ICLG publishes Asgari & Associates’ article on international arbitration in Iran’s oil & gas sector

International Arbitration in Relation to the Oil and Gas Industry of Iran: The Legal System and Strategic Framework Issues

1. Introduction

 According to the latest estimates, Iran is the world’s fourth-largest oil producer and the second-largest producer of natural gas. The country is known to have one of the largest proven oil and gas reserves. Despite possessing such immense energy reserves, the country’s legal system, geopolitical issues, and, most importantly, international sanctions from the US and EU have discouraged foreign investment and significantly limited the upstream development of the oil and gas sector, as well as the transfer of technology. This article aims to examine the framework and core legal aspects of international arbitrations in Iran’s oil and gas sector, focusing on several key areas, including enforcement, arbitrability, the evolution of investment dispute arbitration, and state relations. The legal framework is continuously evolving, particularly following the latest arbitration rule amendments and prominent cases up to the year 2025, which entail both opportunities and challenges for foreign investors.

2. Iran’s Legal Framework for Arbitration

2.1. Domestic Law: LICA and Civil Code

 LICA does parallel the UNCITRAL Model Law. Iran’s 1997 Law on International Commercial Arbitration (LICA), issued in 1997, does align with international standards and considers international arbitration in Iran. LICA also aligns with.

Since 2016, there have been some institutional rule changes aimed at improving efficiency. Some changes have been made, for example, the Arbitration Center of the Iran Chamber of Commerce (ACIC) updated its rules in 2023 to include provisions for expedited and emergency arbitrators, as well as compliance with UNCITRAL standards. Iran remains an attractive option for arbitration, but enforcement by domestic courts is still necessary.

LICA works in parallel to the Iranian Civil Procedure Code (Articles 454–501 in Part 7), which governs domestic arbitrations. That code does not favor international arbitration and its cross-border energy deals due to the extensive judicial oversight. Studies on Iran’s arbitration system have shown some alignment with international standards in the types of disputes related to construction, which are prevalent in oil and gas projects.

2.2. New York Convention

 Iran became a participant in the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards in 2001. Iran, however, incorporated a reservation that it would be implemented only on a commercial basis and on reciprocal grounds alongside other member countries. While there have been cases of Iranian courts enforcing foreign arbitral awards, enforcement has often been erratic and influenced by public policy considerations, particularly those related to sanctions.

3. Constitutional Constraints and Arbitrability

Constitutional Iran Article 139 of the Constitution states that the government grants its approval through the Cabinet and notifies Parliament in matters relating to public and state property dispute arbitration. This has raised questions about the legitimacy of arbitration in contracts with state-owned companies, such as the National Iranian Oil Company (NIOC), the National Iranian Gas Company (NIGC), or Petropars Ltd.

These constraints have become less restrictive due to a landmark decision by Iran’s Supreme Court in recent years, which clarifies the arbitration hurdles for state-owned entities by loosening the interpretation of Article 139 in international contexts. As an instance, we can recall the case of Iran’s Ministry of Defense suing Cubic Defense Systems. 665 F.3d 1091 (9th Cir. 2011). A US court did set an ICC award for Iran in Switzerland. Iran, in turn, claimed that the contract was invalid under Article 139. The court’s decision was based on the rejection of Iran’s claim that Article 139 invalidated the contract. The court explained that the agreement was governed by Swiss law, and domestic constitutional rules couldn’t override an international treaty.

Furthermore, English courts have also dealt with Islamic principles of contract interpretation in Iranian cases, as seen in National Iranian Oil Company v Crescent Petroleum Company International Ltd [2023] EWCA Civ 826, where the court examined the enforcement of arbitration awards through Sharia-influenced construction rules.

4. Typically Encountered Energy Disputes and Contractual Terms

 The Buy-Back Contract model has dominated Iran’s upstream sector since the 1990s. Under this model, recovery of investment and a guaranteed return on a fixed percentage of production is all investors gain in return.

To transition to a more collaborative profit-sharing model, Iran introduced the Iran Petroleum Contract in 2016, reserving ownership of the oil and gas fields for NIOC and allowing for greater foreign operator involvement over a longer duration. Due to the sanctions, the implementation of IPCs has been limited, which is one reason why there have been few high-profile IPC arbitrations. Iran’s IPCs feature the use of either UNCITRAL or ad hoc arbitration, which is an improvement over the Buy-Back models and is more favorable for investment. Typical disputes include cost overruns, project stagnation in progress (as seen in South Pars Phases 6-8), bailouts of projects due to sanctions (the exits of Repsol, Total, and Petronas from the South Pars projects), and disputes concerning taxes or payments. Another recent example is the Iran-Pakistan gas pipeline dispute, where Pakistan hired international legal representatives in 2024 to counter Iran’s arbitration claims regarding sanctions delays.

5. Options and the Practice of Arbitration

Usually, participants prefer the rules of institutions such as the ICC, LCIA, UNCITRAL, and sometimes the SCC. Their preferences are neutral locations such as Paris, Geneva, Vienna, or London, and the proceedings are conducted in English. Iranian law permits the selection of foreign law as the governing law in arbitration, although proving the applicability of the foreign law is necessary. There is also participation of Iranian parties in investor-state arbitrations. For example, in Saba Fakes v. Turkey, ICSID Case No. ARB/07/20: A Dutch investor claimed that media licenses expropriated in Turkey were brought to arbitration under the Netherlands-Turkey BIT. The tribunal dismissed the case for lack of proven investment, but later explained some of the jurisdictional boundaries and sensitive BIT disputes. A prominent ongoing series involves Crescent Petroleum and NIOC under a 2001 Gas Sales and Purchase Agreement. As of 2024-2025, multiple tribunals and courts in the UK, the Netherlands, and the U.S. have seen NIOC win some cases and lose others. For example, in February 2025, NIOC dismissed Crescent’s multi-billion-dollar claims, while other courts continue to enforce their own rulings. A Dutch court recently refused to reverse a property sale to satisfy a US$2.75 billion award.

6. BIT and Investment Treaty Arbitration

According to UNCTAD data, Iran has in force about 52 Bilateral Investment Treaties (BITs) as of 2025, primarily with countries in Europe, Asia, and the Middle East. Iran is not a member of ICSID, but most of its treaties permit UNCITRAL or ad hoc arbitration. Disputes with Iran correlate mainly with expropriation or unjust enrichment from canceled projects, breach of the fair and equitable treatment (FET) norm—often stemming from biased energy regulation, or court denials of justice for non-nationals— and jurisdictional challenges, such as claims that investments contravened Article 139 and therefore cannot be considered valid. More recent analyses emphasize Iran’s first investor-state arbitration victory in 2014, demonstrating the supporting role of BITs despite sanctions.

7. Enforcement and Sanctions

The enforcement sanctions issued by the European Union and the United States pose significant challenges, including arbitration fees and awards, restricted access to financial institutions, and compliance concerns with OFAC or EU restrictions for arbitrators and lawyers. Between 2024 and 2025, the United States’ sanctions on Iranian oil networks led to a divergence in paradigms, with the EU focusing more on trade with Iran through protective measures, such as the blocking statute. In Bank Markazi v. Peterson, 136 S. Ct. 1310 (2016), the US Supreme Court endorsed the use of frozen Iranian assets against terrorism judgments. This illustrates the mounting risk to sovereign assets, even beyond the commercial veil, as illustrated by recent enforcement actions against NIOC properties. To mitigate these risks, parties should seek to obtain OFAC licenses for sanctions-bound zones, select venues with a proven track record of robust arbitration enforcement, and draft anti-suit clauses that include sanctions carve-outs and alternative payment frameworks.

8. Conclusion

On paper, Iran’s arbitration system performs close to international benchmarks, but it faces constitutional obstacles, sanctions, and enforcement challenges in practice. Some of the recent updates of institutions, the explanation of Article 139 of the Constitution, and prominent disputes like Crescent v. NIOC show some movement towards reliability. Nevertheless, oil and gas disputes involving Iran can still be effectively managed through arbitration, thanks to contract structuring, strategic venue selection, and inventive risk management strategies, such as force majeure clauses for sanctions and BIT shield provisions. Counsel for these transactions should focus on assisting with Article 139 approvals, designated forums with treaty protection, monetizing BITs when possible, and imposing dispute sanctions safeguards, especially with the shifting U.S.-EU sanctions in 2025.