- Hoge Raad
- International Military Services Ltd vs Islamic Republic of Iran
STATE CONTRACTS - LONG-TERM CONTRACTS - MILITARY EQUIPMENT SUPPLY CONTRACT - BETWEEN AN ENGLISH COMPANY AND THE IRANIAN MINISTRY OF DEFENCE - REFERENCE TO UNIDROIT PRINCIPLES TO INTERPRET CONTRACT CLAUSE
TERMINATION - CONTRACTS TO BE PERFORMED OVER A PERIOD OF TIME - TERMINATION NOT AFFECTING PARTS ALREADY PERFORMED (ARTICLE 7.3.6 (2) [ART. 7.3.7 OF THE 2010 EDITION] UNIDROIT PRINCIPLES)
International Military Services Ltd. (IMS), an English company, entered into two contracts with the Ministry of Defence and Support for Armed Forces of the Islamic Republic of Iran (Modsaf) and the Islamic Republic of Iran, for the delivery, in several stages, of tanks and other military equipment. The contracts provided that in case of early termination, the seller should submit a “termination account” setting out the balance of “cost” incurred by it and the payments already made by the buyer. The contracts were subsequently terminated by the parties and the seller submitted the required termination accounts in which with respect to the goods already delivered it set off their market price and not only their cost against the payments already made by the buyer. The buyer objected that according to the contract, the seller should have set off only the cost of the goods. The parties commenced an arbitration proceeding under the ICC Arbitration Rules in accordance with the arbitration agreement contained in the contracts. The Arbitral Tribunal decided in favour of the seller. The Tribunal held that while it was true that the contractual termination clause related to "cost" only, it would be commercially unreasonable to consider that from the moment when the contract was terminated, the buyer would have to pay no more than cost for the goods it got. The Tribunal could not see any reasonable rationale which would support such an interpretation of the contract, and pointed out that the solution it adopted was consistent with the modern trend expressed, among other provisions, by the UNIDROIT Principles of International Commercial Contracts (Art. 7.3.6 para. 2) [Art. 7.3.7 of the 2010 edition], which considers that in case of termination of a contract to be performed over a period of time, the parts already performed should not be affected by the termination. Otherwise, the Arbitral Tribunal stated, it would be extraordinarily harsh to rule that on termination the parts already performed should be paid for only at cost.
The Arbitral Award was challenged before the Supreme Court of the Netherlands basically on procedural grounds but was confirmed by the Supreme Court.