International Court of Justice allows Iran claim to proceed to the merits phase but upholds jurisdictional objection on sovereign immunity

On 13 February 2019, the International Court of Justice dismissed one of the United States' jurisdictional objections to a claim by Iran, upheld another and deferred a final jurisdictional objection to the merits phase in the case concerning Certain Iranian Assets (Iran v United States). The substantive claim, brought by Iran against the United States, relates to legislative and executive acts by the latter permitting enforcement against Iranian assets.

Iran filed its application instituting proceedings on 14 June 2016 under the 1955 Treaty of Amity, Economic Relations, and Consular Rights between the United States of America and Iran (a "Party" or the "Parties") (the "Treaty"), from which the United States has since indicated it will withdraw. This is one of two cases currently pending before the Court between Iran and the United States.

The Judgment on Preliminary Objections (the "Judgment") is available on the Court's website, and can be accessed here. Our previous post concerning Iran's application instituting proceedings in the same case is available here.

Background

Between 2002 and 2012, the United States adopted measures to allow enforcement and execution against the assets of the Government of Iran, including those of Bank Markazi—the Central Bank of Iran—to satisfy default judgments against Iran. In 2016, the Supreme Court of the United States in Bank Markazi v Peterson and others upheld the provision in the Iran Threat Reduction and Syria Human Rights Act that facilitated such execution of assets.

Further detail on the background of the case is available here.

Judgment

The United States made a number of objections on grounds of jurisdiction and admissibility, which are set out in further detail below.

Jurisdictional Objections

First, the United States argued that the measures adopted fell outside the scope of the Treaty (the "First Jurisdictional Objection"). The United States pointed to Article XX (1), which provides that:

"The present Treaty shall not preclude the application of measures…

(c) regulating the production of or traffic in arms…; and

(d) … necessary to protect [a Party's] essential security interests".

The Court dismissed the United States' objection, and upheld its prior interpretation of the same Treaty in the Oil Platforms case, concluding that this provision did not restrict the jurisdiction of the Court but was confined to affording the Parties a possible defence on the merits.

Second, the United States argued that the Treaty did not concern the immunity of the Parties or any of their State-owned entities (the "Second Jurisdictional Objection"). To support its argument, it noted that the articles in the Treaty upon which Iran relied did not explicitly mention immunity from jurisdiction or enforcement. The United States also made reference to the context of the Treaty and its object and purpose, which it considered to concern only commercial and consular relations between the Parties.

Although Iran did not dispute the fact that the Treaty contained no clause referring explicitly to immunity, it argued that some of the clauses referring to "international law" incorporated the law on immunities. Iran also argued that a second category of clauses, which did not make reference to international law, "necessarily entail[ed]" consideration of the law on State immunity under international law.

The Court upheld the United States' objection, and found that none of the clauses invoked by Iran in either "category" warranted an examination of the immunity to which Iran may have been entitled to under general international law. In particular, the Court distinguished between protections for nationals and companies engaging in economic activities and the "protections enjoyed by State entities by virtue of the principle of sovereign equality of States".

Third, the United States also objected to Iran's claims under certain provisions that referred to protections owed to a "company" insofar as those claims related to actions by the Government of Iran or to a governmental entity, such as Bank Markazi (the "Third Jurisdictional Objection"). In particular, the United States contended that Bank Markazi is not a "company" under the Treaty and that it carries out "exclusively sovereign functions", as opposed to actions of a commercial nature.

After addressing the arguments made by both parties, the Court found that it "[did] not have before it all the facts necessary to determine whether Bank Markazi was carrying out activities… which permit characterisation as a 'company' within the meaning of the Treaty". Therefore, it held that the Third Jurisdictional Objection did not possess an "exclusively preliminary character".

Nonetheless, the Court made important statements in anticipation of a more thorough examination of the facts. It considered that an entity that carried out "exclusively sovereign activities" could not be considered a "company" within the meaning of the Treaty. It also stated, however, that the fact that Bank Markazi is wholly owned by and closely aligned to the Iranian State does not, of itself, exclude it from falling under the definition of a "company".

Objections to Admissibility

The United States filed two main objections to admissibility:

1. first, that Iran's reliance on the Treaty to establish jurisdiction was an abuse of process, in light of the breakdown of the relationship between the Parties; and
2. second, that Iran had "unclean hands", claiming that Iran has allegedly "sponsored and supported international terrorism" and allegedly taken "destabilizing actions" in contravention of various other obligations.

The Court rejected both objections. It reiterated its previous position that there has to be "clear evidence" that the applicant State's conduct amounted to an abuse of process. Given that the Treaty was in force at the time of the application, the Court found no abuse of process and dismissed this objection.

In relation to the "clean hands" argument, the Court did not take a position on the facts but noted that even if the United States' allegations were correct, they would not be sufficient to found an objection to admissibility. However, it left the door open for the United States to make an argument on the merits regarding Iran's alleged activities.

Comment

In our previous post, we noted that the Court's jurisdiction, if upheld, would be limited to matters arising under the Treaty, and in particular, to its "interpretation or application". We also noted that the Court may not have jurisdiction over wider questions of alleged violations of international law that do not fall to be considered within the context of the Treaty.

The Judgment, therefore, unsurprisingly carves out Iran's claims in relation to sovereign immunity on the basis that they do not fall within the scope of the Treaty. Although a position by the Court on the customary international law applicable to immunities would have shed light on the parameters of the law, the Court was limited in its jurisdiction by virtue of the terms of the Treaty. Nonetheless, the Court is yet to determine whether the actions by the United States violated the specific protections in the Treaty, including provisions on discrimination, "most constant protection and security", expropriation and freedom of commerce.

The Judgment comes at a politically sensitive time for both countries, following the deterioration in relations between Iran and the United States, to which the Court itself refers in the Judgment. The Court is also concurrently considering a challenge brought by Iran relating to the decision by the President of the United States to re-impose sanctions on Iran in a separate pending case under the same Treaty. In response, the United States Department of State indicated in October 2018 that it will withdraw from the Treaty of Amity. It remains to be seen when this will formally take effect, and what impact, if any, it may have on these proceedings.

For further information please contact Andrew Cannon, Partner, or your usual Herbert Smith Freehills contact.