THE HAGUE — In Certain Iranian Assets (Islamic Republic of Iran v. United States of America), the International Court of Justice delivered a significant ruling on the legal protections accorded to foreign state-owned enterprises under bilateral commercial pacts. The dispute arose from United States legislative amendments to the Foreign Sovereign Immunities Act (FSIA) and executive freezing orders—specifically Executive Order 13599—which stripped sovereign immunity protections and permitted the enforcement of domestic default judgments totaling billions of dollars against Iranian state entities and Bank Markazi, the central bank of Iran.
Relying on the compromissory clause in Article XXI(2) of the 1955 Treaty of Amity, Economic Relations, and Consular Rights, Iran sought restitution and damages for breaches of treaty guarantees protecting corporate legal status, property rights, and freedom of commerce. The Court’s merits judgment establishes critical boundaries concerning the legal characterization of sovereign economic organs and the extent to which domestic terrorism-related exceptions can override bilateral treaty guarantees.
1. The Jurisdictional Carve-Out: Bank Markazi and the “Company” Threshold
The procedural threshold of the case centered on whether Bank Markazi could claim protection as a “company” under the 1955 Treaty. Under Article III(1) of the Treaty, each party agreed to recognize the juridical status of “companies” established under the applicable laws of the other party.
In its 2019 Preliminary Objections judgment, affirmed on the merits, the Court drew a functional distinction between sovereign administrative organs and commercial entities:
- The Predominant Function Test: The Court evaluated whether Bank Markazi carried out commercial activities or acted exclusively as a sovereign monetary authority. It concluded that the central bank’s operations—managing foreign reserves, regulating national monetary policy, and acting as banker to the state—were sovereign in character (acta jure imperii).
- The Jurisdictional Consequence: Because the compromissory clause of the 1955 Treaty of Amity covered only rights of “nationals” and “companies,” Bank Markazi fell outside the treaty’s substantive protection ratione materiae. Consequently, claims relating to the largest block of immobilized assets—roughly $1.75 billion belonging to the central bank—were dismissed for lack of jurisdiction under the Treaty.
By establishing that central banks engaged in standard monetary management cannot be retroactively reclassified as commercial “companies” to secure treaty standing, the Court confirmed that sovereign property protections must be sought under customary international law immunities rather than bilateral commercial friendship treaties.
2. Juridical Separateness and the Piercing of the Corporate Veil
For non-central bank state-owned enterprises (such as state banks and commercial enterprises), the Court found jurisdiction and ruled that the United States had breached substantive treaty obligations:
| Treaty Provision | Legal Obligation | ICJ Holding on Breach |
|---|---|---|
| Article III(1) | Mandatory recognition of the juridical status of foreign companies. | The US violated Article III(1) by enacting domestic statutes that disregarded the separate legal personality of Iranian corporate entities, allowing judgment creditors of the state to execute against independent corporate assets. |
| Article IV(1) | Obligation to refrain from unreasonable or discriminatory measures impairing rights. | Enacting legislative mechanisms targeted specifically at Iranian entities to satisfy third-party tort judgments constituted an unreasonable and discriminatory impairment of legally acquired rights. |
| Article IV(2) | Most constant protection and security; prohibition of unlawful taking without just compensation. | The expropriatory attachment and physical distribution of corporate assets without compensation breached the statutory property guarantees of the Treaty. |
Under customary corporate law, codified across major legal systems, a corporation possesses a distinct legal personality separate from its shareholders or the state that created it (Barcelona Traction).
The ICJ rejected the United States’ argument that state-owned enterprises could be treated as mere alter egos of the sovereign government without specific evidence of corporate abuse or operational commingling. By holding that domestic statutes could not pierce the corporate veil solely because the entity is wholly owned by a foreign state, the Court placed a firm international check on domestic statutory enforcement tools.
3. The National Security Exception: Testing Article XX(1)(d)
As an affirmative defense, the United States invoked Article XX(1)(d) of the Treaty of Amity, which provides that the treaty shall not preclude the application of measures “necessary to protect its essential security interests.”
The Court applied an objective standard of review:
- Non-Self-Judging Standard: Consistent with its prior jurisprudence in Nicaragua and Oil Platforms, the Court reiterated that the term “necessary” in Article XX(1)(d) does not confer unfettered, subjective discretion on the state invoking it. The Court retains adjudicative power to determine whether the measures were genuinely necessary.
- The Remoteness of Asset Forfeiture: The Court held that blocking assets and facilitating their execution to satisfy domestic civil damage awards lacked a direct, proximate nexus to protecting essential security interests. The measures were compensatory and retributive in character, rather than defensive or preventive security actions, rendering the Article XX(1)(d) exception inapplicable.
Doctrinal Implications and the Reparation Phase
The judgment in Certain Iranian Assets establishes that domestic civil litigation mechanisms, even when addressing terrorism-related claims, cannot unilaterally displace bilateral treaty commitments owed to foreign legal entities. While the Court declined to extend the Treaty of Amity’s commercial protections to sovereign central banks, its robust defense of corporate legal separateness reinforces protections for state-owned enterprises in cross-border trade.
Because the parties were unable to reach a negotiated settlement on pecuniary compensation within the initial 24-month window provided in the judgment, the proceedings have advanced into the formal compensation phase. The Court will now determine the precise quantum of damages owed by the United States for the unlawful execution of protected corporate assets, marking the final procedural chapter of the 1955 Treaty’s legacy at the Peace Palace.