The Background

Since withdrawal of the United States from the Iran nuclear deal (the JCPOA) in 2018, we have witnessed a change in the disputes landscape in Iran with a sharp increase in the number of claims against foreign companies. The defendants include German, French, Italian, Austrian, British, South Korean, Japanese, Chinese, Singaporean, UAE and Turkish companies in a wide range of industries including automobiles, pharmaceuticals, FMCG, petrochemicals, power, steel and banking. Many of these disputes are ongoing.

Foreign companies doing business in Iran or with Iranian counterparts often do not concern themselves with the possibility of litigation before Iranian courts and occasionally even ignore ongoing proceedings against them. This may be due to a variety of reasons, including unfamiliarity with the Iranian court system and procedure, assumptions about application of statutory time limits to a claim or the assumption that a final judgment of an Iranian court may not be enforceable abroad. In addition, some companies may wrongly assume that if there is a choice of exclusive foreign court jurisdiction in their contract, Iranian courts will not exercise jurisdiction and thus there is no need for their appearance before the court.

As will be discussed, most of these assumptions are incorrect. In addition, as both civil and criminal courts in Iran can hand down judgments in absentia and the judgments can be enforceable abroad, foreign companies may expose themselves to reputational risks by ignoring rather than defending a claim.

To resolve these misapprehensions and help avoid unpleasant surprises, we will first give a general overview of the Iranian court system and then discuss some potential quirks and hazards of litigation in Iran based on our experience defending foreign companies. Our discussion is in the context of civil proceedings, such as commercial disputes, rather than criminal ones.

Overview of the Court System

A civil lawsuit is commenced by filing a petition and supporting documents at the court of first instance. A copy of the petition with an invitation to the initial hearing will then be served on the defendant. If the defendant is domiciled aboard, service of process will be through the Ministry of Foreign Affairs of Iran, through Iranian political or consular officers. Notwithstanding this, if the defendant has a branch in Iran, service of process will be accomplished by serving the documents on the Iranian branch.

Once a proceeding is initiated, the court can hold as many hearings as it deems necessary in adjudication of the claim. In examination of the case, the court takes into account the parties’ evidence, but can also investigate other matters at its own initiative.

The parties can attend the hearing in person or submit a statement. Notwithstanding this, generally the absence of the defendant or its attorney at the hearing session does not prevent the court from continuing the proceedings and making a decision.

A civil claim (such as a debt and damages claim) at the court of first instance would usually take 9 to 18 months to be adjudicated, depending, among other things, on the workload of the court, involvement of experts, defendant’s statements and defences, and any counterclaims.

If defendant has not been present during the proceedings, and the claimant’s statement and the hearing invitation have not been served on him (or other competent persons) in person, then the judgment will be regarded as a judgment in absentia. In such a case, the defendant has the right to ask for re-examination by the court of first instance.

The parties can appeal the judgment of the court of first instance within twenty days (or two months where the would-be appellant resides abroad) from the date of service of the judgement. The appeal petition must be sent to the respondent within two days of its filing by the appellant. The respondent may provide its response and defences within ten days of the date of service of the appeal petition, after which, regardless of whether the respondent has replied, the case will be sent to the appeal court, which will examine the case.

Judgments on an underlying money claim of more than IRR 20,000,000 (approximately EUR 35), and a limited number of other judgments, which have not been appealed to the court of appeal can be appealed to the Supreme Court within twenty days (or two months where the would-be appellant resides abroad) of the expiry of the appeal period.

Generally, court fees depend on the type of claim. For monetary claims, the court fees are 3.5 per cent of the claim amount for the court of first instance and 4.5 per cent for the court of appeal, both of which must be paid by the claimant upon filing its petition. There is some inadvertent relief from this on foreign currency claims: the foreign currency claim amount is converted into rials based on the highly subsidised rate announced by the Central Bank of Iran which currently is almost one-tenth of the open market rate. Therefore, in these claims the claimant, in foreign currency terms, would effectively pay court fees on one-tenth of the claim amount.

For non-monetary claims, court fees are fixed. For the Persian year 1401 (21 March 2022 – 20 March 2023), the fixed fees range from IRR 400,000 to IRR 1,800,000 (de minimis amounts). If defendant loses the case, it can be compelled by the court (upon request by the claimant) to reimburse the claimant for its incurred expenses such as court fees, attorney fees and expert fees.

Some Litigation Quirks and Hazards

Enforceability of Iranian judgments abroad

As mentioned above, some foreign companies may assume that as they have no assets or presence in Iran, they may not be affected if they suffer an unfavourable judgment, for example from a former distributor or franchisee; therefore, they decide to dispense with the time and expense of defending a claim in Iranian courts. This assessment disregards the possibility of enforcement of an Iranian judgment in other countries where they may have assets.

Generally, after a civil judgment becomes final, the judgment creditor can request the court of first instance to issue an enforcement writ against the judgment debtor. This writ will require the judgment debtor to settle the judgment within ten days of service, failing which the judgment creditor may seek to attach its assets, which will then be appraised and auctioned. If the judgment creditor is unable to identify assets of a debtor who is a natural person, it may request the court of first instance to issue an Exit Ban and may also request apprehension of the judgment debtor; these will continue in effect until the judgment debt is fully settled.

These are territorial consequences in Iran, but if a judgment debtor does not have assets in Iran, Iranian judgments may still be enforced against it in other countries where the judgment creditor can identify its assets. Where there is a mutual judicial assistance treaty between Iran and a country, such as China, Turkey and UAE, the enforcement procedure is simplified. Though there is no such treaty with most European countries, Iranian judgements may still be enforceable in those jurisdictions under the laws of the relevant jurisdiction on recognition and enforcement of foreign judgments. Therefore, it is important for foreign companies to make an informed and serious assessment before choosing to not appear to defend a civil suit in Iran.

Frequent unenforceability of exclusive foreign jurisdiction clauses

Iranian courts may disregard the parties’ contractual agreement on exclusive foreign court jurisdiction as enforceable. This may arise where a contract party, regardless of the choice of exclusive foreign court jurisdiction, files a claim before a competent Iranian court. In such case, Iranian courts may in their discretion decline to recognise exclusive foreign court jurisdiction and accept the claim. This would be on the basis that Iranian law provides, as a mandatory rule which parties cannot limit by contract, that courts have general jurisdiction to hear disputes.

Therefore, generally speaking, a dispute could appear before an Iranian court if the contract was silent on the dispute resolution forum, or if there was a choice of exclusive foreign court jurisdiction but a party nevertheless filed a claim in Iran and the Iranian court chose not to accept this choice. This could present a risk in interpretation of agreements choosing foreign court jurisdiction including shareholders agreements, joint venture agreements and distribution agreements.

Arbitration may be the answer to this risk. Iranian courts are required, subject to some narrow exceptions, to recognise a choice of arbitration (whether domestic or abroad) and must dismiss a claim brought before them if there is a valid arbitration agreement.

General absence of statutory time limits for civil claims

There have been cases where a foreign company defendant assumed that as the claimed contract breach occurred over ten years ago, the claim must have become time barred and therefore unable to be brought in Iran. This can arise in connection with long-concluded distributorship or franchise arrangements. However, as a general rule subject to limited exceptions, there is no statute of limitation for civil claims in Iran. This is because statutory limitations are viewed as contrary to Sharia.

The absence of statutory limitations may also lead to evidentiary difficulties because some companies do not keep archives of that duration, and lack of documentary evidence may affect their claim or defence. To overcome this, foreign companies may need to keep an archive of documents related to Iran transactions, or better yet sign a bilateral termination agreement with their counterparty stipulating that the contract has been performed satisfactorily.

Weak discovery rules

There is no general discovery mechanism available under the Civil Procedure Code, which may prevent litigants from obtaining crucial information under the other party’s control. This can be particularly an issue in litigation where there are significant and complex underlying facts held by others, for example in construction disputes. Only in limited cases where the documents or information relating to the claim are held by governmental organisations, banks or municipalities do the parties have the opportunity to request a court to order the relevant governmental organisation, bank or municipality to provide the court with the relevant information or document.

Accordingly, it is important to take special care to maintain a detailed archive of documents and information relating to dealings in Iran which may in the future become the subject of litigation. This includes original signed documents and significant correspondence.

Unavailability of summary proceedings

Under the Civil Procedure Code, there is no summary proceeding available for judgment on indisputable claims or dismissal of vexatious ones. Therefore, even an indisputable claim or a vexatious one, for example an obvious trademark infringement or a frivolous product liability claim, must follow the same procedure that contested, bona fide claims follow. This may result in a longer period for resolution of the dispute compared to what may be expected in other jurisdictions.

Unavailability of a complete public database of judgments

Iran is a civil law jurisdiction and court precedents are not binding, except in the limited circumstances where the Supreme Court has issued a “unifying” judgment to resolve differences in interpretation among lower courts. As a consequence, judgments are mostly unpublished, though there are compendiums of selected decisions. Accordingly, the actual application of the law and interpretation adopted by the courts in practice becomes difficult to predict.

Wide reliance by courts on experts

Under the Civil Procedure Code, the court may, on its own initiative or at the request of either party, seek the opinion of judiciary experts, who are certified by the judiciary in various specialist areas. There is no concept of each party appointing its own experts, but if the parties mutually agree on an expert, the court will refer the case to the agreed expert. Absent an agreement, the court will appoint an expert from amongst the judiciary experts specialised in the subject. The court is not bound to follow the opinion of the expert and has discretion to set aside the expert opinion if it deems that the opinion is not in accordance with circumstances of the case.

In practice, courts rely widely on judiciary experts in complicated matters. This may sometimes lead to cases where an ostensible question of law of a complicated nature, for example validity of an LC, a complex merger arrangement or infringement of a trademark, is seen instead as a technical matter and referred to experts.

This risk is particularly acute in complicated contractual arrangements such as construction, projects or complex financings. The potential risks may be avoided by agreeing to arbitration in such cases, so that the parties have the possibility to agree on arbitrators with specialised knowledge and to have party-appointed experts.

Potentially large judicial bonds required from foreign claimants

Under the Civil Procedure Code, where a foreign claimant files a claim against an Iranian defendant before Iranian courts, the Iranian defendant may ask the court to require the claimant to post a judicial bond in the form of a cash deposit to cover potential damage to the defendant should the defendant prevail. Unless an exception applies, the law requires such request to be granted and the Courts have discretion to determine the amount of any such bond. The amount is usually determined based on the financial position of the claimant. In our experience, it has ranged from 10 to 75 per cent of the claim amount. This can be a significant amount in high-value litigation, for example, in a construction dispute.

It is possible that the posting of a judicial bond is waived in bilateral judicial assistance treaties, as is the case in the Iran-China treaty.

An agreement to refer disputes to arbitration can overcome this potential hurdle.

Caveats regarding arbitration

We have referred to arbitration as a possible solution to some of the hazards above, but there are two important arbitration-related caveats to bear in mind in Iran, particularly where there is a possibility that a final award would be enforced in Iran.

The first is that under Iranian law, an Iranian party to an arbitration agreement with a foreign person may not, in advance of a dispute arising, commit to refer potential disputes to arbitration by arbitrators with the same nationality as the foreign person. There have been cases where the courts in Iran interpreted this rule broadly to include agreeing on arbitration institutions in the country of nationality of the foreign person.

The second is that under the Constitution of Iran, referral of disputes concerning public and sovereign assets to arbitration requires approval of the Council of Ministers and approval of Parliament in cases where the other party to the arbitration agreement is a foreign person. These requirements have sometimes been interpreted broadly to include any dispute involving governmental entities. In addition, as the law is silent on when this approval is required, there are some controversies in practice. It is advisable that these approvals are obtained before the parties enter into an agreement with an arbitration clause.