Restrictions made to International Agreements by the Constitution of Iran

The constitution of the Islamic Republic of Iran makes several restrictions to International agreements or contracts, especially when an Iranian governmental party is involved. The historical mentality was that, the executive branch might not be vigilant in preserving national interests when foreigners are involved, therefore the legislative branch should be involved as the supervisor. However, these restrictions create serious obstacles for international trade and the day to day business of governing. Therefore, officials and jurists have tried to circumvent these restrictions by presenting a more lenient interpretation of the relevant principles of the constitutions. We will review some of these restrictions below:

  1. Principle 77 of the Constitution declares: “Treaties, transactions, contracts, and all international agreements must be ratified by the Islamic Consultative Assembly.” This principle seems to be very restrictive. Its reach is not restricted to conventions and would include simple trade agreements. However, The Guardian Council, as the authoritative source of interpretation of the Constitution, has declared in an interpretative opinion that the restrictions of Principle 77 shall apply only when both parties to an agreement are public entities. Therefore, a trade agreement between an Iranian governmental entity and a private foreign company shall not fall under Principle 77.
  2. Principle 80 declares: “: Receiving and issuing national or international loans or grants by the government must be ratified by the Islamic Consultative Assembly.” This principle is also quite restricting. It would require the ratification of the Parliament even for small loans and thus will create a serious obstacle for financing of infrastructure projects. Unlike, Principle 77, the Guardian Council has not restricted the reach of Principle 80 to loans given to or received from public entities. Once, an Iranian governmental entity is involved, the restrictions of Principle 80 shall apply. In practice, the Government of Iran tries to circumvent this restriction by receiving a blanket approval for foreign loans in yearly budget bills. However, the Guardian Council has opined that the approval by the Parliament should be on a case by case basis. Therefore, the legality of this practice is dubious. Another way for circumventing this restriction is that, the Government of Iran can assign the project to a private entity, and the loan could be received by that entity. However, international creditors might be more hesitant to issue a loan for a private entity.
  3. Principle 139 declares: “Resolving the litigation related to public and state property or referring it to arbitration is contingent, in each case, upon the approval of the Council of Ministers, and must be communicated to the Assembly. In cases where the party to the dispute is a foreigner and in important internal cases, it must also be approved by the Assembly. The law determines the important cases.” According to this article, it seems that in business agreements, involving an Iranian Governmental entity, and a foreign party, the arbitration clause should be approved by the Parliament. This requirement is quite restricting because the large corporations which are involved in International trade usually insist on inclusion of an Arbitral clause in order to mitigate their legal risks. Having the Parliament approve all arbitration clauses is honestly not feasible. Some jurists have tried to blunt the restriction of Principle 139 by emphasizing of the words “public and state property”. According to them, not all governmental contracts are agreements involving public or state property. Therefore, The government would not need to obtain the approval of the Parliament for an arbitration clause in a simple drilling contract with a foreign oil and gas company. Also note that, of the foreign party is not concerned about enforcing the arbitral award in Iran, it should not be worried about the approval of the Parliament because most international arbitral tribunals and most third party countries will disregard the restriction made by Principle 139 and will simply issue and enforce the arbitral award in accordance with the New York Convention. Of course the Iranian courts shall treat the arbitral clause as null and void if it is interpreted to be contrary to Principle 139.
  4. Another restriction concern international employment agreements or foreign employees working for the government of Iran. Principal 82 declares: “The government cannot employ foreign experts, except in urgent situations and with the approval of the Islamic Consultative Assembly.” This Principal is quite restricting because, it deprives the government from the opportunity to benefit from the expertise of foreign experts in high-tech and sensitive industries. The government can circumvent this restriction by signing and advisory agreement instead of an employment agreement of by assigning the project to a private party.

Submitted by Dr. Shahin Fadakar and Dr. Mahnaz Mehrinfar