Implications for Investor-State Disputes Arising From the International Court of Justice’s Judgment in Certain Iranian Assets

Background

The Islamic Republic of Iran (Iran) initiated the case against the United States of America (United States or U.S.) on June 14, 2016, pursuant to the Treaty of Amity, Economic Relations, and Consular Rights, which was signed on August 15, 1955, and entered into force on June 16, 1957 (the Treaty of Amity). Iran alleged violations of the Treaty of Amity arising from various judicial, legislative, and executive measures imposed by the U.S. on Iran on the basis that Iran was a “state sponsor of terrorism.” These measures included the enactment of the Terrorism Risk Insurance Act (TRIA); amendments to the Foreign and Sovereign Immunities Act (FSIA); the U.S. President’s Executive Order 13599; and the U.S. Supreme Court’s decision in Bank Markazi v Peterson,³ which applied U.S. federal laws relating to anti-terrorism to permit the blocking and attachment of numerous Iranian assets (both state- and non-state-owned). Subsequently, the U.S. sent a diplomatic note giving one year’s notice to terminate the Treaty of Amity, and it ceased to have effect as of October 3, 2019.

Objections to Jurisdiction and Admissibility

On February 13, 2019, the ICJ delivered its judgment on preliminary objections raised by the United States relating to the ICJ’s jurisdiction and admissibility of the case⁴. The Court rejected three of the five preliminary objections raised by the United States⁵ and upheld one of them, finding that the Court did not have jurisdiction under the Treaty of Amity over Iran’s claims based on the alleged failure to accord sovereign immunity⁶.

The final preliminary objection raised by the United States, relating to the characterisation of Iran’s Central Bank, Bank Markazi, bears highlighting. The U.S. had claimed, in this respect, that Bank Markazi was not a “company” for the purposes of the Treaty of Amity, meaning that the rights and protections guaranteed by the Treaty of Amity were inapplicable to Bank Markazi⁷. On this issue, the Court opined that “an entity carrying out exclusive sovereign activities, linked to the sovereign functions of the State, cannot be characterized as a ‘company’ within the meaning of the Treaty of Amity”⁸  though the Court warned that there was “nothing to preclude […] a single entity from engaging both in activities of a commercial nature […] and in sovereign activities.”⁹  The Court held that whether Bank Markazi could be characterized as a “company” would depend on “whether Iran had demonstrated the existence of other activities” (i.e., commercial activities).¹⁰  In the Preliminary Objections Judgment, the Court held that it did not have the facts necessary to determine the activities carried out by Bank Markazi at the relevant time and thus deferred its ruling to the merits phase of the proceedings.¹¹  In revisiting this issue in the 2023 Judgment, the Court found on the facts that in reality, the only activities Iran relied on for its characterization of Bank Markazi as a “company” consisted of the purchase of a number of security entitlements in dematerialized bonds issued in the United States financial market and Bank Markazi’s subsequent management of proceeds deriving from those entitlements. These operations were, according to the Court, insufficient to “establish that Bank Markazi was engaged, at the relevant time, in activities of a commercial character.”¹²  Therefore, the Court considered that it did not have jurisdiction to consider claims relating to Bank Markazi. This had the effect of excluding claims worth approximately US$ 1.8 billion, constituting the bulk of Iran’s claims.

Separately, the United States subsequently raised an objection based on an alleged failure to exhaust local remedies. The Court dismissed this objection was dismissed by the Court on the basis that “in the circumstances of the present case, the [Iranian] companies in question had no reasonable possibility of successfully asserting their rights in United States court proceedings.”¹³

Defenses

The Court first addressed three defenses on the merits put forward by the United States.

First, the United States argued that Iran’s claims were inadmissible because Iran had come to the Court with “unclean hands”. The Court rejected this defense on the basis of an insufficient connection between the wrongful conduct imputed to Iran by the United States and Iran’s claims. Notably, the Court also opined that it had never held that the unclean hands doctrine was part of customary international law or a general principle of law; it also observed that the doctrine has found little success in international disputes.¹⁴

Second, the United States argued that the case brought by Iran constituted an abuse of rights as the measures underlying Iran’s case were unrelated to commerce and hence the Treaty of Amity was inapplicable. The Court dismissed the abuse of rights defense, finding that the United States had failed to demonstrate that Iran sought to exercise rights conferred on it by the Treaty of Amity for purposes other than those for which those rights were established or that Iran was doing so to the detriment of the United States.¹⁵

Third, the United States invoked Article XX, paragraphs 1(c) and (d) of the Treaty of Amity, which excluded from the scope of the Treaty of Amity measures that (i) regulated the production of or traffic in arms or (ii) were necessary to protect the United States’ essential security interests.¹⁶  The United States argued that its actions under Executive Order 13599 fell within these exceptions.¹⁷  The Court also rejected this defense, holding that only measures intended to regulate the production of or traffic in arms fell within the scope of Article XX, paragraph 1(c), and it “cannot be relied upon to justify measures taken by a party which might impair the rights afforded by the Treaty and which are solely intended to have an indirect effect on the production of and the traffic in arms ….”¹⁸  The Court also found that in any event, the United States had failed to convincingly demonstrate that Executive Order 13599 was a measure necessary to protect its essential security interests, noting that the reasons set out in Executive Order 13599 had made no mention of security considerations.¹⁹

Merits

The Court then addressed the merits of the case.

First, the Court dealt with Iran’s argument that the United States had failed to accord FET to Iranian nationals and companies and that the United States’ actions constituted unreasonable or discriminatory measures, contrary to Article III, paragraph 1, and Article IV, paragraph 1 of the Treaty of Amity. The Court rejected the U.S. submission that the FET clause in the Treaty of Amity afforded parties only the minimum standard of treatment under customary international law,²⁰ noting that “Article IV, paragraph 1, neither refers to the ‘customary minimum standard of treatment’, nor employs other formulations sometimes associated with that standard, such as ‘required by international law.’”²¹ The Court also found, and the parties agreed, that the obligation to afford FET “includes protection against a denial of justice”,²² but found no denial of justice in this case because the rights of Iranian companies to appear before U.S. courts had not been curtailed. The Court did not consider that the U.S.’s enactment, and U.S. courts’ application, of legislative provisions that removed defences based on separate legal personality was sufficient to constitute “a serious failure in the administration of justice amounting to a denial of justice.”²³

The Court also held that the protection against “unreasonable or discriminatory measures” was encompassed within the FET standard.²⁴ Because the Treaty of Amity used a disjunctive “or” in the term “unreasonable or discriminatory measures,” the Court found that the U.S.’s conduct should be assessed separately under these two different standards.²⁵ To this end, in ascertaining the “reasonableness” of a measure, the Court considered the following elements: (i) whether the measure was in pursuit of a legitimate public purpose;²⁶ (ii) whether there was a relation between the purpose pursued and the measure adopted (i.e., a relation between means and ends);²⁷ and (iii) whether the adverse impact of the measure would be “manifestly excessive” in relation to the purpose pursued.²⁸ Applying this test to the facts at hand, the Court found that the United States had, through its various measures taken under the TRIA and FSIA, unjustifiably disregarded and set aside the legal personality of Iranian companies in relation to judgments rendered in cases in which the companies could neither participate nor had any factual involvement, and thus such measures were unreasonable in violation of Article IV, paragraph 1.²⁹  Having so held, the Court did not consider it necessary to consider if the measures were also discriminatory.³⁰

Second, the Court considered Iran’s argument that as a result of the measures adopted by the United States, the properties of Iranian companies were blocked, seized, or disposed of in violation of Article IV, paragraph 2 of the Treaty of Amity. With respect to this argument, the Court first noted that Article IV, paragraph 2 sets out two distinct rules: (i) constant protection and security to the property and interests in property and (ii) protections against taking or expropriation.³¹

As regards expropriation, the Court opined that a judicial decision ordering the attachment and execution of property would not “per se constitute a taking or expropriation of that property.” Instead, a “specific element of illegality related to that decision is required” to turn the decision into a compensable expropriation.³² In the present case, the Court referred to its earlier finding that the measures the United States had taken under the TRIA and FSIA were unreasonable³³ and so held that they “amounted to takings without compensation of the property and interests in property of Iranian companies.”³⁴ The Court, however, declined to find that the United States’ Executive Order 13599 amounted to a violation, as (i) Iran had not identified the property or interests in property of Iranian companies that were specifically affected by Executive Order 13599; and (ii) in any event, Executive Order 13599 mainly concerned the blocking of Bank Markazi’s assets, which was outside the Court’s jurisdiction.³⁵

As for the claims related to “constant protection and security,” the Court noted that Iran did not assert a failure to protect the property of Iranian nationals and companies from physical harm but rather that such claims asserted a failure to ensure legal protections. In the Court’s view, Article IV, paragraph 2 was not designed to cover legal protections, as this was already provided for under Article IV, paragraph 1’s FET standard. Instead, it created an obligation to exercise due diligence in providing protection of property from physical harm.³⁶ Thus, the Court rejected Iran’s claims relating to constant protection and security.³⁷

Third, the Court accepted Iran’s argument that the U.S.’s measures amounted to a breach of the freedom of commerce and navigation in violation of Article X, paragraph 1 of the Treaty of Amity.³⁸ In particular, the Court found that Executive Order 13599, as well as measures under the TRIA and FSIA, constituted an “actual impediment to any financial transaction or operation to be conducted by Iran or Iranian financial institutions in the territory of the United States.”³⁹

Finally, the Court dismissed all other claims made by Iran, namely:

a) Alleged violations of Article III, paragraph 2 through measures that deprived Iranian companies of any “meaningful” access to the courts of the United States.⁴⁰ The Court found that the rights of Iranian companies to appear before U.S. courts had not been curtailed.⁴¹
b) Alleged violations of Article V, paragraph 1 through measures that allegedly deprived Iranian companies of the right to dispose of their property.⁴² The Court opined that expropriatory takings (as discussed above) “are not the type of measures that fall within the scope” of this provision and that there was therefore no violation of this provision.⁴³
c) Alleged violations of Article VII, paragraph 1 through measures that allegedly blocked, attached, and confiscated funds belonging to Iranian entities and Iran, amounting to restrictions on the making of payments and transfer of funds.⁴⁴ The Court dismissed this argument on the basis that Iran’s claims were “not related to exchange restrictions.”⁴⁵

Compensation, Costs and Opinions of The Court

Having found violations of the Treaty of Amity by the U.S., the Court ordered the U.S. to compensate Iran for the harms arising from the violations, but did not fix the amount of compensation due to Iran.⁴⁶ The Court also ordered each party to bear its own costs.⁴⁷

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¹ The full Judgment of the Court can be accessed here and the summary here.
² Elettronica Sicula S.p.A. (ELSI), Judgment, I.C.J. Reports 1989, p. 15.
³ Bank Markazi v. Peterson et al., 136 S. Ct. 1310, 194 L. Ed. 2d 463 (U.S. 2016).
⁴ Certain Iranian Assets (Islamic Republic of Iran v. United States of America), Preliminary Objections, Judgment, I.C.J. Reports 2019, p. 7 (Preliminary Objections Judgment).
⁵ Preliminary Objections Judgment, paras. 47, 115, 124.
⁶ Preliminary Objections Judgment, para. 80.
⁷ Preliminary Objections Judgment, para. 49. See also Judgment, para. 34.
⁸ Preliminary Objections Judgment, para. 91.
⁹ Preliminary Objections Judgment, para. 92.
¹⁰ Preliminary Objections Judgment, paras. 92-93.
¹¹ Preliminary Objections Judgment, para. 97.
¹² Judgment, paras. 49-50.
¹³ Judgment, para. 72.
¹⁴ Judgment, paras. 76-84.
¹⁵ Judgment, paras. 85-93.
¹⁶ Treaty of Amity, Article XX, paras. 1(c) and 1(d), reproduced in the Judgment, para. 96.
¹⁷ Judgment, paras. 94-109.
¹⁸ Judgment, para. 102.
¹⁹ Judgment, paras. 104-109.
²⁰ Judgment, para. 132.
²¹ Judgment, para. 141. The FET provision in the Treaty of Amity reads: “Each High Contracting Party shall at all times accord fair and equitable treatment to nationals and companies of the other High Contracting Party, and to their property and enterprises; shall refrain from applying unreasonable or discriminatory measures that would impair their legally acquired rights and interests; and shall assure that their lawful contractual rights are afforded effective means of enforcement, in conformity with the applicable laws.” Treaty of Amity, Article IV, para. 1.
²² Judgment, para. 142.
²³ Judgment, para. 143.
²⁴ Judgment, para. 144.
²⁵ Judgment, para. 145.
²⁶ Judgment, para. 147.
²⁷ Judgment, para. 148.
²⁸ Judgment, para. 149.
²⁹ Judgment, paras. 156-157, 159.
³⁰ Judgment, para. 158.
³¹ Judgment, para. 177. The Treaty of Amity, Article IV, para. 2 reads: “Property of nationals and companies of either High Contracting Party, including interests in property, shall receive the most constant protection and security within the territories of the other High Contracting Party, in no case less than that required by international law. Such property shall not be taken except for a public purpose, nor shall it be taken without the prompt payment of just compensation. Such compensation shall be in an effectively realizable form and shall represent the full equivalent of the property taken; and adequate provision shall have been made at or prior to the time of taking for the determination and payment thereof.”
³² Judgment, para. 184.
³³ Judgment, para. 186.
34 Judgment, para. 187.
³⁵ Judgment, para. 188.
³⁶ Judgment, para. 190.
³⁷ Judgment, paras. 191-192.
³⁸ Judgment, para. 210.
³⁹ Judgment, para. 209-223.
⁴⁰ Judgment, para. 161.
⁴¹ Judgment, paras. 167-168.
⁴² Judgment, para. 194.
⁴³ Judgment, paras. 193-201.
⁴⁴ Judgment, para. 203.
⁴⁵ Judgment, para. 208.
⁴⁶ Judgment, para. 231. The Court ordered the parties to agree on the amount of compensation due to Iran within 24 months of the Judgment, failing which the Court would, at either party’s request, determine the amount due.
⁴⁷ Judgment, para. 235.