Law on International Commercial Arbitration (LICA) entered into force on November 15, 1997 and governs international arbitration in Iran. Like many other countries, Iran has modeled its arbitration law on the UNCITRAL Model Law, with several significant changes. Important provisions of the LICA include: (i) the arbitrator does not have to be of Iranian nationality; (ii) the arbitrator can decide jurisdiction and can determine whether the arbitration agreement existed (i.e., whether the arbitration clause is void ab initio); (iii) the parties are free to agree upon the procedure to be adopted with regard to arbitral proceedings; (iv) the parties can agree on the seat of the arbitration and the language to be used; and (v) the arbitration award is binding. The LICA is silent on the terms and conditions of “confidentiality,” and therefore this issue should be addressed by the parties in the arbitration agreement. Further, the LICA makes no reference to the costs of arbitration, and it is prudent for the parties to decide and include an expense provision in the arbitration agreement.

With respect to post-judgment enforcement, on October 15, 2001, Iran acceded to the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards, also known as the New York Convention. Therefore, foreign arbitral awards can be enforced in Iran.

  1. What arbitration institutions exist for contracts with Iranian entities?

The selection of arbitration institution generally is a function of the parties’ own making. With that in mind, it is worth noting that there are arbitration institutions within Iran, as well as international institutions that regularly appear in arbitration agreements with Iranian entities.

Tehran Regional Arbitration Centre (TRAC)

TRAC has a number of international arbitrators and functions under the Asian-African Legal Consultative Organization. The rules are based on the UNCITRAL rules and allow the possibility for the parties to determine the number of arbitrators, appoint the arbitrators of their choice, define the procedure for their appointment, venue selection, procedural rules, and substantive law that may be applied to the arbitration.

Arbitration Centre of the Iran Chamber (ACIC)

ACIC is the first independent Iranian arbitration institution established for the purpose of settlement of both domestic and international disputes through arbitration or conciliation. ACIC rules are based on the LICA and essentially adopt the UNCITRAL arbitration rules. As is the case with other arbitration centers, ACIC rules do not allow appeals and require advance payment of costs.

Other Institutions: International Chamber of Commerce, London Chamber of International Arbitration, Arbitration Institute of the Stockholm Chamber of Commerce, and Dubai International Financial Center

Traditionally, the International Chamber of Commerce and increasingly, the London Chamber of International Arbitration and Arbitration Institute of the Stockholm Chamber of Commerce have been the preferred institutions used for international commercial arbitration with Iranian parties. Many parties now are using Dubai International Financial Center arbitration as well. The International Court of Justice is used to assist with arbitrator selection in certain Iranian bilateral investment treaties, where the parties have failed to appoint arbitrators. Other international arbitration institutions may be used as well, depending on the parties’ needs and agreement.

Authored by: Sofia Jannati, Summer Associate 2016. The views expressed in this article are solely those of the author; they do not necessarily represent the position of the United States-Iran Chamber of Commerce or of any other entity.

About the author: USIRCC