In a recent arbitration under the Rules of Arbitration Centre of Iran Chamber (ACIC) with my chair as the sole arbitrator, a question arose as to the matter of delayed payment penalty for foreign currencies under Iran legal system.
The dispute was arising out of a charter party contract with a daily rent to be paid in Dirham. The claimant was of the position that a part of the rent was not paid to it and accordingly, was asking for payment of delayed rent. The claimant was asking for the equivalent amount in Iran Rials (IRR) in order to be eligible for asking for delayed payment penalty for foreign currencies under Iran legal system. In the contract, however, there was no reference to the matter of interest rate or delayed payment penalty.
Delayed payment penalty for foreign currencies under Iran legal system is a controversial matter because Article 522 of Iran Civil Procedure Code (CPC) provides that in disputes that the subject matter is a debt in the currency that is commonly used in Iran (namely IRR) and the debtor refuses to pay after the demand by the creditor, the debtor must pay damages equivalent to the inflation rate from the time the demand is made till the time the real payment is made, based on what is called as “Central Bank Index” announced each year by The Central Bank of Iran. In a more simple language, according to laws of Iran, delayed payment penalty might be granted by Iranian courts, only if the requested amount is in common currency, i.e. IRR. However, when it comes to the matter of interest on foreign exchange rates, there exists no clear provision under Iranian law.
While some practitioners prefer to request for IRR equivalent of the amount, in order to be eligible for delayed payment penalty, there are at least 3 matters that they should be cautious about when making such request:
First, there should be a reasonable justification as to why such conversion is justified. That is, in cases that all monetary communications of the parties are in foreign currency, and the price of the contract is also in the same currency, the requesting party might have a hard time to explain why it is entitled to the equivalent of the amount in IRR, and accordingly, it is entitled to receive delayed payment penalty.
Second, the date of the exchange rate is a crucial matter. That is, due to tremendous fall in the exchange rate of IRR in the recent years, it is an extremely important matter that what rate would apply to their request (i.e. the rate of the date of concluding the contract, the date of fulfilling the obligation or the date of enforcement of award) as they might be considerably different.
Third, there should be always an alternative request on the table. That is, when Claimant is requesting for the equivalent of the amount in IRR, after all justifications, it should alternatively request that, if for any reason the amount is not granted in IRR, it is granted in the original rate, i.e. EURO. This is a simple, but tricky matter; because if such alternative request is not made, and if the tribunal decides that the amount in IRR should not be granted, it might indeed dismiss the whole claim, as there is no alternative request there.
Note 1: Needless to add that when the parties have agreed on the interest rate in the contract, there should be no problem -or at least a serious problem- in awarding such interest. This paper targets the contractual relationships which have not such agreement.
Note: More research and information on the matter of delayed payment penalty can be found here, in an article written by Dr. Kamran Aghaei.