Iran has been subject to a web of UN, US, and EU sanctions since the 1970s, but a significant part of those sanctions are now poised to be relaxed following a historical deal reached between Iran, the EU and the “P5+1” (the United Kingdom, France, Germany, the US, China, and Russia) in July this year. Foreign investment by investors from these and associated jurisdictions may be politically sensitive, particularly if they involve key Iranian industries. The need for protections for foreign investors against illegitimate interference from the Iranian state / state owned entities may be of paramount importance.

The purpose of this article is to give a high level primer for potential investors following the relaxation of sanctions and, in particular, to provide a broad overview of:<

  • changes expected to be made regarding the economic sanctions framework against Iran;
  • typical concerns investors may have in making foreign direct investment;
  • general protections and guarantees owed by host states to foreign investors under international law;
  • protections and guarantees owed by Iran directly to foreign investors and the interplay between these obligations and its own local arbitration laws and constitution; and
  • factors that investors may consider in structuring future investments to maximise treaty protections in a post sanctions Iran.
  • Iran as a destination for foreign direct investment

For investors of global calibre, a key investment consideration is structuring investments to maximise investment protection. Iran has a highly developed legal system and in recent years has been active in promoting foreign investment protection within the confines of the sanctions regime. Iran adopted the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards in 2001, entered into numerous bilateral and multilateral investment treaties (IIAs) between 1995 and 2007 and passed local legislation regarding arbitration and investment protection in 2002.

Iran has played a historically important role in the development of investor-state dispute settlement (ISDS) in general, both from the perspective of an instigator of change (due to its government’s political actions against foreign investors)[1] and as a participant in international arbitrations which have had a lasting impact on the development of the international framework of investment protection (particularly decisions of the Iran-US Claims Tribunal).[2]

The upcoming changes to the economic sanctions framework against Iran

On 14 July 2015, Iran and the P5+1 reached a deal for Iran to step down its nuclear programme in exchange for the comprehensive lifting of all nuclear-related UN Security Council (UNSC) sanctions and multilateral and EU/US national sanctions. This agreement was formalised in the Joint Comprehensive Plan of Action (JCPOA) under which relevant US and EU sanctions will be withdrawn in a phased manner conditional on certain verifications by the International Atomic Energy Agency (IAEA) and Iranian actions. UNSC has already endorsed the JCPOA but it may take some months before the first stage of EU and US sanctions relief is implemented.

There are legislative and executive steps yet to occur in Iran and the US [3] with EU legislation expected to follow. Implementation under the JCPOA is expected to begin, at the earliest, in the first half of 2016.

Typical protections and guarantees owed to foreign investors

Iran presents particular risks for a foreign investor because of high levels of political, fiscal and economic uncertainty. Faced with this, investors seek reliable, neutral and effective legal protection for the duration of their investments using all available tools, including under domestic law and, if possible, IIAs to which a host state is a party.

National courts are seldom suitable in such cases. Host states are understandably reluctant to submit to the courts of other jurisdictions whereas foreign investors worry about hometown advantage for the state and the risks regarding enforcement of any judgment against the state. International arbitration goes some way to address these concerns as both parties can be assured of:

  • a neutral venue of their choice;
  • procedural due process by adopting reputable arbitration rules and the presumed oversight by an arbitral institution; and
  • in due course, an internationally enforceable award recognised under one of the many international and regional conventions regarding arbitral awards.

Investors may negotiate a contractual right to arbitrate investment disputes or consent to arbitration may arise by way of IIAs between the host nation and the state of the investor. Although IIAs are concluded between states, a major innovation of such treaties is that an investor is permitted to enforce its rights under the investment treaty directly against a host state.

In order to rely on the substantive protections of an IIA, a foreign investor must typically qualify as a defined “investor” with a qualifying “investment”, amongst other scope of application requirements. Common categories of substantive IIA protections and guarantees owed by host states to foreign investors include obligations:

  • not unlawfully to expropriate (or nationalise) property without the prompt payment of compensation;
  • not to treat foreign investors less favourably than nationals;
  • not to treat foreign investors differently, based on state of origin;
  • to provide fair and equitable treatment to all investments;
  • to provide protection and security of the investment; and
  • not to adopt discriminatory measures

A checklist for foreign investors

Iran now has a number of investment treaties with capital exporting states. Between 1995 and 2007, Iran entered into approximately 50 Bilateral Investment Treaties (BITs) with both developed and developing countries. In addition to BITs, recourse through ISDS may also be offered by lesser known regional multilateral investment treaties (MITs).[4]

Potential investors should consider how they structure investments in order to qualify for protection under existing IIAs. Tailored advice should be sought for each individual investment in order to obtain optimal protection. The following will be relevant:

  • Is the investor (or can it be made to be) a qualifying investor? The Iranian Model BIT 2001 largely reflects international norms in relation to the definitions of foreign corporate and natural persons qualifying as foreign investors. Notably, however, certain Iranian IIAs,[5] in addition to covering legal entities established under the laws of the contracting state party, extend the definition of qualifying investor to include any company, provided that the company is controlled by the natural or legal investor of the investor state nationality. In other words, a foreign investor can structure an investment vehicle in a third country and enjoy IIA protection. These provisions will be of great interest to investors from states that have no IIA protection with Iran at present because they may be able to structure investments through companies registered in third party states that do enjoy IIA protection.
  • Is there a qualifying Investment? The Iranian Model BIT 2001 applies to investments approved by the Organisation for Investment, Economic and Technical Assistance of Iran (OIETAI). The provision means that a foreign investor in Iran must register its investment with OIETAI and receive a certificate of admission (or an investment licence) containing the conditions under which the investment is permitted to be made in Iran in order to qualify for investment protection. The criteria for the approval and admission of such investments are set out in the Foreign Investment Promotion and Protection Act (FIPPA)[6] which was passed by Iran in 2002, its first new foreign direct investment legislation for almost 50 years. The Rouhani government recently streamlined OIETAI registration. [7] In practice, there are often ways to circumvent registration requirements if necessary in order to obtain investment protection.
  • Does the relevant treaty protect the investor against material risk? The substantive protections owed by Iran will vary depending on the agreed text of each IIA. The analysis of each treaty’s terms will form part of any investor’s consideration of how to structure an inbound investment and the types of claims it may bring in the future. Iranian BITs include standard substantive investment protections including, of particular importance for investors given the political climate in Iran, obligations to pay compensation in case of direct or indirect government expropriation of investments. Another common feature is the guarantee of transferability and convertibility of currency at an official exchange rate that must be effected without delay, which is important given the fiscal volatility in Iran in recent years (and the potential reintroduction of banking isolation under ‘snap-back’ provisions).[8] The Iranian Model BIT also authorises investors to transfer investment returns abroad and provides a right to free and unrestricted transfer of payments by an investor from compensation awarded to that investor under BIT expropriation and loss provisions. FIPPA also mirrors many of the compensation and monetary exchange provisions in the BITs.[9]
  • Does the investor have the right to refer disputes to international arbitration? FIPPA recognises arbitration referral under a BIT, stipulating that foreign investment disputes should be referred to the national courts unless “the Law ratifying the [BIT] with the [foreign investor’s government] provides another method of settlement”[10].The Iranian constitution, however, requires that the Iranian parliament approve the referral to arbitration of government disputes with foreign investors[11]. From the perspective of an investor claimant, tribunals have consistently held that the constitutional requirement for consent to arbitrate disputes applies solely to the state and not a foreign investor. In other words, the Iranian government could not rely on the provisions of the constitution to justify its breach of its international obligation under an IIA to provide a foreign investor with access to arbitration [12]. As Iranian IIAs condition the application of substantive investment protection standards on registration and approval of the investment by OIETAI, the investor must have obtained an investment licence to benefit from access to international arbitration under any IIA.

Additional considerations for investors seeking to maximise investment protection

Any investor planning for future investment in Iran should consider at an early stage the structuring of investment vehicles to take full advantage of the IIA arrangements most favourable to its specific investment. A selection of considerations when evaluating an optimal BIT include:

  • Non-intervention of national courts and antiarbitration injunction: A host government or state entity may seek to prevent an investor from submitting a dispute to international arbitration by obtaining an anti-suit injunction from the national courts to cease the arbitration proceedings. The Iranian Model BIT provides that “national courts shall not have jurisdiction over any dispute referred to arbitration”. A number of Iranian BITs, including those of China, Turkey and Austria, expressly include dispute resolution provisions that prohibit local court intervention in arbitration proceedings.
  • Waiver of sovereign immunity: An IIA may contain a clause stipulating that the host contracting state should not rely on sovereign immunity as a defence to a claim brought through arbitration. The Iranian Model BIT does not contain a waiver of sovereign immunity but in some Iranian BITs, such as with Switzerland, there is an express waiver of immunity from suit in relation to international arbitration.
  • The availability of specific fora for dispute resolution: Some investors may prefer to refer to arbitration under specific rules. For example, some Iranian BITs[13] refer to the International Centre for Settlement of Investment Disputes (ICSID) arbitration as an option for the settlement of investment disputes (in the event that Iran accedes to the ICSID Convention on the Settlement of Investment Disputes between States and Nationals of Other States).

These considerations should be analysed in close conjunction with the most favoured nation clause in a relevant IIA. An increased appetite for investment in Iran will likely see the renegotiation or implementation of new treaty obligations (a desire, for instance, expressed by the latest German trade delegation to Iran in July 2015).[14]

As existing sanctions are rolled back, new foreign investors may be able to obtain significant protection for their investments into Iran if such investments are structured in accordance with specialist advice. Such advice should always be obtained before investments are made. If successful, the investor can be assured that it will have recourse against illegitimate state action in relation to the investment and a neutral venue to hear the investor’s claim.