Insolvency's Effect on Arbitration Agreements in Iranian Law with a Comparative Study in Common and Civil Law

Iranian legislator Article 481(2) of the Civil Procedure Code (2000) states that an arbitration agreement is set aside if one party dies or becomes incapacitated. Although this article doesn't explicitly mention insolvency, some Iranian lawyers believe that insolvency should be considered a form of incapacity, leading to the termination of the arbitration agreement. Some courts follow this approach, considering an award unenforceable if rendered after one party's insolvency. This essay, using a descriptive-analytical method and comparative approach, aims to answer the question: "What is the effect of insolvency on an arbitration agreement in Iranian law?"
Studies reveal that the insolvency effect on arbitration agreements has been a focus in international commercial arbitration and foreign legal systems. Before examining Iran's approach, it's beneficial to explore the perspectives of some developed countries' legal systems on this issue. This analysis helps assess the alignment of Iranian law with recent global developments.
In some legal systems, including civil law and common law, three main views have emerged. While there are differing opinions in US law, a distinction can be made between core and non-core insolvency cases. Core insolvency disputes should be adjudicated by insolvency courts, rendering arbitration awards unenforceable. However, in non-core cases, parties can refer to arbitration according to the arbitration agreement. A significant challenge lies in separating core from non-core cases and determining the standards for this separation. The varying standards result in conflicting judgments in US law. Generally, the arbitration clause is applicable unless referring to arbitration undermines the fundamental purposes of the insolvency act.
In UK law, the effect of insolvency on arbitration agreements differs for corporate and natural persons. A valid arbitration agreement remains binding on an insolvent company. For insolvent natural persons, if the trustee adopts and respects the arbitration agreement, it's enforceable in all contractual matters or related issues. Claims can be brought against the trustee referring to arbitration, or the trustee can initiate arbitration. However, if the trustee rejects the arbitration agreement, the court has jurisdiction over the insolvency dispute and must decide on arbitration validity.
In some legal systems, arbitrability of insolvency disputes is recognized, categorizing disputes as either capable or incapable of being settled through arbitration. Disputes related to insolvent persons are arbitrable in German and French law. Unlike these systems, none of the aforementioned legal systems claim that the arbitration agreement is voidable; rather, it's applicable under certain conditions.
Iranian law lacks explicit statutory rules for setting aside arbitration agreements in case of insolvency. Most lawyers believe the agreement becomes voidable upon one party's insolvency, based on Article 496(1) of the Civil Procedure Code (2000). However, this interpretation is not accurate because the article pertains to insolvency disputes under Article 412 of the Commercial Code (1932), which may lead to a judgment declaring a person insolvent. Therefore, it doesn't apply to arbitration agreements made before an insolvency event. Additionally, creditors may find arbitration more favorable to their interests. The other party may also prefer arbitration to court proceedings, potentially saving costs. In such cases,creditors may suffer less financial damage. Furthermore, arbitration agreements are not dependent on the parties' personalities, meaning insolvency doesn't automatically invalidate the agreement. While public policy can prevent the arbitrability of certain insolvency disputes, it cannot override an arbitration agreement.
It's important to note that an insolvent person is not considered incapacitated under Iranian statutes by many commercial law specialists. This belief, affirmed by the Iranian Supreme Court, contradicts the notion of resorting to Article 481(2) of the Civil Procedure Code (2000). Some arbitration centers' rules and case law also demonstrate a different approach to the arbitrability of insolvency disputes compared to the traditional Iranian doctrine.
The essay reveals that while many judgments and Iranian lawyers support the unenforceability of arbitration agreements in case of insolvency, this perspective is open to criticism and may not align with the latest global developments. Following the views of some Iranian lawyers who believe insolvency disputes are non-arbitrable can pose challenges in the enforcement of international commercial arbitration awards. Iranian courts may not accept the recognition and enforcement of a foreign award if one party was insolvent during the arbitration process. Even if the liquidator continues the arbitration process and an award is issued, it may not be effective.