Data

Date:: 05-05-1997
Country:: Arbitral Award
Number:: 7365/FMS
Court:: ICC International Court of Arbitration, Paris 7365/FMS
Parties:: Ministry of Defense and Support for the Armed Forces of the Islamic Republic of Iran v Cubic Defense Systems, Inc.

Keywords

STATE CONTRACTS - CONTRACT FOR THE SUPPLY AND INSTALLATION OF MILITARY EQUIPMENT - BETWEEN A UNITED STATES CORPORATION AND THE IRANIAN AIR FORCE - PARTIES' CHOICE OF DOMESTIC LAW (IRANIAN LAW) - AGREEMENT BY PARTIES AS TO COMPLEMENTARY AND SUPPLEMENTARY APPLICATION OF THE GENERAL PRINCIPLES OF INTERNATIONAL LAW AND TRADE USAGES - ARBITRAL TRIBUNAL REFERENCE TO UNIDROIT PRINCIPLES TO DETERMINE CONTENT OF SUCH GENERAL PRINCIPLES

HARDSHIP - RIGHT TO DEMAND TERMINATION OR ADAPTATION OF CONTRACT (ART. 6.2.3(4) UNIDROIT PRINCIPLES)

IMPLIED OBLIGATIONS - GOOD FAITH AND FAIR DEALING (ARTS. 5.1 AND 5.2 [ARTS. 5.1.1 AND 5.1.2 OF THE 2004 EDITION] UNIDROIT PRINCIPLES)

TERMINATION - RIGHT TO RESTITUTION (ART. 7.3.6 UNIDROIT PRINCIPLES)

INTEREST - RIGHT TO INTEREST INDEPENDENT OF A FORMAL REQUEST BY AGGRIEVED PARTY (ART. 7.4.9 UNIDROIT PRINCIPLES) - DOUBTFUL WHETHER THIS PROVISION CORRESPONDS TO GENERALLY ACCEPTED PRINCIPLES OF INTERNATIONAL LAW

Abstract

The case concerned two contracts for the sale and the installation of sophisticated military equipment, entered into in 1977 between a United States corporation (Cubic) and the Iranian Air Force (Iran). The contracts were duly performed until the advent of the Islamic Revolution in early 1979. The parties entered into a series of negotiations but were unable to reach an agreement as to how to proceed. Iran claimed reimbursement of payments made to Cubic in addition to damages, whereas Cubic, objecting that it was Iran which, by not paying the remainder of the price, had breached its contractual obligations, presented a counterclaim for damages. The contracts contained a choice of law clause designating the law of Iran, but parties eventually agreed to the complementary and supplementary application of general principles of international law.

Regarding the issue of the substantive applicable law to the dispute, the Arbitral Tribunal held that "[s]ince both Parties eventually agreed to the complementary and supplementary application of general principles of international law and trade usages, and based on Article 13(5) of the ICC Rules, the Tribunal shall, to the extent necessary, take into account such principles and usages as well. As to the contents of such rules, the Tribunal shall be guided by the Principles of International Commercial Contracts, published in 1994 by the UNIDROIT Institute, Rome."

Thus, in finding that, as a result of the chaotic events preceding and following the Islamic Revolution in February 1979, each party was entitled to unilaterally request termination of the contracts or adaptation of their terms, the Arbitral Tribunal expressly referred to Article 6.2.3(4) of the UNIDROIT Principles, pointing out that "[...] from the covenant of good faith and fair dealing which is implied in each contract follows that in a case in which the circumstances to a contract undergo [...] fundamental changes in an unforeseeable way, a party is precluded from invoking the binding effect of the contract [...] In such restrictive and narrow form this concept [of hardship or clausula rebus sic stantibus] has been incorporated into so many legal systems that it is widely regarded as a general principle of law. As such, it would be applicable in the instant arbitration even if it did not form part of the Iranian law."

Furthermore, in order to justify the application by analogy of a "Termination for Convenience Clause" contained in the contracts, to the termination of the contract as a result of changed circumstances, the Arbitral Tribunal applied Articles 5.1 and 5.2 [Arts. 5.1.1 and 5.1.2 of the 2004 edition] of the UNIDROIT Principles and the "widely accepted principles therein set forth regarding implied obligations."

In dealing with the consequences of the termination of the contracts, the Arbitral Tribunal held that "[t]he obvious and most important effect of a contract termination, be it for the convenience of one party or for other reasons, is that 'either party may claim restitution of whatever it has supplied, provided that such party concurrently makes restitution of whatever it has received", quoting verbatim Article 7.3.6 of the UNIDROIT Principles.

However, as regards the date from which interest is to be awarded, the Arbitral Tribunal, while admitting that "[t]here is a tendency in international commercial law to award interest from the time when the payment has become due without any need for the aggrieved party to give notice of the default (UNIDROIT Principles Article 7.4.9)", stressed that the Iran-US Claims Tribunal had also adopted a different solution, and concluded that it seems doubtful whether it may be considered to form part of generally accepted principles of international law. The Arbitral Tribunal concluded that "[e]ven if a generally accepted principle of international law existed in this respect, the Tribunal would only be authorized to apply it as a complementary and supplementary rule, not as a rule in clear contradiction to an unambiguous provision of the Iranian law chosen by the Parties."

Fulltext

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Source

Source:
- Uniform Law Review / Revue de droit uniforme, 1999, 796

Commented on by:
- Prof. M.J. Bonell, Unidroit Principles: a significant recognition by a United States District Court, Unif. L. Rev. / Rev. dr. unif., 1999, 651

Abstract published in English and French:
- Uniform Law Review / Revue de droit uniforme, 1999, 1014 - 1015}}