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The Iranian debt: How Netanyahu is losing Israel's real battle with the Islamic Republic - Diplomacy and Defense - Israel News | Haaretz
With billions of dollars hanging in the balance, Israel and Iran have been waging legal war in Swiss courtrooms since 1981 – while conducting behind-the-scenes contacts over an ever-growing debt to the National Iranian Oil Company.
By Aluf Benn | Jan. 17, 2015 | 4:30 PM |
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Laying the final part of the Eilat-Ashkelon Pipeline, 1969. Photo by Daniel Rosenblum / Starfot
Thursday, January 23, 2014, was a particularly happy day for the Iranian-Swiss attorney Homayoon Arfazadeh. The Geneva-based law firm of Python and Peter, of which he’s a member, announced his promotion to full partner, and took the occasion to note his achievements as an expert in international arbitration.
Indeed, it had been a successful week. Two days before the promotion announcement, he and the firm’s senior partner, Wolfgang Peter, won a judgment in Switzerland’s Federal Supreme Court in favor of their most important client, the National Iranian Oil Company (NIOC).
The court ruled that Israeli energy companies must pay the Iranians an old debt from the period of the Shah, and rejected the appeal filed by the Israeli side in the matter.
A dozen years earlier, Arfazadeh published a learned legal article, “Israel’s Best Bet: True Justice or International Law?” Now, together with his partner, he racked up a small victory over Israel in the legal arena.
Judge Katherine Klett, who presided over the panel of judges in the federal court at Lausanne, rebuffed the arguments put forward by Daniel Guggenheim, a Swiss lawyer hired by the Israelis. Debts have to be paid, Klett asserted, and the political issues between Israel and Iran are of no interest to the court.
The loss was as expensive as it was stinging: The Israelis were ordered to pay the Iranians’ court costs of 90,000 francs ($104,000) and another 80,000 francs to the federal court.
The only consolation was that the collection of the full debt was delayed for the time being, until it becomes clear whether its payment would violate the Swiss sanctions against Iran.
On the day after Israel’s court defeat, Prime Minister Benjamin Netanyahu arrived in Switzerland to take part in the World Economic Forum at Davos. The participants’ attention was focused on a new member of the group, Iranian President Hassan Rohani, who was out to present his country’s new moderate face since his electoral victory the previous summer.
True to form, Netanyahu – disappointed at the applause his rival received and the favorable impression he made in general – issued a statement warning the international community that “Rohani is continuing with the Iranian show of deception,” adding, “The goal of the Iranian ayatollahs’ regime, which is hiding behind Rohani’s smiles, is to ease sanctions without conceding on their program to produce nuclear weapons.”
Iranian President Hassan Rohani, September 26, 2013. (Credit: Reuters)
The statement enumerated the wrongdoings of the Iranian regime, from pursuing a “nuclear project” to blocking access to the Internet. However, he did not mention the judicial defeat he had just sustained at the hands of the ayatollahs’ representatives.
Israel and Iran have been engaged in “oil arbitration” for many years, revolving around a dispute over an amount estimated at billions of dollars.
Jerusalem is treating the arbitration with high sensitivity, as though it were a dark state secret: to this day, the government has refrained from referring officially to the legal battle against the Iranians.
We can assume that each development in the case is discussed at the highest state level by a handful of officials with top security clearance, legal experts and security officers.
Similar secrecy prevails in Iran – authorities in Tehran did not celebrate their victory in the Swiss court with parades and declarations. Both sides prefer to hurl mutual threats and condemnations, but to remain silent about the only channel – as far as is known – in which contact is maintained between official representatives of the two countries.
In June 2013, attorney Nitsana Darshan-Leitner, head of Shurat Hadin – Israel Law Center, petitioned the Jerusalem District Court against the foreign and justice ministries, requesting information about the arbitration proceedings with Iran.
The ministries rejected the request laconically, and that case is now being heard in the Supreme Court, under a confidentiality order.
Cause célèbre
But the official silence in Jerusalem and Tehran does not obligate the Swiss, on whose soil the arbitration is being conducted. Two judgments handed down by the Supreme Court in Lausanne, published last year and the year before, reveal the minutiae of the judicial deliberations.
In accordance with Swiss legal tradition, the names of the parties do not appear in the judgments, and in one of the cases Israel requested explicitly that they be kept secret.
Judge Klett guffawed at this, saying that the legal dispute between Iran and Israel was an international cause célèbre and had been extensively referred to in law journals devoted to international arbitration. The detailed judgments show clearly exactly who and what is involved.
A perusal of the documents reveals that Israel’s legal strategy has changed in the past few years, since Netanyahu’s return to power. Before that, Israel adopted a foot-dragging stance in which it put forward technical and procedural arguments.
In fact, six years ago Israel paid the Iranians an advance on account of the debt in one of the cases. But in the Netanyahu period, Israel has displayed a militant approach and tried to present its refusal to pay as part of the global struggle against the Iranian nuclear project.
Israel’s lawyers have put forward public-diplomacy arguments in the Swiss court and spoken about the Iranian leaders’ calls “to wipe Israel off the map” as sufficient reason to cancel the debt.
The Swiss judges have not been impressed by this or the Israeli attempt to liken the Iranian claimants to the deposed Zaire dictator Mobutu Sese Seko or to art thieves.
In the past four years, against the background of the international sanctions imposed on Iran, the two sides have stepped up their legal battle. Because the decision-making processes in Tehran are not transparent, it is not clear whether this was a deliberate policy of the Iranian leadership aimed at testing the toughness of the sanctions and humiliating Israel, a desperate effort to obtain money, or just habitual action by officials and lawyers who have become addicted to the legal battle and don’t want to stop.
What is clear is that the Iranians believe they have a case, that the arbitration will conclude in their favor, and that they will get vast sums of money from Israel.
By the same token, it’s clear that the Israeli side is apprehensive about losing, and therefore has made every effort to gain time and evade substantive discussion of the financial suit.
In the past few years, the judicial preparations in Jerusalem have taken place parallel to a formal stiffening of the rules of the boycott against Iran, spearheaded by Netanyahu and former Finance Minister Yuval Steinitz.
This new legislation was presented as Israel’s contribution to the international sanctions against Iran, which are aimed at stopping the nuclear project. But it’s obvious that the Israeli decision makers were aware of the financial threat contained in the oil arbitration and sought to exploit the sanctions in order to eliminate it.
The dispute revolves around two claims by NIOC to receive money accruing from joint deals with Israel, which were frozen when relations between the two countries were broken off after the Islamic Revolution of 1979.
One claim, which can be dubbed the “great arbitration,” relates to Iran’s share in the economic profits of a joint project to build an oil pipeline in Israel and operate a fleet of oil tankers. This arbitration is currently valued at about $7 billion, according to the journal Global Arbitration Review, which apparently drew on NIOC lawyers for its calculation.
The second claim, or “little arbitration,” is far simpler. On the eve of the revolution, the Iranians sold crude oil to three Israeli energy companies: Paz, Delek and Sonol. They were not paid, and now they want their money, plus interest.
Taken by surprise
Iran and Israel maintained close ties in the period of the Shah’s rule. This involved military and intelligence cooperation; the sale of Iranian oil to Israel and Israeli arms to Iran; talks at all levels; aid to the United States in the Cold War against the Soviet Union; and a joint stand against the radicals in the Middle East, from Gamal Abdel Nasser to Yasser Arafat.
Yet, even though El Al flew regularly to Tehran and thousands of Israelis visited Iran and worked there, the relations between the countries were always cloaked in secrecy. The two embassies, in Tehran and Ramat Gan, operated without official status and did not hoist flags. The Iranians always explained to their Israeli interlocutors that they were under pressure from the Arab states not to cooperate with Israel, and therefore had to keep a low profile. Israel accepted their request for discretion, just as it obscures its ties with Arab states today.
For more than 20 years, from the mid-1950s until the fall of the Shah, Iran was Israel’s chief oil supplier. The channel of supply was consolidated in 1957, when Israel gained freedom of navigation in the Red Sea via the Straits of Tiran. Tankers carrying Iranian oil unloaded their cargo in the port of Eilat, from where the oil flowed via a pipeline to the refineries in Haifa.
The Iranians had a partial partnership in the Eilat-Haifa pipeline project, which was headed by two Jewish businessmen from Europe: Baron Edmond de Rothschild from France, and the banker Yehuda Assia from Geneva.
Iran’s insistence on secrecy obliged Israel to operate through foreign shell companies and not sign direct contracts with NIOC (or with foreign oil companies that operated in Iran at the time). The three Israeli energy companies purchased the crude oil through a Geneva-based company, SPTM (Société des Pétroles et des Transports Maritimes), usually referred to as Sopetrol.
According to the documents of the Registrar of Companies in Geneva, Sopetrol was established in 1955 and is no longer operating. It was erased from the registry of companies in 1999. However, its official address suggests that it is the shell company now being sued: it is located “c/o Daniel Guggenheim, advocate,” who represents the Israeli side in the “little arbitration.” Guggenheim was also listed as the company’s sole director until 1996, when the liquidation processes were set in motion.
Even though it is no longer operating, the little shell company continues to exist in the arbitration and court documents, and to occupy statesmen and lawyers.
The Six-Day War of 1967 – for whose eruption the Shah pushed, according to the historian Ami Gluska – drew Israel and Iran even closer.
The Suez Canal, through which a substantial part of Iran’s oil exports passed, was closed to navigation. The Israelis persuaded the Shah that it would be worth his while to join them in an ambitious project: laying a large pipeline from Eilat to Ashkelon, which would act as a “land bridge” and replace the closed route of the Suez Canal, and through which Iranian oil would flow to clients in Europe. Israel would build the pipeline and the accompanying facilities, Iran would supply the oil, and both sides would benefit from the fruits of the investment.
On February 29, 1968, following intense negotiations of a few months and the raising of the funds from a German bank, a “participation agreement” was signed in Tehran between Israel’s finance minister, Pinhas Sapir, and the director general of NIOC, Manuchar Akbal.
Under the terms of the agreement, whose full content has yet to be made public, the Israeli government agreed to grant the project a 49-year concession, exemption from taxes and planning, and building leeway. Censorship was imposed on press reports relating to the pipeline, its funding and its sources of fuel.
In those days of running roughshod by Mapai – the forerunner of Labor – and in the absence of green organizations and High Court of Justice petitions, the project was implemented in record time: by the end of 1969, oil was flowing through the pipeline. Israel built a second refinery in Ashdod and storage tanks at both ends of the line.
The Arab boycott and Iranian apprehensions again obliged the sides to operate through shell companies, which were registered in Canada and Panama. Outwardly, two companies were active: the Eilat-Ashkelon Pipeline Company (EAPC), which was responsible for transporting and storing the oil inside Israel; and Trans-Asiatic Oil, Ltd., which was in charge of carrying and marketing the oil.
The Iranians did not appoint officials of their own to the companies’ boards, and requested Israeli and Jewish-European oil personnel to represent them. As international shipping companies refused to take part in the project, for fear of the Arab boycott, Trans-Asiatic leased a large fleet of tankers, of which there 23 at the time the partnership collapsed.
After peaking on the eve of the 1973 Yom Kippur War, the project began to lose momentum with the reopening of the Suez Canal. Trans-Asiatic had a hard time finding clients for Iranian oil in Europe; most of the oil that flowed through the pipeline was earmarked for Israel, or arrived from the Egyptian oil wells that Israel operated in the period of its rule in the Sinai Peninsula.
Later studies – by Prof. Uri Bialer from the Hebrew University of Jerusalem, and by the journalists Yuval Elitzur and Eliahu Salpeter in their book “Oil Plots” – reached the conclusion that the pipeline-and-tankers project was an economic failure but ensured the supply of Iranian oil to Israel.
The last oil-supply agreement was signed on October 18, 1977, between NIOC and the Israeli shell company in Geneva. Relations between the sides were then at a high point: the Shah played a part in encouraging the Israeli-Egyptian peace process and signed large security deals with Israel. Prime Minister Menachem Begin visited him secretly in February 1978, in what turned out to be the last meeting between the leaders of the two countries.
The wave of Islamic protest began in Iran shortly afterward, the Shah lost his grip on the country and was deposed in January 1979.
A month later, the Islamic Republic of Ayatollah Khomeini came to power, the ties with Israel were severed, and Iran became a vociferous enemy of the Jewish state, which was branded the “little Satan” and the “Zionist regime.”
The Shah’s fall came as a surprise to officials in charge of the oil partnership. In December 1978, when the tension in Tehran was at its height, Trans-Asiatic took a 10-year lease on a tanker called Sea Rover. Trans-Asiatic’s directors apparently thought that the Shah’s regime would survive and that business would continue as usual.
The Iranian side, too, fulfilled its part until the last minute: five oil shipments from Iran arrived in Eilat at the end of 1978. According to Samuel Segev’s book, “The Iranian Connection,” the Iranian oil company granted its Israeli clients credit of 120 days. But by the time the date of payment arrived, the regime in Tehran had changed.
The three Israeli energy companies – Paz, Delek and Sonol – used the oil, but the Iranians did not receive the quid pro quo. This issue is currently at the heart of the “little arbitration.” Haaretz has previously reported that it is entrusted to the accountant general of the Finance Ministry.
The partnership in the pipeline and in the fleet of tankers ended in the wake of the Iranian revolution. Iranian oil no longer flowed to Israel – which found alternative energy sources. Trans-Asiatic sold the ships it had leased at a big loss, and the pipeline has since exploited only a small part of its capacity.
In the past decade, EAPC completed its reverse-flow project – enabling oil to be pumped southward, too, from its Ashkelon oil port to Eilat – in an effort to sell oil from Azerbaijan to clients in Asia. That business project failed.
Last month, millions of liters of oil spilled from the pipeline during maintenance work, seriously damaging the Evrona nature reserve, north of Eilat. That event sparked public calls to lift the veil of secrecy from EAPC and its operations, backed by a series of articles by Avi Bar-Eli in TheMarker, class-action suits for compensation in the wake of the environmental damage, and a petition to the High Court of Justice by an NGO, the Israel Union for Environmental Defense, to lift the company’s confidentiality.
The timing of the spill is especially bad for EAPC, because it must inform the government by March 25 whether it wishes to extend the concession for another 49 years when the current concession expires in two years.
The oil spill at Israel's Arava Desert, December 10, 2014. (Credit: Sassi Horesh)
Public criticism of the terms of the concession, accompanied by demands for transparency in the company’s activity and for greater oversight, will make it more difficult to renew the existing arrangement.
The government will have to decide whether to nationalize the company or continue with the unfriendly partnership with NIOC.
Arbitration under fire
Khomeinist Iran devoted its first years to consolidating the regime – first by conducting a violent internal purge of the remnants of the Shah’s regime, then by repulsing an invasion by Iraq.
In 1980, Iran nationalized oil production, which until then had been divided between NIOC and a consortium of foreign companies. Despite the public declarations of hate, Iran’s rulers purchased arms and spare parts from Israel in a triangular transaction with the United States, which evolved into the “Irangate” affair. Subsequently, the Iranians also purchased gas masks, for protection against Saddam Hussein’s chemical weapons.
But even at the height of the war against Iraq, some officials in Tehran remembered the debt owed by the Israeli energy companies. In October 1981, Haaretz published the first report that Iran was going to sue Israel for $1 billion.
The Iranians were in no hurry. The 1977 supply agreement stipulated that the parties would be obligated by Iranian law, and that any dispute that arose would be heard before a tribunal of three arbitrators in Tehran. On July 27, 1985, NIOC launched an arbitration process against Sopetrol, the Geneva-based shell company.
Haaretz' 1981 report on Iran's intentions to sue Israel for $1 billion.
In 1991, the claimants added the Israeli energy companies – Paz, Delek and Sonol – to their suit, apparently having concluded that the shell company had ceased to operate and would not be able to pay them a cent. Better to aim for the deeper pockets of large, profitable corporations.
According to the documents, the Iranian arbitrators went about their task very slowly. It was not until March 3, 1999, that they declared the Israeli energy companies had been added to the suit justly, and it took them two more years to decide on the substantive question of the debt.
On June 8, 2001, almost 16 years after the suit was filed, the arbitrators ruled that Sopetrol and the three Israeli companies must pay $97 million to NIOC ($30 million principal, $66 million interest and about $1 million for collection expenses).
The Swiss shell company did not appeal the decision and did not try to make contact with the court in Iran, even though – in contrast to the Israeli companies – no one hindered it from going to court in the Islamic Republic.
These developments were kept secret in Israel. The financial reports issued by the energy companies, which list in wearisome detail every suit of tens of thousands of shekels against them for soil pollution, or business disputes with gas station owners, fail to mention the old debt to the Iranians or the arbitration process underway in Tehran.
In the meantime, the Iranians found a more ambitious goal for their legal battle. While awaiting the results of the arbitration against the Israeli energy companies, the directors of NIOC also claimed their share in the lost pipeline and tanker fleet partnership with Israel.
Here, though, they faced far more complex challenges than in the “little arbitration.” The respondent in this case was none other than the government of Israel itself, not a shell company in a neutral country. Iran doesn’t have an ambassador here who can serve the documents to the Finance Ministry in Jerusalem.
The second problem was of a procedural character. The 1968 participation agreement did not stipulate the binding law of the agreement, and set forth a complicated procedure for resolving disputes between the partners. If a disagreement were to arise, and the parties could not resolve it amicably, each side would appoint an arbitrator to represent it.
In the event that the two arbitrators failed to reach a decision, or to agree on the appointment of a third arbitrator, the parties would ask the president of the Paris-based International Chamber of Commerce to appoint the additional arbitrator.
That procedure is presently at the heart of the legal dispute between Iran and Israel; Israel has exploited this situation in order to gain time with empty procedures.
‘Great arbitration’ against the ‘Little Satan’
On October 14, 1994, the Iranians launched the “great arbitration” against Israel. They appointed an arbitrator and asked Israel to appoint one as well. This period was the height of the Oslo Accords process. The Palestinian Authority was operating in territories Israel had vacated in the Gaza Strip and Jericho; Israel and Jordan were about to sign a peace agreement; the Gulf states and North African countries took part in regional economic conferences and opened Israeli representations on their soil; and U.S. President Bill Clinton was about to make a historic visit to Syria, Iran’s ally, in order to advance the process under which Israel would return the Golan Heights in return for peace.
At that moment, it looked as though Iran were going to suffer a strategic debacle at the hands of the United States and its wards in the region, and the Israeli-Arab peace process appeared to be irreversible.
Israel’s leaders at this time were Yitzhak Rabin and Shimon Peres, former confidants of the Shah and the fomenters of the secret contacts with Khomeinist Iran during Irangate. Iran, they said, was the greatest danger to the peace process and regional security, and, as expected, they rejected outright the Iranian arbitration demand. Formally, Israel claimed that the claimant had not defined the essence of the dispute between the sides properly and that no prior dialogue had preceded the arbitration, as called for.
Unfazed by the Israeli rejection, the Iranians pressed ahead. The next step was a request to the president of the International Chamber of Commerce in Paris, on August 22, 1995, to compel Israel to appoint an arbitrator.
After a series of delays on procedural grounds, the ICC president acceded to Iran’s request. Israel appealed the decision, unsuccessfully, and on March 29, 2001, the Paris Court of Appeal instructed Israel to appoint an arbitrator.
Israel objected and presented two legal opinions to back up its refusal – one denying the authority of the French court in this case; the other asserting that as long as a conflict exists between Iran and Israel, it is impossible to compel the appointment of an arbitrator.
The judges disagreed and, in November 2001, appointed an arbitrator on Israel’s behalf. Israel appealed to the French Supreme Court, but the appeal did not halt the process. In December 2003, Israel suggested that the arbitration take place in Geneva. The Iranians agreed.
As has been reported, Israel’s first arbitrator was former Justice Minister Haim Zadok. After his death, in 2002, he was replaced by attorney Avigdor “Dori” Klagsbald, who continues to hold the post. His firm’s website notes, “Dr. Klagsbald serves as an arbitrator on behalf of the State of Israel in an international arbitration taking place in Switzerland.”
According to a report by Avi Bar-Eli in TheMarker, Klagsbald receives a fee of about $500,000 a year. A report by Yossi Melman in Haaretz, in 2006, noted that EAPC had hired the Jerusalem attorney Elhanan Landau, a former legal adviser to the Finance Ministry, as an external adviser on the Iranian suit. When Landau died, he was replaced by his partner, Zvi Nixon, whose firm also represents EAPC in legal proceedings in which it’s involved in Israel. Nixon declares proudly on his website that he has “extensive experience in international arbitration, oil and gas projects,” and more.
Directly to the pantheon
On December 24, 2003, NIOC presented its formal claim to the arbitrators. The Iranians demanded that Israel pay them $800 million, which in their estimate represented half the value of the assets related to the 1968 participation agreement – the oil pipeline and its attendant facilities, and apparently also the tanker fleet, which had been sold – and compensation relating to “another arbitration,” which was still pending. The amount in question is thought to have swelled since then to billions of dollars.
The Israeli writ of defense, submitted on April 23, 2004, asked the arbitrators to reject the claim for three reasons: opposition to the process by which the Israeli arbitrator was appointed; lack of good faith on the part of the Iranian arbitrator; and objection in principle to the suit as such.
Israel submitted a counterclaim for compensation from NIOC for unilaterally violating the agreement after the revolution. The amount of compensation being demanded is not spelled out in the documents of the Swiss court.
On February 1, 2005, Israel suffered a resounding legal defeat in France. The Supreme Court rejected its appeal concerning the appointment of the arbitrator and published its judgment. The decision was extensively reported in the trade press. According to Prof. Thomas Clay, a renowned expert on international arbitration from the University of Versailles, the judgment “belongs to the pantheon of the great arbitration decisions.”
The French judges found that the rights of the Iranian company had been infringed, because it could not turn to courts in Iran or Israel owing to the enmity between the two countries. Right of access to a judge – including an arbitrator – is part of the international order and is enshrined in the European Convention on Human Rights, the judges ruled.
In their opinion, because the agreement vested authority in the Paris-based ICC, the French courts possessed the authority to rule in the case. In wake of the judgment, French law was amended to adopt this principle.
At the time, Netanyahu was finance minister in the government of Ariel Sharon, and as such was responsible for EAPC and the arbitration with Iran. But his public activity was focused on the Gaza disengagement and extracting provident funds from the banks (via the Bachar committee). He made no public statements about the Iranian suit or Israel’s defeat in the French court.
Similar silence prevailed in Tehran, even though the proceedings were conducted openly and the judgment was widely cited in the legal press.
In response to Yossi Melman’s 2006 article that contained a partial description of the arbitration proceedings, Iran issued an official statement denying the proceedings’ existence, claiming that the report was “unfounded and a complete fabrication.”
On December 18, 2006, about 10 days after the Iranian denial, the arbitrators met for a first oral meeting, after years of exchanging documents. Klagsbald sat with his Iranian counterpart in a discussion of the first item on the agenda: Israel’s persistent denial of the tribunal’s authority. Substantive discussion of the monetary claims was postponed until the procedural question could be resolved.
Things moved slowly until February 10, 2012, when the arbitrators made a first decision that rejected the Israeli objection to Klagsbald’s coerced appointment. The tribunal made no reference to the Israeli allegation that the Iranian arbitrator was not acting in good faith, stating that this matter would be considered in the future.
Prime Minister Benjamin Netanyahu (Credit: Emil Salman)
Arak and sheep
While waiting for the decision about the fitness of their arbitrator in the “great arbitration,” the Iranians again set in motion the “little arbitration.” The Swiss document does not elaborate about the contacts that were conducted in the period when Ehud Olmert was prime minister and Roni Bar-On finance minister.
What’s clear, though, is that in March 2009, toward the end of their term in office, the Iranians received a first payment on account from the Israelis’ Geneva-based shell company.
Two years later, the Iranians set out to finish collecting the debt.
Their timing is interesting. On January 19, 2011, the Federal Council of Switzerland joined the international sanctions against Iran, which included restrictions on monetary transfers. Two months later, on March 11, NIOC asked the Debt Collection Office of Geneva to serve an order of payment on Sopetrol in the amount of 94 million Swiss francs, based on the Iranian arbitrators’ ruling in 2001, with annual interest of 5 percent. The shell company opposed the payment.
Sopetrol and the Israeli energy companies were represented by the aforementioned Daniel Guggenhein, the owner of a small law firm in Geneva, whose expertise lies in banking laws and commercial law.
But his connection with Israel runs far deeper than representation of the shell company. He heads a philanthropic foundation called Bona Terra, which provides grants for young Jews who want to work in agriculture. The foundation was established by a friend of the family, and Guggenheim inherited its management from his father, Prof. Paul Guggenheim, who was a world-renowned authority on international law.
The foundation donates hundreds of thousands of shekels a year to agricultural projects in the Negev and the Arava, such as “sheep breeding based on wastes” and “producing arak from date waste.”
On June 8, 2011, NIOC filed a petition with the Court of the First Instance in Geneva, seeking enforcement of the order of payment. Guggenheim objected, on behalf of the shell company, arguing that the rulings of the Iranian arbitrators about the oil debt could not be enforced in Switzerland.
On September 25, 2012, the court accepted the NIOC petition, ruling that the debt was collectable in Switzerland. Both sides hurried to appeal to the next instance, the Court of Justice in Geneva: the Israelis objected again to paying the debt, the Iranians demanded payment with the addition of tens of millions of francs in interest.
In the meantime, regulatory developments occurred in Israel that had implications for the proceedings in Switzerland.
On July 31, 2011, pursuant to the international sanctions, Finance Minister Yuval Steinitz signed a “trading with the enemy” ordinance, which classified Iran as an “enemy state” and contained a long list of Iranian organizations and individuals involved in the country’s nuclear and missile projects. NIOC was not explicitly mentioned, but the ordinance prohibits all economic activity with enemy states.
Then-Finance Minister Yuval Steinitz (Credit: Tomer Appelbaum)
A year later, the Knesset passed a special law in connection with the struggle against the Iranian nuclear project, extending the restrictions and prohibitions.
The Israeli lawyers in both arbitrations – “little” and “great” – lost no time in arguing that Steinitz’s ordinance meant that Israel was unable to pay the Iranians anything. The lawyers explained to the Geneva court that if Paz, Delek and Sonol were to pay the debt to NIOC, they would be in breach of the law in Israel that prohibits making payments to enemy states.
The sanctions regime protected Zadik Bino, Yitzhak Tshuva and David Azrieli, the owners of the energy companies, from having to fork over tens of millions of Swiss francs. But Steinitz went further. On December 14, 2011, the accountant general of the Finance Ministry, Michal Abadi-Boiangiu – who also holds the title of “custodian of enemy property” – sent an official letter to attorney Guggenheim, according to which the Geneva shell company, too, is prohibited from paying the debt to the Iranians, because the company is “controlled by Israeli interests.”
Now the legal battle arrived at the highest instance of all: the Federal Supreme Court of Switzerland, in Lausanne. This institution differs from its Israeli counterpart. It consists of expert units in criminal law, civil law and so forth, and the judges are appointed on a completely open and aboveboard political basis.
Judge Klett, from the civil department, represents the left-wing Social Democratic Party, which is anticapitalism and advocates Switzerland’s joining the European Union.
Ahead of the Supreme Court deliberations, the Israeli legal team prepared a “voluminous” file, as Judge Klett put it, in support of the argument that any payment made to the Islamic Republic of Iran would contradict the international norm of the sanctions regime.
The file contained many documents referring to the United Nations and EU sanctions against Iran, detailed charts of past transactions between Iran and Israel, the joint contracts and the shell companies, and the opinion of a learned but unnamed Israeli professor.
The first case arrived in Lausanne on March 14, 2012, in the form of Israel’s appeal against the authority of the arbitrators in the “great arbitration,” dealing with the division of oil pipeline property and the tankers. Acceptance of the appeal would have brought a halt to the process and released Israel from the nightmare of having to pay billions of dollars to an enemy state.
The Israeli government’s lawyers, Dominique Brown-Berset and Dominique Ritter, from Brown & Page in Geneva, presented the opinion of an Israeli legal expert (whose name was not made public in the judgment) holding that the French judges had erred in ruling that NIOC enjoyed protection under the European Convention on Human Rights.
Not making do with the procedural arguments, which had already been rejected in France, the lawyers presented as “new evidence” the ordinance issued by Steinitz and the charts of the transactions.
NIOC responded to the appeal on May 7, 2012, by urging its rejection and asking the court to recognize the arbitrators’ authority.
The judges in Switzerland work quickly. On January 10, 2013, less than nine months after the appeal was filed, Judge Klett and the other four members of the panel signed off on a judgment rejecting the Israeli objections and finding no flaws in the procedure for appointing the arbitrator.
Judge Klett found the Israeli interpretation of the original 1968 agreement with the Iranians to be mistaken. This meant that the arbitration would continue and that Israel would have to address the substance of the issues and not only the procedures.
At the conclusion of the judgment came the price tag: the Israeli government had to pay the highest court costs allowed under Swiss law, because “the importance of the amount in dispute justifies charging the maximum court fee.”
Israel was ordered to pay 250,000 Swiss francs (about $285,000) to the Iranian oil company and another 200,000 francs to the court. The Iranians’ lawyers, Wolfgang Peter and his colleagues, had routed the Israelis’ legal team.
Yitzhak Tshuva (Credit: Tomer Appelbaum)
In the dark
The Swiss court’s decision was handed down on the eve of the 2013 general election in Israel, but the voters were in the dark about the legal debacle sustained by the government at the hands of the Iranians in Lausanne, and about the debt, which threatened to swell.
Three days later, in the weekly cabinet meeting, Netanyahu reiterated his promise that “preventing a nuclear Iran was and remains my central goal as prime minister.” It was necessary to take action against Iran “both at the international level and at the level of Israel’s ability to act,” Netanyahu said, and promised to continue on this path “if we win, as I believe [we will], the voters’ trust.”
Even the full judgment, which was published in Switzerland a few weeks later, barely resonated in Israel.
On March 18, 2013, Netanyahu presented his new government in the Knesset. Steinitz was moved to the Strategic and Intelligence Affairs Ministry, and the EAPC file, along with the oil arbitrations, fell under the responsibility of the new finance minister, Yair Lapid.
The “great arbitration” sank into the recesses of oblivion once more, muted by the commitment of the parties and the lawyers to maintain confidentiality.
But at the same time, the open proceedings relating to the “little arbitration” case, involving the debt of the energy companies, were accelerated. On March 22, 2013, the Court of Justice in Geneva rejected the appeals of both sides and ruled that the Israelis did not have to pay the interest being demanded by the Iranians, but only the original debt of 94 million francs. However, it was clear to everyone involved that this decision was only a transition stage to the Supreme Court in Lausanne.
The Israeli appeal to the Supreme Court was submitted on May 7, 2013. The Swiss shell company and its Israeli operators requested that the payment of the debt be annulled, and in the meantime be postponed until a judgment be handed down, or to send the case back to a lower court for reconsideration.
The next day, attorney Guggenheim visited Israel and took part in the annual meeting of the board of governors of Ben-Gurion University of the Negev, in Be’er Sheva, wearing his philanthropic hat as president of the Bona Terra Foundation.
The university’s president, Prof. Rivka Carmi, awarded him a citation in a ceremony at Kibbutz Sde Boker, where the Swiss Institute for Dryland Environmental and Energy Research was dedicated.
The Zionist donor to the farmers of the Arava appeared in the court at Lausanne against the Iranian-Swiss lawyer. The arguments he presented read like a judicial version of Prime Minister Netanyahu’s speeches at the UN: Denying financial resources to Iran, in accordance with the sanctions regime, is “an important principle of international law,” he declared. Israel is working to deny Iran funds that will help it develop a nuclear strike force aimed at “wiping Israel off the map,” as Iran’s leaders have declared. The Israeli stance is backed up by UN and EU resolutions relating to the sanctions. According to this interpretation, payment of the debt to NIOC would be contrary to international law and to the position of the government of Switzerland.
The Swiss judges were not impressed. The diplomatic arguments are inadmissible, they wrote in their judgment, because Israel did not make them in the lower court and because they are not reasoned. They are “based indeed on some abstract considerations concerning international policy and, in particular, the conflict existing between the State of Israel and the Islamic Republic of Iran,” the judges wrote.
The court does not understand, they added, why a debt of a Swiss company to an Iranian company, stemming from unpaid invoices for oil deliveries made 34 years earlier, is relevant to Swiss foreign policy today. The appeal was rejected and Israel ordered to pay court costs.
But the judges left the Israelis a small opening to avoid paying the historic debt. They wrote that transferring the money to the Iranians might clash with the international sanctions regime, to which the Swiss government is committed, and accordingly sent a copy of the judgment to the State Secretariat for Economic Affairs in Bern for its perusal. In this matter, the court indirectly accepted part of the Israeli case, which they had rejected scornfully in their decision.
The judgment from a year ago hasn’t ended the dispute. Israel and Iran are continuing with the “great arbitration” relating to the pipeline and the oil tankers. It’s not clear how the Debt Collection Office in Geneva will actually collect, if at all, the debt relating to the “little arbitration” from energy companies that are subject to the Israeli sanctions law.
The Iranians, at any rate, won judgments in their favor, even if they aren’t getting the money for the time being.
Israel’s old partnership with the regime of the Shah of Iran is refusing to fade away. EAPC still exists and continues to operate the oil pipeline, the ports and the storage containers, while the government conceals the company’s activity and its financial reports – apparently for fear that the dormant partners from Iran will demand more money for their role in the partnership.
In recent years, Israel has invested large efforts in the legal battle against NIOC, and the defeats in the French and Swiss courts have not discouraged it. The Iranians are displaying similar determination, despite the difficulty in translating their legal victories into economic achievements.
Both sides prefer to keep things quiet and not to exploit the proceedings for propaganda purposes. It’s more convenient for them to exchange public threats, to practice brinkmanship, and not to reveal that they are also able to speak courteously and through lawyers.
The Israeli public remains in the dark, as its leaders hide the quiet dialogue they have been conducting for many years with the national oil company of the Islamic Republic – and will go on conducting for the foreseeable future.
With billions of dollars hanging in the balance, Israel and Iran have been waging legal war in Swiss courtrooms since 1981 – while conducting behind-the-scenes contacts over an ever-growing debt to the National Iranian Oil Company.
By Aluf Benn | Jan. 17, 2015 | 4:30 PM |
Laying the final part of the Eilat-Ashkelon Pipeline, 1969. Photo by Daniel Rosenblum / Starfot
Thursday, January 23, 2014, was a particularly happy day for the Iranian-Swiss attorney Homayoon Arfazadeh. The Geneva-based law firm of Python and Peter, of which he’s a member, announced his promotion to full partner, and took the occasion to note his achievements as an expert in international arbitration.
Indeed, it had been a successful week. Two days before the promotion announcement, he and the firm’s senior partner, Wolfgang Peter, won a judgment in Switzerland’s Federal Supreme Court in favor of their most important client, the National Iranian Oil Company (NIOC).
The court ruled that Israeli energy companies must pay the Iranians an old debt from the period of the Shah, and rejected the appeal filed by the Israeli side in the matter.
A dozen years earlier, Arfazadeh published a learned legal article, “Israel’s Best Bet: True Justice or International Law?” Now, together with his partner, he racked up a small victory over Israel in the legal arena.
Judge Katherine Klett, who presided over the panel of judges in the federal court at Lausanne, rebuffed the arguments put forward by Daniel Guggenheim, a Swiss lawyer hired by the Israelis. Debts have to be paid, Klett asserted, and the political issues between Israel and Iran are of no interest to the court.
The loss was as expensive as it was stinging: The Israelis were ordered to pay the Iranians’ court costs of 90,000 francs ($104,000) and another 80,000 francs to the federal court.
The only consolation was that the collection of the full debt was delayed for the time being, until it becomes clear whether its payment would violate the Swiss sanctions against Iran.
On the day after Israel’s court defeat, Prime Minister Benjamin Netanyahu arrived in Switzerland to take part in the World Economic Forum at Davos. The participants’ attention was focused on a new member of the group, Iranian President Hassan Rohani, who was out to present his country’s new moderate face since his electoral victory the previous summer.
True to form, Netanyahu – disappointed at the applause his rival received and the favorable impression he made in general – issued a statement warning the international community that “Rohani is continuing with the Iranian show of deception,” adding, “The goal of the Iranian ayatollahs’ regime, which is hiding behind Rohani’s smiles, is to ease sanctions without conceding on their program to produce nuclear weapons.”
The statement enumerated the wrongdoings of the Iranian regime, from pursuing a “nuclear project” to blocking access to the Internet. However, he did not mention the judicial defeat he had just sustained at the hands of the ayatollahs’ representatives.
Israel and Iran have been engaged in “oil arbitration” for many years, revolving around a dispute over an amount estimated at billions of dollars.
Jerusalem is treating the arbitration with high sensitivity, as though it were a dark state secret: to this day, the government has refrained from referring officially to the legal battle against the Iranians.
We can assume that each development in the case is discussed at the highest state level by a handful of officials with top security clearance, legal experts and security officers.
Similar secrecy prevails in Iran – authorities in Tehran did not celebrate their victory in the Swiss court with parades and declarations. Both sides prefer to hurl mutual threats and condemnations, but to remain silent about the only channel – as far as is known – in which contact is maintained between official representatives of the two countries.
In June 2013, attorney Nitsana Darshan-Leitner, head of Shurat Hadin – Israel Law Center, petitioned the Jerusalem District Court against the foreign and justice ministries, requesting information about the arbitration proceedings with Iran.
The ministries rejected the request laconically, and that case is now being heard in the Supreme Court, under a confidentiality order.
Cause célèbre
But the official silence in Jerusalem and Tehran does not obligate the Swiss, on whose soil the arbitration is being conducted. Two judgments handed down by the Supreme Court in Lausanne, published last year and the year before, reveal the minutiae of the judicial deliberations.
In accordance with Swiss legal tradition, the names of the parties do not appear in the judgments, and in one of the cases Israel requested explicitly that they be kept secret.
Judge Klett guffawed at this, saying that the legal dispute between Iran and Israel was an international cause célèbre and had been extensively referred to in law journals devoted to international arbitration. The detailed judgments show clearly exactly who and what is involved.
A perusal of the documents reveals that Israel’s legal strategy has changed in the past few years, since Netanyahu’s return to power. Before that, Israel adopted a foot-dragging stance in which it put forward technical and procedural arguments.
In fact, six years ago Israel paid the Iranians an advance on account of the debt in one of the cases. But in the Netanyahu period, Israel has displayed a militant approach and tried to present its refusal to pay as part of the global struggle against the Iranian nuclear project.
Israel’s lawyers have put forward public-diplomacy arguments in the Swiss court and spoken about the Iranian leaders’ calls “to wipe Israel off the map” as sufficient reason to cancel the debt.
The Swiss judges have not been impressed by this or the Israeli attempt to liken the Iranian claimants to the deposed Zaire dictator Mobutu Sese Seko or to art thieves.
In the past four years, against the background of the international sanctions imposed on Iran, the two sides have stepped up their legal battle. Because the decision-making processes in Tehran are not transparent, it is not clear whether this was a deliberate policy of the Iranian leadership aimed at testing the toughness of the sanctions and humiliating Israel, a desperate effort to obtain money, or just habitual action by officials and lawyers who have become addicted to the legal battle and don’t want to stop.
What is clear is that the Iranians believe they have a case, that the arbitration will conclude in their favor, and that they will get vast sums of money from Israel.
By the same token, it’s clear that the Israeli side is apprehensive about losing, and therefore has made every effort to gain time and evade substantive discussion of the financial suit.
In the past few years, the judicial preparations in Jerusalem have taken place parallel to a formal stiffening of the rules of the boycott against Iran, spearheaded by Netanyahu and former Finance Minister Yuval Steinitz.
This new legislation was presented as Israel’s contribution to the international sanctions against Iran, which are aimed at stopping the nuclear project. But it’s obvious that the Israeli decision makers were aware of the financial threat contained in the oil arbitration and sought to exploit the sanctions in order to eliminate it.
The dispute revolves around two claims by NIOC to receive money accruing from joint deals with Israel, which were frozen when relations between the two countries were broken off after the Islamic Revolution of 1979.
One claim, which can be dubbed the “great arbitration,” relates to Iran’s share in the economic profits of a joint project to build an oil pipeline in Israel and operate a fleet of oil tankers. This arbitration is currently valued at about $7 billion, according to the journal Global Arbitration Review, which apparently drew on NIOC lawyers for its calculation.
The second claim, or “little arbitration,” is far simpler. On the eve of the revolution, the Iranians sold crude oil to three Israeli energy companies: Paz, Delek and Sonol. They were not paid, and now they want their money, plus interest.
Taken by surprise
Iran and Israel maintained close ties in the period of the Shah’s rule. This involved military and intelligence cooperation; the sale of Iranian oil to Israel and Israeli arms to Iran; talks at all levels; aid to the United States in the Cold War against the Soviet Union; and a joint stand against the radicals in the Middle East, from Gamal Abdel Nasser to Yasser Arafat.
Yet, even though El Al flew regularly to Tehran and thousands of Israelis visited Iran and worked there, the relations between the countries were always cloaked in secrecy. The two embassies, in Tehran and Ramat Gan, operated without official status and did not hoist flags. The Iranians always explained to their Israeli interlocutors that they were under pressure from the Arab states not to cooperate with Israel, and therefore had to keep a low profile. Israel accepted their request for discretion, just as it obscures its ties with Arab states today.
For more than 20 years, from the mid-1950s until the fall of the Shah, Iran was Israel’s chief oil supplier. The channel of supply was consolidated in 1957, when Israel gained freedom of navigation in the Red Sea via the Straits of Tiran. Tankers carrying Iranian oil unloaded their cargo in the port of Eilat, from where the oil flowed via a pipeline to the refineries in Haifa.
The Iranians had a partial partnership in the Eilat-Haifa pipeline project, which was headed by two Jewish businessmen from Europe: Baron Edmond de Rothschild from France, and the banker Yehuda Assia from Geneva.
Iran’s insistence on secrecy obliged Israel to operate through foreign shell companies and not sign direct contracts with NIOC (or with foreign oil companies that operated in Iran at the time). The three Israeli energy companies purchased the crude oil through a Geneva-based company, SPTM (Société des Pétroles et des Transports Maritimes), usually referred to as Sopetrol.
According to the documents of the Registrar of Companies in Geneva, Sopetrol was established in 1955 and is no longer operating. It was erased from the registry of companies in 1999. However, its official address suggests that it is the shell company now being sued: it is located “c/o Daniel Guggenheim, advocate,” who represents the Israeli side in the “little arbitration.” Guggenheim was also listed as the company’s sole director until 1996, when the liquidation processes were set in motion.
Even though it is no longer operating, the little shell company continues to exist in the arbitration and court documents, and to occupy statesmen and lawyers.
The Six-Day War of 1967 – for whose eruption the Shah pushed, according to the historian Ami Gluska – drew Israel and Iran even closer.
The Suez Canal, through which a substantial part of Iran’s oil exports passed, was closed to navigation. The Israelis persuaded the Shah that it would be worth his while to join them in an ambitious project: laying a large pipeline from Eilat to Ashkelon, which would act as a “land bridge” and replace the closed route of the Suez Canal, and through which Iranian oil would flow to clients in Europe. Israel would build the pipeline and the accompanying facilities, Iran would supply the oil, and both sides would benefit from the fruits of the investment.
On February 29, 1968, following intense negotiations of a few months and the raising of the funds from a German bank, a “participation agreement” was signed in Tehran between Israel’s finance minister, Pinhas Sapir, and the director general of NIOC, Manuchar Akbal.
Under the terms of the agreement, whose full content has yet to be made public, the Israeli government agreed to grant the project a 49-year concession, exemption from taxes and planning, and building leeway. Censorship was imposed on press reports relating to the pipeline, its funding and its sources of fuel.
In those days of running roughshod by Mapai – the forerunner of Labor – and in the absence of green organizations and High Court of Justice petitions, the project was implemented in record time: by the end of 1969, oil was flowing through the pipeline. Israel built a second refinery in Ashdod and storage tanks at both ends of the line.
The Arab boycott and Iranian apprehensions again obliged the sides to operate through shell companies, which were registered in Canada and Panama. Outwardly, two companies were active: the Eilat-Ashkelon Pipeline Company (EAPC), which was responsible for transporting and storing the oil inside Israel; and Trans-Asiatic Oil, Ltd., which was in charge of carrying and marketing the oil.
The Iranians did not appoint officials of their own to the companies’ boards, and requested Israeli and Jewish-European oil personnel to represent them. As international shipping companies refused to take part in the project, for fear of the Arab boycott, Trans-Asiatic leased a large fleet of tankers, of which there 23 at the time the partnership collapsed.
After peaking on the eve of the 1973 Yom Kippur War, the project began to lose momentum with the reopening of the Suez Canal. Trans-Asiatic had a hard time finding clients for Iranian oil in Europe; most of the oil that flowed through the pipeline was earmarked for Israel, or arrived from the Egyptian oil wells that Israel operated in the period of its rule in the Sinai Peninsula.
Later studies – by Prof. Uri Bialer from the Hebrew University of Jerusalem, and by the journalists Yuval Elitzur and Eliahu Salpeter in their book “Oil Plots” – reached the conclusion that the pipeline-and-tankers project was an economic failure but ensured the supply of Iranian oil to Israel.
The last oil-supply agreement was signed on October 18, 1977, between NIOC and the Israeli shell company in Geneva. Relations between the sides were then at a high point: the Shah played a part in encouraging the Israeli-Egyptian peace process and signed large security deals with Israel. Prime Minister Menachem Begin visited him secretly in February 1978, in what turned out to be the last meeting between the leaders of the two countries.
The wave of Islamic protest began in Iran shortly afterward, the Shah lost his grip on the country and was deposed in January 1979.
A month later, the Islamic Republic of Ayatollah Khomeini came to power, the ties with Israel were severed, and Iran became a vociferous enemy of the Jewish state, which was branded the “little Satan” and the “Zionist regime.”
The Shah’s fall came as a surprise to officials in charge of the oil partnership. In December 1978, when the tension in Tehran was at its height, Trans-Asiatic took a 10-year lease on a tanker called Sea Rover. Trans-Asiatic’s directors apparently thought that the Shah’s regime would survive and that business would continue as usual.
The Iranian side, too, fulfilled its part until the last minute: five oil shipments from Iran arrived in Eilat at the end of 1978. According to Samuel Segev’s book, “The Iranian Connection,” the Iranian oil company granted its Israeli clients credit of 120 days. But by the time the date of payment arrived, the regime in Tehran had changed.
The three Israeli energy companies – Paz, Delek and Sonol – used the oil, but the Iranians did not receive the quid pro quo. This issue is currently at the heart of the “little arbitration.” Haaretz has previously reported that it is entrusted to the accountant general of the Finance Ministry.
The partnership in the pipeline and in the fleet of tankers ended in the wake of the Iranian revolution. Iranian oil no longer flowed to Israel – which found alternative energy sources. Trans-Asiatic sold the ships it had leased at a big loss, and the pipeline has since exploited only a small part of its capacity.
In the past decade, EAPC completed its reverse-flow project – enabling oil to be pumped southward, too, from its Ashkelon oil port to Eilat – in an effort to sell oil from Azerbaijan to clients in Asia. That business project failed.
Last month, millions of liters of oil spilled from the pipeline during maintenance work, seriously damaging the Evrona nature reserve, north of Eilat. That event sparked public calls to lift the veil of secrecy from EAPC and its operations, backed by a series of articles by Avi Bar-Eli in TheMarker, class-action suits for compensation in the wake of the environmental damage, and a petition to the High Court of Justice by an NGO, the Israel Union for Environmental Defense, to lift the company’s confidentiality.
The timing of the spill is especially bad for EAPC, because it must inform the government by March 25 whether it wishes to extend the concession for another 49 years when the current concession expires in two years.
Public criticism of the terms of the concession, accompanied by demands for transparency in the company’s activity and for greater oversight, will make it more difficult to renew the existing arrangement.
The government will have to decide whether to nationalize the company or continue with the unfriendly partnership with NIOC.
Arbitration under fire
Khomeinist Iran devoted its first years to consolidating the regime – first by conducting a violent internal purge of the remnants of the Shah’s regime, then by repulsing an invasion by Iraq.
In 1980, Iran nationalized oil production, which until then had been divided between NIOC and a consortium of foreign companies. Despite the public declarations of hate, Iran’s rulers purchased arms and spare parts from Israel in a triangular transaction with the United States, which evolved into the “Irangate” affair. Subsequently, the Iranians also purchased gas masks, for protection against Saddam Hussein’s chemical weapons.
But even at the height of the war against Iraq, some officials in Tehran remembered the debt owed by the Israeli energy companies. In October 1981, Haaretz published the first report that Iran was going to sue Israel for $1 billion.
The Iranians were in no hurry. The 1977 supply agreement stipulated that the parties would be obligated by Iranian law, and that any dispute that arose would be heard before a tribunal of three arbitrators in Tehran. On July 27, 1985, NIOC launched an arbitration process against Sopetrol, the Geneva-based shell company.
In 1991, the claimants added the Israeli energy companies – Paz, Delek and Sonol – to their suit, apparently having concluded that the shell company had ceased to operate and would not be able to pay them a cent. Better to aim for the deeper pockets of large, profitable corporations.
According to the documents, the Iranian arbitrators went about their task very slowly. It was not until March 3, 1999, that they declared the Israeli energy companies had been added to the suit justly, and it took them two more years to decide on the substantive question of the debt.
On June 8, 2001, almost 16 years after the suit was filed, the arbitrators ruled that Sopetrol and the three Israeli companies must pay $97 million to NIOC ($30 million principal, $66 million interest and about $1 million for collection expenses).
The Swiss shell company did not appeal the decision and did not try to make contact with the court in Iran, even though – in contrast to the Israeli companies – no one hindered it from going to court in the Islamic Republic.
These developments were kept secret in Israel. The financial reports issued by the energy companies, which list in wearisome detail every suit of tens of thousands of shekels against them for soil pollution, or business disputes with gas station owners, fail to mention the old debt to the Iranians or the arbitration process underway in Tehran.
In the meantime, the Iranians found a more ambitious goal for their legal battle. While awaiting the results of the arbitration against the Israeli energy companies, the directors of NIOC also claimed their share in the lost pipeline and tanker fleet partnership with Israel.
Here, though, they faced far more complex challenges than in the “little arbitration.” The respondent in this case was none other than the government of Israel itself, not a shell company in a neutral country. Iran doesn’t have an ambassador here who can serve the documents to the Finance Ministry in Jerusalem.
The second problem was of a procedural character. The 1968 participation agreement did not stipulate the binding law of the agreement, and set forth a complicated procedure for resolving disputes between the partners. If a disagreement were to arise, and the parties could not resolve it amicably, each side would appoint an arbitrator to represent it.
In the event that the two arbitrators failed to reach a decision, or to agree on the appointment of a third arbitrator, the parties would ask the president of the Paris-based International Chamber of Commerce to appoint the additional arbitrator.
That procedure is presently at the heart of the legal dispute between Iran and Israel; Israel has exploited this situation in order to gain time with empty procedures.
‘Great arbitration’ against the ‘Little Satan’
On October 14, 1994, the Iranians launched the “great arbitration” against Israel. They appointed an arbitrator and asked Israel to appoint one as well. This period was the height of the Oslo Accords process. The Palestinian Authority was operating in territories Israel had vacated in the Gaza Strip and Jericho; Israel and Jordan were about to sign a peace agreement; the Gulf states and North African countries took part in regional economic conferences and opened Israeli representations on their soil; and U.S. President Bill Clinton was about to make a historic visit to Syria, Iran’s ally, in order to advance the process under which Israel would return the Golan Heights in return for peace.
At that moment, it looked as though Iran were going to suffer a strategic debacle at the hands of the United States and its wards in the region, and the Israeli-Arab peace process appeared to be irreversible.
Israel’s leaders at this time were Yitzhak Rabin and Shimon Peres, former confidants of the Shah and the fomenters of the secret contacts with Khomeinist Iran during Irangate. Iran, they said, was the greatest danger to the peace process and regional security, and, as expected, they rejected outright the Iranian arbitration demand. Formally, Israel claimed that the claimant had not defined the essence of the dispute between the sides properly and that no prior dialogue had preceded the arbitration, as called for.
Unfazed by the Israeli rejection, the Iranians pressed ahead. The next step was a request to the president of the International Chamber of Commerce in Paris, on August 22, 1995, to compel Israel to appoint an arbitrator.
After a series of delays on procedural grounds, the ICC president acceded to Iran’s request. Israel appealed the decision, unsuccessfully, and on March 29, 2001, the Paris Court of Appeal instructed Israel to appoint an arbitrator.
Israel objected and presented two legal opinions to back up its refusal – one denying the authority of the French court in this case; the other asserting that as long as a conflict exists between Iran and Israel, it is impossible to compel the appointment of an arbitrator.
The judges disagreed and, in November 2001, appointed an arbitrator on Israel’s behalf. Israel appealed to the French Supreme Court, but the appeal did not halt the process. In December 2003, Israel suggested that the arbitration take place in Geneva. The Iranians agreed.
As has been reported, Israel’s first arbitrator was former Justice Minister Haim Zadok. After his death, in 2002, he was replaced by attorney Avigdor “Dori” Klagsbald, who continues to hold the post. His firm’s website notes, “Dr. Klagsbald serves as an arbitrator on behalf of the State of Israel in an international arbitration taking place in Switzerland.”
According to a report by Avi Bar-Eli in TheMarker, Klagsbald receives a fee of about $500,000 a year. A report by Yossi Melman in Haaretz, in 2006, noted that EAPC had hired the Jerusalem attorney Elhanan Landau, a former legal adviser to the Finance Ministry, as an external adviser on the Iranian suit. When Landau died, he was replaced by his partner, Zvi Nixon, whose firm also represents EAPC in legal proceedings in which it’s involved in Israel. Nixon declares proudly on his website that he has “extensive experience in international arbitration, oil and gas projects,” and more.
Directly to the pantheon
On December 24, 2003, NIOC presented its formal claim to the arbitrators. The Iranians demanded that Israel pay them $800 million, which in their estimate represented half the value of the assets related to the 1968 participation agreement – the oil pipeline and its attendant facilities, and apparently also the tanker fleet, which had been sold – and compensation relating to “another arbitration,” which was still pending. The amount in question is thought to have swelled since then to billions of dollars.
The Israeli writ of defense, submitted on April 23, 2004, asked the arbitrators to reject the claim for three reasons: opposition to the process by which the Israeli arbitrator was appointed; lack of good faith on the part of the Iranian arbitrator; and objection in principle to the suit as such.
Israel submitted a counterclaim for compensation from NIOC for unilaterally violating the agreement after the revolution. The amount of compensation being demanded is not spelled out in the documents of the Swiss court.
On February 1, 2005, Israel suffered a resounding legal defeat in France. The Supreme Court rejected its appeal concerning the appointment of the arbitrator and published its judgment. The decision was extensively reported in the trade press. According to Prof. Thomas Clay, a renowned expert on international arbitration from the University of Versailles, the judgment “belongs to the pantheon of the great arbitration decisions.”
The French judges found that the rights of the Iranian company had been infringed, because it could not turn to courts in Iran or Israel owing to the enmity between the two countries. Right of access to a judge – including an arbitrator – is part of the international order and is enshrined in the European Convention on Human Rights, the judges ruled.
In their opinion, because the agreement vested authority in the Paris-based ICC, the French courts possessed the authority to rule in the case. In wake of the judgment, French law was amended to adopt this principle.
At the time, Netanyahu was finance minister in the government of Ariel Sharon, and as such was responsible for EAPC and the arbitration with Iran. But his public activity was focused on the Gaza disengagement and extracting provident funds from the banks (via the Bachar committee). He made no public statements about the Iranian suit or Israel’s defeat in the French court.
Similar silence prevailed in Tehran, even though the proceedings were conducted openly and the judgment was widely cited in the legal press.
In response to Yossi Melman’s 2006 article that contained a partial description of the arbitration proceedings, Iran issued an official statement denying the proceedings’ existence, claiming that the report was “unfounded and a complete fabrication.”
On December 18, 2006, about 10 days after the Iranian denial, the arbitrators met for a first oral meeting, after years of exchanging documents. Klagsbald sat with his Iranian counterpart in a discussion of the first item on the agenda: Israel’s persistent denial of the tribunal’s authority. Substantive discussion of the monetary claims was postponed until the procedural question could be resolved.
Things moved slowly until February 10, 2012, when the arbitrators made a first decision that rejected the Israeli objection to Klagsbald’s coerced appointment. The tribunal made no reference to the Israeli allegation that the Iranian arbitrator was not acting in good faith, stating that this matter would be considered in the future.
Arak and sheep
While waiting for the decision about the fitness of their arbitrator in the “great arbitration,” the Iranians again set in motion the “little arbitration.” The Swiss document does not elaborate about the contacts that were conducted in the period when Ehud Olmert was prime minister and Roni Bar-On finance minister.
What’s clear, though, is that in March 2009, toward the end of their term in office, the Iranians received a first payment on account from the Israelis’ Geneva-based shell company.
Two years later, the Iranians set out to finish collecting the debt.
Their timing is interesting. On January 19, 2011, the Federal Council of Switzerland joined the international sanctions against Iran, which included restrictions on monetary transfers. Two months later, on March 11, NIOC asked the Debt Collection Office of Geneva to serve an order of payment on Sopetrol in the amount of 94 million Swiss francs, based on the Iranian arbitrators’ ruling in 2001, with annual interest of 5 percent. The shell company opposed the payment.
Sopetrol and the Israeli energy companies were represented by the aforementioned Daniel Guggenhein, the owner of a small law firm in Geneva, whose expertise lies in banking laws and commercial law.
But his connection with Israel runs far deeper than representation of the shell company. He heads a philanthropic foundation called Bona Terra, which provides grants for young Jews who want to work in agriculture. The foundation was established by a friend of the family, and Guggenheim inherited its management from his father, Prof. Paul Guggenheim, who was a world-renowned authority on international law.
The foundation donates hundreds of thousands of shekels a year to agricultural projects in the Negev and the Arava, such as “sheep breeding based on wastes” and “producing arak from date waste.”
On June 8, 2011, NIOC filed a petition with the Court of the First Instance in Geneva, seeking enforcement of the order of payment. Guggenheim objected, on behalf of the shell company, arguing that the rulings of the Iranian arbitrators about the oil debt could not be enforced in Switzerland.
On September 25, 2012, the court accepted the NIOC petition, ruling that the debt was collectable in Switzerland. Both sides hurried to appeal to the next instance, the Court of Justice in Geneva: the Israelis objected again to paying the debt, the Iranians demanded payment with the addition of tens of millions of francs in interest.
In the meantime, regulatory developments occurred in Israel that had implications for the proceedings in Switzerland.
On July 31, 2011, pursuant to the international sanctions, Finance Minister Yuval Steinitz signed a “trading with the enemy” ordinance, which classified Iran as an “enemy state” and contained a long list of Iranian organizations and individuals involved in the country’s nuclear and missile projects. NIOC was not explicitly mentioned, but the ordinance prohibits all economic activity with enemy states.
A year later, the Knesset passed a special law in connection with the struggle against the Iranian nuclear project, extending the restrictions and prohibitions.
The Israeli lawyers in both arbitrations – “little” and “great” – lost no time in arguing that Steinitz’s ordinance meant that Israel was unable to pay the Iranians anything. The lawyers explained to the Geneva court that if Paz, Delek and Sonol were to pay the debt to NIOC, they would be in breach of the law in Israel that prohibits making payments to enemy states.
The sanctions regime protected Zadik Bino, Yitzhak Tshuva and David Azrieli, the owners of the energy companies, from having to fork over tens of millions of Swiss francs. But Steinitz went further. On December 14, 2011, the accountant general of the Finance Ministry, Michal Abadi-Boiangiu – who also holds the title of “custodian of enemy property” – sent an official letter to attorney Guggenheim, according to which the Geneva shell company, too, is prohibited from paying the debt to the Iranians, because the company is “controlled by Israeli interests.”
Now the legal battle arrived at the highest instance of all: the Federal Supreme Court of Switzerland, in Lausanne. This institution differs from its Israeli counterpart. It consists of expert units in criminal law, civil law and so forth, and the judges are appointed on a completely open and aboveboard political basis.
Judge Klett, from the civil department, represents the left-wing Social Democratic Party, which is anticapitalism and advocates Switzerland’s joining the European Union.
Ahead of the Supreme Court deliberations, the Israeli legal team prepared a “voluminous” file, as Judge Klett put it, in support of the argument that any payment made to the Islamic Republic of Iran would contradict the international norm of the sanctions regime.
The file contained many documents referring to the United Nations and EU sanctions against Iran, detailed charts of past transactions between Iran and Israel, the joint contracts and the shell companies, and the opinion of a learned but unnamed Israeli professor.
The first case arrived in Lausanne on March 14, 2012, in the form of Israel’s appeal against the authority of the arbitrators in the “great arbitration,” dealing with the division of oil pipeline property and the tankers. Acceptance of the appeal would have brought a halt to the process and released Israel from the nightmare of having to pay billions of dollars to an enemy state.
The Israeli government’s lawyers, Dominique Brown-Berset and Dominique Ritter, from Brown & Page in Geneva, presented the opinion of an Israeli legal expert (whose name was not made public in the judgment) holding that the French judges had erred in ruling that NIOC enjoyed protection under the European Convention on Human Rights.
Not making do with the procedural arguments, which had already been rejected in France, the lawyers presented as “new evidence” the ordinance issued by Steinitz and the charts of the transactions.
NIOC responded to the appeal on May 7, 2012, by urging its rejection and asking the court to recognize the arbitrators’ authority.
The judges in Switzerland work quickly. On January 10, 2013, less than nine months after the appeal was filed, Judge Klett and the other four members of the panel signed off on a judgment rejecting the Israeli objections and finding no flaws in the procedure for appointing the arbitrator.
Judge Klett found the Israeli interpretation of the original 1968 agreement with the Iranians to be mistaken. This meant that the arbitration would continue and that Israel would have to address the substance of the issues and not only the procedures.
At the conclusion of the judgment came the price tag: the Israeli government had to pay the highest court costs allowed under Swiss law, because “the importance of the amount in dispute justifies charging the maximum court fee.”
Israel was ordered to pay 250,000 Swiss francs (about $285,000) to the Iranian oil company and another 200,000 francs to the court. The Iranians’ lawyers, Wolfgang Peter and his colleagues, had routed the Israelis’ legal team.
In the dark
The Swiss court’s decision was handed down on the eve of the 2013 general election in Israel, but the voters were in the dark about the legal debacle sustained by the government at the hands of the Iranians in Lausanne, and about the debt, which threatened to swell.
Three days later, in the weekly cabinet meeting, Netanyahu reiterated his promise that “preventing a nuclear Iran was and remains my central goal as prime minister.” It was necessary to take action against Iran “both at the international level and at the level of Israel’s ability to act,” Netanyahu said, and promised to continue on this path “if we win, as I believe [we will], the voters’ trust.”
Even the full judgment, which was published in Switzerland a few weeks later, barely resonated in Israel.
On March 18, 2013, Netanyahu presented his new government in the Knesset. Steinitz was moved to the Strategic and Intelligence Affairs Ministry, and the EAPC file, along with the oil arbitrations, fell under the responsibility of the new finance minister, Yair Lapid.
The “great arbitration” sank into the recesses of oblivion once more, muted by the commitment of the parties and the lawyers to maintain confidentiality.
But at the same time, the open proceedings relating to the “little arbitration” case, involving the debt of the energy companies, were accelerated. On March 22, 2013, the Court of Justice in Geneva rejected the appeals of both sides and ruled that the Israelis did not have to pay the interest being demanded by the Iranians, but only the original debt of 94 million francs. However, it was clear to everyone involved that this decision was only a transition stage to the Supreme Court in Lausanne.
The Israeli appeal to the Supreme Court was submitted on May 7, 2013. The Swiss shell company and its Israeli operators requested that the payment of the debt be annulled, and in the meantime be postponed until a judgment be handed down, or to send the case back to a lower court for reconsideration.
The next day, attorney Guggenheim visited Israel and took part in the annual meeting of the board of governors of Ben-Gurion University of the Negev, in Be’er Sheva, wearing his philanthropic hat as president of the Bona Terra Foundation.
The university’s president, Prof. Rivka Carmi, awarded him a citation in a ceremony at Kibbutz Sde Boker, where the Swiss Institute for Dryland Environmental and Energy Research was dedicated.
The Zionist donor to the farmers of the Arava appeared in the court at Lausanne against the Iranian-Swiss lawyer. The arguments he presented read like a judicial version of Prime Minister Netanyahu’s speeches at the UN: Denying financial resources to Iran, in accordance with the sanctions regime, is “an important principle of international law,” he declared. Israel is working to deny Iran funds that will help it develop a nuclear strike force aimed at “wiping Israel off the map,” as Iran’s leaders have declared. The Israeli stance is backed up by UN and EU resolutions relating to the sanctions. According to this interpretation, payment of the debt to NIOC would be contrary to international law and to the position of the government of Switzerland.
The Swiss judges were not impressed. The diplomatic arguments are inadmissible, they wrote in their judgment, because Israel did not make them in the lower court and because they are not reasoned. They are “based indeed on some abstract considerations concerning international policy and, in particular, the conflict existing between the State of Israel and the Islamic Republic of Iran,” the judges wrote.
The court does not understand, they added, why a debt of a Swiss company to an Iranian company, stemming from unpaid invoices for oil deliveries made 34 years earlier, is relevant to Swiss foreign policy today. The appeal was rejected and Israel ordered to pay court costs.
But the judges left the Israelis a small opening to avoid paying the historic debt. They wrote that transferring the money to the Iranians might clash with the international sanctions regime, to which the Swiss government is committed, and accordingly sent a copy of the judgment to the State Secretariat for Economic Affairs in Bern for its perusal. In this matter, the court indirectly accepted part of the Israeli case, which they had rejected scornfully in their decision.
The judgment from a year ago hasn’t ended the dispute. Israel and Iran are continuing with the “great arbitration” relating to the pipeline and the oil tankers. It’s not clear how the Debt Collection Office in Geneva will actually collect, if at all, the debt relating to the “little arbitration” from energy companies that are subject to the Israeli sanctions law.
The Iranians, at any rate, won judgments in their favor, even if they aren’t getting the money for the time being.
Israel’s old partnership with the regime of the Shah of Iran is refusing to fade away. EAPC still exists and continues to operate the oil pipeline, the ports and the storage containers, while the government conceals the company’s activity and its financial reports – apparently for fear that the dormant partners from Iran will demand more money for their role in the partnership.
In recent years, Israel has invested large efforts in the legal battle against NIOC, and the defeats in the French and Swiss courts have not discouraged it. The Iranians are displaying similar determination, despite the difficulty in translating their legal victories into economic achievements.
Both sides prefer to keep things quiet and not to exploit the proceedings for propaganda purposes. It’s more convenient for them to exchange public threats, to practice brinkmanship, and not to reveal that they are also able to speak courteously and through lawyers.
The Israeli public remains in the dark, as its leaders hide the quiet dialogue they have been conducting for many years with the national oil company of the Islamic Republic – and will go on conducting for the foreseeable future.
