Case of the Day: Ministry of Defense of Iran v. Cubic Defense Systems

If you need convincing of the strength of the public policy in favor of arbitration, look no further than today’s case of the day, Ministry of Defense & Support for the Armed Forces of the Islamic Republic of Iran v. Cubic Defense Systems, Inc. (9th Cir. 2011). In 1977, Cubic, a US corporation, entered into a contract with Iran’s Ministry of War for the sale and service of an air combat maneuvering range. After the Iranian Revolution, the parties agreed to terminate the contracts and that Cubic would try to resell the equipment, with the parties to settle accounts with each other at a later date. Ultimately, Cubic sold the equipment originally meant for Iran to Canada.

In 1982, the Ministry filed a claim against Cubic for breach of contract with the Iran-United States Claims Tribunal. Several years later, the tribunal found that it lacked jurisdiction to hear the dispute. The Ministry then initiated an ICC arbitration in Switzerland. The tribunal awarded the ministry more than $2.8 million in 1997. Cubic failed to pay, and the Ministry obtained confirmation of the award in the US District Court in San Diego.

Judgment entered in 1999, and Cubic appealed. The appeal was then stayed for a decade, while litigation over whether Iran’s judgment creditors could attach the Ministry’s judgment. The case was finally argued earlier this year, and the Ninth Circuit invited the United States to brief the issue whether confirmation of the award would be contrary to US public policy.

Cubic argued that the US had a public policy against “trade and financial transactions with the Islamic Republic of Iran,” noting the Iranian Asset Control Regulations, the Iranian Transactions Regulations, and the Weapons of Mass Destruction Proliferators Sanctions Regulations. Under these sanctions regimes, Cubic is forbidden to pay the award to Iran without a license from the Office of Foreign Assets Control. Cubic argued that the rule against payment of the award shows a public policy against confirmation of the award (even though the regulations contemplate licenses to authorize payments of an award of the Iran/US tribunal), and that more broadly, the sanctions show a public policy against any economic support of the Iranian government.

But the court (and, interestingly, the government’s amicus brief) rejected these arguments in light of the stronger policy in favor of the recognition of foreign arbitration awards. Although it recognized that the sanctions regulations prohibited payment of the award, it distinguished sharply between payment of the award, which enriches Iran, and confirmation of the award, which does not. The court also gave “great weight” to the government’s views as a correct statement of US public policy. In response to Cubic’s hypothetical argument that it would face an impossible situation if the award were confirmed and the government did not grant a license for payment, the court responded that Cubic could seek a stay of execution of the judgment.

Photo credit: yeowatzup (license)

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