Arbitration is one of the recognised methods of dispute resolution. In general terms, arbitration may be defined as the resolution of a dispute between parties outside the court system by one or more persons selected by the parties.
Arbitration has several characteristics, including its private and non-judicial nature. Its most important feature, however, is traditionally considered to be its consensual basis. As a general rule, arbitration cannot take place unless the parties have agreed to submit their dispute to arbitration.
What Is Mandatory Arbitration?
Mandatory arbitration is a form of arbitration in which the parties do not have complete freedom to decide whether their dispute should be referred to arbitration. Instead, they are legally required to resolve the dispute through an arbitral mechanism.
Under Iranian law, mandatory arbitration generally refers to a situation in which the law assigns a particular category of disputes to an arbitrator or arbitral tribunal, without the parties having any role in determining whether arbitration should be used. In such cases, the referral of the dispute to arbitration does not originate from the parties’ consent but directly from a statutory provision.
The term may also refer to situations in which the law provides that disputes arising in a particular field may be resolved exclusively through arbitration.
Considering the growing volume of legal disputes and litigation, as well as the potential advantages of arbitration in terms of speed, cost efficiency and the subject-matter expertise of arbitrators, the Iranian legislature has made recourse to arbitration mandatory in certain areas.
In some cases, the law requires the inclusion of an arbitration clause in a contract. Where the contract is one of adhesion, recourse to arbitration may, in practice, become compulsory because rejection of the arbitration clause may prevent the conclusion of the contract.
In other cases, the legislature places certain disputes within the jurisdiction of an arbitrator or arbitral tribunal even where no contract or agreed arbitration clause exists between the parties.
Contractual and Statutory Mandatory Arbitration
Mandatory arbitration may be understood in both a broad and a narrow sense.
In its broad sense, the concept includes statutory arbitration as well as arbitration that becomes compulsory on the basis of an agreement concluded by the parties before a dispute arises. In its narrow sense, mandatory arbitration refers only to arbitration imposed directly by law.
Accordingly, mandatory arbitration may be divided into two categories:
- contractual mandatory arbitration; and
- non-contractual or statutory mandatory arbitration.
Contractual Mandatory Arbitration
Contractual mandatory arbitration refers to an arrangement that is formally based on a contract and contained in an arbitration clause signed by the parties, but in which one party may have little practical freedom to accept or reject the clause due to the adhesive nature of the contract.
In such circumstances, refusal to accept the arbitration clause may result in the contract not being concluded. This situation may particularly arise in certain contracts entered into between governmental bodies or state organisations and private persons.
Statutory Mandatory Arbitration
In statutory mandatory arbitration, the parties’ dispute is referred to arbitration by operation of law. The source of the obligation to arbitrate is therefore not a contract or an agreement between the parties.
This type of arbitration is compulsory, and the parties are required to refer their dispute initially, or in some cases exclusively, to an arbitrator or arbitral tribunal.
The obligation to use arbitration is established by law before the dispute arises.
The following sections examine two significant instances of statutory mandatory arbitration under Iranian law.
1. The Capital Market Arbitration Board
Article 36 of the Iranian Securities Market Act, enacted on 22 November 2005, provides:
“Disputes between brokers, market makers, broker-dealers, investment advisers, issuers, investors and other relevant persons arising from their professional activities shall, where no settlement is reached within the relevant associations, be heard by the Arbitration Board.”
Under Article 37 of the Act, the Capital Market Arbitration Board consists of three members.
One member is appointed by the Head of the Judiciary from among experienced judges. The other two members are selected from among experts in economic and financial matters, upon the recommendation of the Securities and Exchange Organization and with the approval of the Supreme Council of Securities and Exchange.
The Head of the Judiciary and the Securities and Exchange Organization must also appoint alternate members, subject to the approval of the Council. An alternate member participates in the proceedings where the relevant principal member is absent. Alternate members are subject to the same eligibility requirements as principal members.
According to the notes to Article 37:
- the representative of the Judiciary serves as the chair of the Arbitration Board;
- the term of office of principal and alternate members is two years, and they may be reappointed for no more than two additional terms;
- the Arbitration Board has a secretariat established within the Securities and Exchange Organization;
- the Board’s budget is included in and paid from the budget of the Securities and Exchange Organization; and
- awards issued by the Arbitration Board are final and enforceable, and their enforcement is entrusted to the enforcement departments of the State Organization for Registration of Deeds and Properties.
Scope of Jurisdiction of the Capital Market Arbitration Board
Where a dispute between the persons identified in Article 36 arises from their professional activities in the securities market, the Capital Market Arbitration Board has jurisdiction to hear the dispute if no settlement is reached within the relevant association.
In such circumstances, the ordinary courts may not hear the dispute merely on the basis of their general jurisdiction over legal claims. In other words, the jurisdiction of the Capital Market Arbitration Board is limited to disputes arising from the professional activities of persons operating in the capital market. Such disputes may be financial or non-financial in nature.
As a general rule, the dispute must first be referred to the relevant association for settlement. Where no settlement is reached, a certificate of non-settlement is issued. This certificate is generally a prerequisite for the Arbitration Board to hear the dispute.
Nevertheless, in certain cases, a dispute may be brought directly before the Arbitration Board without first completing the settlement proceedings before the relevant association.
Therefore, where a dispute falls within the statutory jurisdiction of the Capital Market Arbitration Board, the judicial courts do not have jurisdiction to hear it.
Furthermore, pursuant to Note 5 of Article 37 of the Securities Market Act, awards issued by the Capital Market Arbitration Board are final and enforceable.
2. The Privatisation Arbitration Board
The Third Economic, Social and Cultural Development Plan Act of the Islamic Republic of Iran, enacted in 2000, identified privatisation as an important component of the country’s economic programme.
The Act also established arbitration as the appropriate mechanism for resolving certain disputes arising from the transfer of state-owned companies and economic units to private persons.
Article 20 of the Act provides:
“The examination, consideration and determination of complaints submitted by natural and legal persons against any decision relating to the process of transfer shall fall within the jurisdiction of the Arbitration Board. This matter shall be stipulated in share-transfer agreements and signed by the parties to the agreement.”
The Privatisation Arbitration Board is therefore an arbitral body established by law to hear disputes relating to agreements concerning the transfer of shares and the management of state-owned companies. The inclusion of a provision recognising the jurisdiction of this Board is mandatory in the relevant transfer agreements.
The transfer of shares in this context generally refers to the transfer of shares in state-owned companies to private persons. Where a dispute arises from such a transfer, it must be resolved in accordance with Article 20 of the Act.
Accordingly, the jurisdiction of the Privatisation Arbitration Board is limited to complaints and disputes brought by natural or legal persons in connection with the transfer of shares and the management of state-owned companies. Such persons may belong to either the private or public sector.
Unlike the awards of the Capital Market Arbitration Board, which are final and enforceable, awards issued by the Privatisation Arbitration Board may be challenged under Article 23 of the Third Development Plan Act.
Differences Between the Privatisation Arbitration Board and the Capital Market Arbitration Board
The principal differences between these two arbitral bodies may be summarised as follows.
1. Difference in Subject-Matter Jurisdiction
The jurisdiction of the Capital Market Arbitration Board is limited to disputes arising from the professional activities of persons operating in the capital market.
By contrast, the jurisdiction of the Privatisation Arbitration Board is limited to complaints submitted by natural and legal persons against decisions relating to the transfer of shares and the management of state-owned companies.
2. Difference in the Stage of Proceedings
As a general rule, the Capital Market Arbitration Board hears a dispute only after the parties have completed the settlement process before the relevant association. The Board may therefore be regarded as a secondary forum for resolving capital-market disputes.
By contrast, the Privatisation Arbitration Board acts as the initial forum for disputes falling within its statutory jurisdiction.
3. Difference in the Ability to Challenge Awards
As explained above, awards issued by the Privatisation Arbitration Board may be challenged pursuant to Article 23 of the Third Development Plan Act.
By contrast, under Note 5 of Article 37 of the Securities Market Act, awards issued by the Capital Market Arbitration Board are final and enforceable.
Conclusion
Although consent is traditionally regarded as one of the principal foundations of arbitration, the Iranian legislature has assigned certain categories of specialised disputes to particular arbitral bodies.
The Capital Market Arbitration Board and the Privatisation Arbitration Board constitute two significant examples of mandatory arbitration under Iranian law. Nevertheless, these bodies differ in terms of their subject-matter jurisdiction, procedural structure and the possibility of challenging their awards.
An accurate understanding of the jurisdiction of each body is particularly important. Commencing proceedings before a forum that lacks jurisdiction may prolong the dispute-resolution process and impose additional costs on the parties.
Rezvanian International, with more than ten years of experience in commercial arbitration and dispute resolution, provides specialised legal advice and representation in relation to determining the competent forum, commencing arbitral proceedings and managing commercial disputes.
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