UNSCR 1929 – The Slayer of Commercial Contracts?

I’ve seen a couple of news stories lately about a lawsuit brought by Iran against Russia, for alleged breach by Russia of a contract to supply S-300 surface-to-air missiles to Iran (see stories here, here and here). More precisely, this would I assume be a claim for breach initiated by Iran under the contract, which apparently provides for arbitration of disputes at the ICC Court of Arbitration in Geneva. 

 Apparently, the $800 million contract was signed in 2007, but Russian President Medvedev signed a decree terminating the contract in September 2010.  Russia’s stated reason for the termination was that fulfilling the contract would be in violation of U.N. Security Council Resolution 1929, adopted in June of 2010.

 So, in April 2011 Iran instituted the claim for breach at the ICC.  Announcing the action, ­Iranian Ambassador in Russia Seyed Mahmoud-Reza Sajjadi reportedly said:

 “We consider the S-300 complex as not falling under the UN Security Council resolution, therefore we are suing Russia to give it this legal cause . . . ”

 This case interested me because it is a rare instance of one state canceling an already existing commercial contract with another state on the basis of a U.N. Security Council Resolution. And, of course, it interested me because it involved a source of arms control law emanating from the U.N. Security Council.

 Thinking about this case brought back to my mind another, similar case, involving the same U.N. Security Council Resolution. In this case, Pakistan and Iran entered into a commercial contract whereunder Pakistan would supply, and Iran would purchase, natural gas. The contract was reportedly signed on May 24, 2009 (see stories here, here, here and here).

Under the contract, both states reportedly agreed to lay pipelines up to their respective borders by 2014 to carry the gas from Pakistan to Iran. The contract reportedly provided that in the event one side was unable to carry out its obligations of building the pipeline on time, it would be required to pay $2 million per day to the other state as penalty.

 Its been a bit more difficult for me to work out the timeline on this case – and I welcome any comments that clarify it – but from what I can gather, after the passage of UNSC Resolution 1929, the government of Pakistan decided it would not go through with the pipeline/gas contract with Iran, citing to Resolution 1929 as a legal prohibition of the deal.  I haven’t found any indication that this case was ever submitted to a judicial or arbitral forum for dispute settlement. However, it has definitely become a sore spot in Iranian-Pakistani diplomatic relations.

 Thinking about these two cases, then – both the Russia-Iran missile contract, and the Pakistan-Iran gas contract – there are some obvious similarities.  Both are commercial contracts entered into before the passage of UNSC Resolution 1929. In both cases, the state contracting with Iran subsequently argued that they could not legally fulfill their end of the contract because of prohibitive provisions in UNSCR 1929.  In both cases, Iran disputed that legal analysis.

 I’ll just go ahead and add one more similarity to that list. In both cases, the legal conclusions advanced by the states contracting with Iran, and cited as the reason for their effective unilateral termination of the commercial contract, were COMPLETE CRAP. And I’m confident that in both cases, the state making that argument knew that it was complete crap.

Take the Russia-Iran missile contract case. Operative paragraph 8 of UNSC Resolution 1929 provides that all states shall prevent the sale or transfer to Iran of: 

 “any battle tanks, armoured combat vehicles, large calibre artillery systems, combat aircraft, attack helicopters, warships, missiles or missile systems as defined for the purpose of the United Nations Register on Conventional Arms . . .”

Ok, so then you go to the U.N. Register on Conventional Arms, and you can easily find the definition of “missiles or missile systems.”  It’s on the Register’s reporting form, under category VII and, in its entirety, reads:

 VII. Missiles and missile launchers

 (a)    Guided or unguided rockets, ballistic or cruise missiles capable of delivering a warhead or weapon of destruction to a range of at least 25 kilometres, and means designed or modified specifically for launching such missiles or rockets, if not covered by categories I through VI. For the purpose of the Register, this sub-category includes remotely piloted vehicles with the characteristics for missiles as defined above but does not include ground-to-air missiles.

(b)    Man-Portable Air-Defence Systems (MANPADS).

Note, that the definition states very clearly that this sub-category “does not include ground-to-air missiles.” It’s hard to see how it could be any clearer that the S-300 missile system, which is without question a ground-to-air missile system, and not a MANPAD, is not covered by the UNRCA’s definition of missiles or missile systems, and is therefore not covered by the prohibitive scope of UNSCR 1929, OP 8.

But don’t just take my word for it. What does Yevgeni Khorishko, a Russian Embassy spokesman, have to say about this provision in UNSCR 1929, and it applicability to S-300 sales? Well, in May 2010 the Washington Times reported that Mr. Khorishko admitted that “his government is aware that the draft resolution does not ban sales of air-defense systems.” And he was directly quoted as saying: “The S-300s is not prohibited,” and “It is not on the list of prohibited items.”

So let me get this straight. Russia knew good and well that the S-300 sale was not prohibited by Resolution 1929, but they went ahead and terminated the contract anyway on that basis.  Ooohhhkkkaaayyy.

Well, what about the Pakistan-Iran gas pipeline case? Does UNSCR 1929 prohibit Pakistan from cooperating with Iran to build a gas pipeline, or from selling gas to Iran? This one isn’t really even a close textual case. There’s just nothing in UNSCR 1929 that would, with any colorable merit, provide the basis for this argument. There are a couple of instances, e.g. in OP 21 & 22, of provisions framed as catch-all statements saying that states basically shouldn’t do business, or allow their nationals to do business, with any entity in Iran “if they have information that provides reasonable grounds to believe that such services, assets or resources could contribute to Iran’s proliferation-sensitive nuclear activities, or the development of nuclear weapon delivery systems . . .”  I gather that it’s these sorts of broad, catch-all statements in UNSCR 1929, and not any more specific provision, that Pakistani officials have cited to as the grounds for their conclusion that the gas pipeline contract is prohibited by UNSCR 1929.

Well, it’s certainly not obvious to me that supplying natural gas to Iran would contribute in any direct, or even any reasonably understood indirect way, to Iran’s nuclear or missile programs.  Now I’m sure there are those who would make the diversion-of-resources-type argument, which would go something like this: Any economic cooperation with Iran that contributes to the economic growth and well-being of the country helps Iran overall to have the resource base to support their nasty nuclear program. Well, yes. At a fairly absurd level of abstraction that is certainly true. But does that mean that every financial transaction of any kind, in any economic sector, by any foreign persons or entities, with any person or entity in Iran, is prohibited by UNSCR 1929? Obviously not. Not even the U.S. has applied that kind of insanely broad interpretation to UNSCR 1929 – as manifest by the subsequent targeted unilateral sanctions applied by the U.S. against Iran’s Central Bank.

So in the case of the Pakistan-Iran gas pipeline, the conclusion that UNSCR 1929 prohibits the fulfilling of this contract by Pakistan is just manifestly absurd and unreasonable, and exceeds the interpretation of the scope of UNSCR 1929 maintained by even the most severe critic of Iran, the U.S.

So what the heck is going on in these cases, if the legal conclusions advanced by the states terminating their commercial contracts with Iran are either incorrect by their own admission (as in the case of Russia), or so manifestly absurd that it’s impossible to believe that the state genuinely believes in it (as in the case of Pakistan)?

I suspect that in both cases, the UNSCR 1929 legal argument has simply been a red herring. A pretext that the advancing states knew to be without merit, but which was available to them, thanks to the passage of UNSCR 1929, and which usefully served their interest by turning attention and debate into the legal sphere, and away from the much more mundane, but genuine reasons why they wanted to terminate their respective commercial contracts with Iran.

In the case of Russia and its missile contract with Iran, this article in the magazine Wired, draws on diplomatic cables made public by Wikileaks to create a pretty persuasive explanatory narrative for what really made Russia change its mind about supplying the S-300s to Iran.  According to this narrative, the coup de grace in this 180 degree turn was actually an accord reached between Russia and Israel.  Here’s a quote from the article (I’ve left the original hyperlinks in it):

 In December 2009, Moscow began talking with Israel about a possible quid pro quo. According to a top Israeli official, the Russians wanted Israeli unmanned planes, recognizing “development gaps” in their own drones, and floated a possible Israeli-Russian drone sale “in exchange for canceling the S-300 sale to Tehran.”

Then, in February 2010, Prime Minister Benjamin Netanyahu arrived in Moscow with a different bargaining chip: potential resumed Israeli arms deals with Georgia, which has close military ties to Israel — including selling them surveillance drones — and with which Russia fought a 2008 war. Both he and Medvedev denied that they were actually talking about a quid pro quo. But an Israeli diplomat in Moscow told U.S. officials Netanyahu “believes that Russia has taken ‘all aspects of regional stability’ into account when taking decisions on the S-300s” and had personal “trust in Medvedev” on the sale.

In September, Russia and Israel announced a $100 million deal to send 36 spy drones to Moscow. That same month, Russia canceled the S-300 deal, citing new United Nations Security Council sanctions on Iran — sanctions that Russia voted to impose in June 2010, after intense U.S. courting. Israel hasn’t sold Georgia any new drones.

In the case of the Pakistan-Iran gas pipeline contract, the assistance of Wikileaks is not required to uncover the real reason why Pakistan wanted to put the kibosh on the deal. Basically, Pakistan has been unable to secure financing for its part of the pipeline, in part due to the dangerous route the pipeline is to follow through the troubled region of Baluchistan.  There have been a number of investors, both state and private, interested in the project over the years, but an actual financing deal has never materialized.  This has resulted in the current circumstance in which Iran has completed its portion of the pipeline up to its border with Pakistan, and in which Pakistan hasn’t even started on theirs. Remember, the contract reportedly provides for liquidated damages in the amount of $2 million per day (that can’t be right, but that’s what’s been reported. Let’s just assume its some realistically astronomical amount) for either party failing to live up to their obligations under the timeframe set in the contract.

So, faced with the reality of a contract that they simply cannot fulfill because of a lack of money, and the prospect of huge losses under the contract’s liquidated damages clause, is it any wonder that some bright spot in the Pakistani Government came up with the idea to plead the illegality of the contract under UNSCR 1929, in order to have it effectively rendered invalid, even though they and everyone else in the government knew this argument was complete crap and pretext?

 So what’s the takeaway lesson from these two cases of states making disingenuous legal arguments based on UNSCR 1929, in order to pretextually facilitate the unilateral termination of commercial contracts with Iran that had become undesirable to them for other political and economic reasons?  There probably isn’t one. At least, nothing specifically arms control law related.  In these cases, as in so many others, well trained government lawyers made legal arguments that they knew were incorrect, but which nevertheless advanced their client’s interests. UNSCR 1929 just happened to be in the right space of interest, at the right time to provide the necessary pretext.

I suppose there’s a bit of a silver lining to what would otherwise be a pretty depressing story for those interested in the integrity and meaningfulness of the international legal system. Since there was a contract involved, at least in the Russia-Iran missile case, that apparently had a dispute resolution provision providing for ICC arbitration, there was actually a forum for international dispute resolution available to the parties.  This is so very often not the case in public international law disputes. There has been a generally welcome proliferation of international courts and arbitral tribunals in recent years, particularly in the context of international commercial law and international investment law, and these institutions are providing important fora for formalized dispute resolution between states, and between private parties and states. So hopefully this trend will result in fewer cases in the future in which states can knowingly make crap international legal arguments with effective impunity.