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UK-Iran £600m Contract Dispute (Arbitration)
Thread to discuss the UK-Iran dispute over a Shah-era military contract, and the resulting arbitration/court cases. This case has been in the news a lot so I thought I would make a thread to summarise and clarify the issue.  

The dispute is between International Military Services (a now defunct UK company wholly owned by the UK Ministry of Defence, "IMS") and the Iranian Military of Defence and Armed Services ("MODSAF"). In 1971, MODSAF signed a £600 million contract with IMS for 1,500 Chieftain tanks and various other armed vehicles. 

A few hundred tanks were delivered by 1979, but after the revolution IMS terminated the contract (and in fact subsequently delivered the remaining tanks/APCs to Saddam Hussein to use against Iran!). Iran under the Shah had paid for the contract in advance, thus sought to have its payment returned and instituted arbitration proceedings to that end. 

In 2001, the International Chamber of Commerce ("ICC") found in favour of Iran and declared that IMS had to pay MODSAF £140 million + interest (from 1984 to the date of payment - estimated to be around £380 million in total). Thus, later in 2001, Iran applied for this arbitral award to be enforced in the UK High Court. However, IMS appealed the sum owed to the Dutch Court of Appeal and applied to adjourn the UK proceedings until the Dutch appeal could be heard and concluded. Iran agreed to this on the condition that IMS transfer a sum of £382 million to a court-held escrow account as security, which it did in 2002 (the balance is now £500 million). 

In 2007, the Dutch court partially set aside the ICC award in favour of Iran by reducing the amount owed to MODSAF to £127.5 million (+ interest), but upheld the rest of the ICC award. In 2009, an appeal to the Dutch Supreme Court was rejected, concluding the Dutch proceedings and allowing the UK proceedings to continue. 

In 2008, however, MODSAF was added to EU sanctions lists in Regulation 423/2007. Thus, the UK Government claimed they are barred from paying the owed amount on the grounds that MODSAF is under EU sanctions. Iran agreed with this, but argued that the UK Court should enter judgment in its favour regardless and declare that the money held in escrow is for MODSAF's benefit. 

In addition, Iran sought a declaration from the British High Court that IMS was liable to pay the interest that accrued during the period that MODSAF was a sanctioned entity under EU law, which IMS rejected. IMS argued that it should not have to pay interest on the sum owed for the period under which IMS was under EU sanctions (i.e. from 2008 to the present) - this issue was the crux of the recent 2019 UK High Court case. 

Furthermore, Iran argued that since its Central Bank had been delisted (from EU sanctions), it could now apply for a licence for the payment to be made. The UK disputes this and the application for a licence has yet to ruled upon (by a separate body), thus the courts proceeded on the basis that sanctions still prevent payment.

In 2019 the British Court High Court ruled on this issue in the "MODSAF v IMS" [2019] EWHC case. I will quote a summary of the judgment and its significance from a legal blog before commenting on the current status of the dispute in light of the judgment. 

Quote: The main question for the court to consider at the May 2019 hearing was whether MODSAF was entitled to enforce the interest component of the [ICC] award in the 7071 claim against IMS during the time that MODSAF was and is subject to sanctions [2008-present]. IMS argued that MODSAF was not so entitled, because during the sanctions period, IMS has been prevented from making payments to MODSAF to discharge its liability under the awards. 

MODSAF’s position was that since the Central Bank of Iran (CBI) has been delisted as a sanctioned entity under Regulation 267, this provided a licensing route pursuant to which it could procure that IMS can make payment of the awards to the CBI. However, Phillips J was not asked to determine whether this licensing route was open to MODSAF in the May 2019 hearing. 

Ultimately, Phillips J found that Article 38 of Regulation 267 precluded the enforcement of the interest element of the award of the 7071 claim, insofar as it concerns the period during which MODSAF was a sanctioned entity.

In simpler terms, the High Court held that IMS does not have to pay interest on the main sum that accrued from 2008-present (the period that MODSAF remains under EU sanctions): "I conclude that Article 38 of Regulation 267 precludes MODSAF from enforcing the interest component of the [ICC] 7071 Award in respect of the sanctions period" (para.83). 

The next step is that "the total quantum due in respect of the Awards should be recalculated... following which the amount of security which may now be returned to IMS may readily be ascertained" (para. 85). In other words, IMS and MODSAF must now use this judgment (which ruled on the issue of the interest payable - holding it is not owed by IMS) to determine the total sum owed to MODSAF and, thus, how much of the £500 million put into escrow by IMS should be returned to it. 

Recent comments from the UK have suggested that there is still an ongoing dispute over the amount owed to MODSAF (from the Iranian side it seems) but that the UK will make the payment once this dispute is resolved. If these negotiations are not fruitful, Iran could potentially appeal this ruling to the UK Supreme Court, but I think Iran is not likely to have success with that (from a legal point of view).

It has been said that the current disagreement is about £20-30 million of difference in opinion. The UK has spent more than £40 million on legal fees fighting this case to date, thus I think an agreement on the amount owed in light of this recent judgment is possible.

I hope this thread was informative and please let me know if I have made any mistakes. I will update this thread upon notice of further developments. 
there were news i read few days ago that the Uk will pay £400million to Iran related to this dispute, is it true ?
(09-29-2019, 01:41 AM)RedDevil Wrote: there were news i read few days ago that the Uk will pay £400million to Iran related to this dispute, is it true ?
That is the latest news (kind of), yes. As I wrote at the end of the first point, there are now Iran-UK negotiations about the final sum to be paid and it is reported that the disagreement is over around £20m (the range is said to be £380-400 million).

This could be delayed by a legal appeal by Iran if there is no agreement, or by a disagreement over the method of payment itself. Iran argues that since its Central Bank has been delisted from EU sanctions it can apply for a licence for the payment to be made to that bank by the UK, but (i) the UK disagrees and (ii) the licence application has been made but it hasn't been ruled upon yet.

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