In 2021, arbitral proceedings were conducted between the Kingdom of Bahrain and Iranian state-owned entities, under the supervision of the Permanent Court of Arbitration in The Hague. There was an investment treaty in place between the Kingdom of Bahrain and Iran.
The arbitration centred around ‘Future Bank’, an Iranian state-owned enterprise, co-founded in 2004 and based in Bahrain. In 2015, the Central Bank of Bahrain (CBB) put Future Bank into administration and then liquidated it in 2016.
Iranian banks initiated the arbitration proceedings saying that their investments in Future Bank were unfairly expropriated without due process and in violation of the investment treaty. Iran claimed that Bahrain had violated its obligations under the investment treaty and international law.
Bahrain contested the claims and said that Future Bank was guilty of systematically violating international sanctions and international rules to combat money laundering and terrorist financing.
The arbitration Tribunal’s findings were that:
- There was insufficient evidence that the proven sanctions violations by Iran were serious and widespread
- There was no close relationship between those violations and the claim
- Bahrain had violated its obligations under the investment treaty
- Bahrain was ordered to pay damages to the value of €214 million.
Recently, Bahrain appealed to the Hague Court of Appeal to set aside the tribunal’s award on the grounds that: (i) there was no valid agreement to arbitrate, and/or (ii) the arbitration award violates public policy.
The Hague Court of Appeal rejected the claim and upheld the decision of the tribunal. The decision was published on 22 April 2025.
Does the arbitration award violate public policy?
Bahrain argued that the arbitral award violated public policy by ordering Bahrain to pay compensation of €214 million to the Iranian banks for an alleged violation of the BIT.
Bahrain alleged the following six public policy violations which they said individually and together should lead to the setting aside of the arbitral award:
- The arbitral award misinterpreted and misapplied sanctions law
- The arbitral award failed to give effect to violations of laws to prevent money laundering and terrorist financing
- The arbitral award legitimises and rewards violations of international sanctions and legislation to prevent money laundering and the financing of terrorism
- The arbitration award provides Iranian banks with double compensation
- The arbitration award undermines regulator's jurisdiction
- The arbitral award ignores the justification given by the CBB in favour of unsubstantiated political motives
Wrongful conduct must be ‘serious and widespread’ before it violates equity’s doctrine
One of the interesting issues in this case was court’s emphasis that the wrongful conduct must be serious and widespread, if it is a reason to block Iran’s claims. The argument is one of equity’s doctrines that the claimant must come to the court with clean hands. But in order for the claims to be inadmissible, the investors’ unlawful conduct must be severe.
The court said that: “in a business as complex and heavily regulated as banking, certain violations are bound to occur. Even serious violations, such as the facilitation of money laundering or sanction violations, would not necessarily result in the inadmissibility of the investors’ international claims as a blanket measure, if they were infrequent and the bank remedied their consequences and took action to avoid repetitions.”
In other words, some violations are expected. But if the banks took action to remedy the effects, and mitigate the risk in future, they are not fatal to its own claims.
The court found that the violations were “sporadic” and that the bank had managed to gradually reduce the exposure over time.
On the other hand, the court agreed with the tribunal’s finding that the decision to put Future Bank into administration and then liquidation was a political one and not a result of the banks alleged shortcomings. There was a “staggering absence of evidence of consideration of reasons for the administration.” The court found that the evidence in the record demonstrated that Bahrain acted with a “contrived agenda of political retribution against the Claimants’ investment.”
Finally, Bahrain argued that the award undermined the supervisory authority of the Central Bank of Bahrain. It had ignored the justification given for legitimate enforcement actions taken against Future Bank. The court said the tribunal had found that the Central Bank’s actions did not act in good faith and that a reassessment of this would be tantamount to an appeal. It also said the tribunal assessed documents provided by the Central Bank and found no contemporaneous evidence to justify its measures.
No public policy reasons to annul the award
The Hague Court of Appeal found that none of the allegations of violations of public policy would lead to the annulment of the arbitral award.
Bahrain's claim to set aside the arbitral award was not allowable, and the court dismissed the claim.
