Facts
- In April 1982, Gatoil International (Gatoil) and the National Iranian Oil Company (NIOC) entered into a written contract for the purchase of Iranian crude oil to be delivered between April and December 1982.
- The contract contained an arbitration clause (Section 8) requiring that disputes “shall be settled by arbitration in accordance with the laws of Iran,” with the seat of arbitration in Tehran unless the parties agreed otherwise.
- The clause set out an appointment process: the initiating party would nominate one arbitrator; the other party would nominate a second within 30 days; and the two arbitrators would appoint a third (chair).
- If the other party failed to nominate an arbitrator, or if the two arbitrators could not agree on a chair within 30 days, the clause allowed the “President of the Appeal Court of Tehran, Iran” to appoint the second arbitrator or the chair, as the case required.
- The clause required arbitrators to have experience in petroleum industry practice and oil marketing and to be reasonably fluent in written and spoken English.
- In 1987, a dispute arose under the contract. Rather than starting arbitration in Tehran, Gatoil filed a claim against NIOC in an English court.
- Gatoil stated it did not wish to arbitrate in Iran. NIOC nonetheless sought to proceed under the arbitration clause and prepared to appoint an arbitrator for a Tehran arbitration.
- NIOC applied for a mandatory stay of the English proceedings under section 1(1) of the Arbitration Act 1975, which implements the New York Convention.
- Gatoil resisted the stay, arguing the arbitration agreement was “incapable of being performed” because (i) the office named as the default appointing authority (President of the Appeal Court of Tehran) no longer existed after changes to Iran’s court structure, and (ii) it was said to be impossible in practice to find a suitably qualified arbitrator willing to travel to and sit in Tehran.
Issues
- Whether, under section 1(1) of the Arbitration Act 1975 / New York Convention Article II(3), the English court had to stay the action in favor of the contract’s Tehran-seat arbitration clause.
- Whether the arbitration agreement was “incapable of being performed” because the contract identified an appointing authority (“President of the Appeal Court of Tehran”) that no longer existed in that form.
- Whether alleged practical difficulties in securing a qualified arbitrator willing to sit in Tehran made the arbitration agreement “incapable of being performed.”
Decision
- The English court granted NIOC’s request for a stay of the English proceedings in favor of arbitration.
- The court held that the arbitration agreement was not “null and void, inoperative, or incapable of being performed” within the meaning of the Arbitration Act 1975 / New York Convention.
- The reference to the “President of the Appeal Court of Tehran” did not defeat the clause, because institutional change did not eliminate the appointing function; a competent Iranian authority could be identified to carry out the appointment role.
- The court rejected the argument that difficulty in finding an arbitrator willing to sit in Tehran met the Convention standard; serious inconvenience or added risk did not equal impossibility.
Legal Principles
- Under section 1(1) of the Arbitration Act 1975 and New York Convention Article II(3), an English court must stay proceedings brought in breach of a Convention arbitration agreement unless the agreement is “null and void, inoperative, or incapable of being performed.”
- The “incapable of being performed” exception is construed narrowly; it requires a showing of real impossibility, not reluctance, inconvenience, added expense, or uncertainty about practical conditions.
- A designation of an appointing authority is read in a functional way where possible; a reorganization or renaming of the relevant institution does not, by itself, make an arbitration clause unworkable if the appointing role can still be carried out under the law of the seat.
- The party resisting a stay bears the burden of showing that a Convention exception applies, with evidence sufficient to displace the strong rule that contractual arbitration agreements should be enforced.
Conclusion
Gatoil’s English lawsuit was stayed because the parties had agreed to arbitrate disputes in Tehran under Iranian law, and Gatoil did not show that arbitration was truly impossible: the changed status of the named Iranian appointing authority could be addressed by identifying an equivalent authority to make appointments, and claimed difficulty in finding an arbitrator willing to sit in Tehran did not satisfy the narrow “incapable of being performed” exception under the New York Convention framework.