There are certain pieces of law enacted after the Revolution in Iran that stipulated almost restrictive regulations for the foreign investments in Iran. Among such laws are principles 44, 80 and 81 of the Constitution, the Act on Petroleum (1987), the Provisions of the Annual Budget Act for the year 1995 as were re-approved in the Annual Budget Acts of subsequent years, and finally certain parts of the Five Years Economic Development Plan Acts (the first, second and third plan Acts).
As a consequence of these laws, the buy-back model was often adopted for the foreign investment transactions in Iran, in particular for upstream operation in petroleum industry.
The buy-back model of contract as applied in Iran for foreign investments has been subject of long debates and criticism among the experts, from different economic points of view, however, less in the lights of the international arbitration precedents produced in oil disputes.
The question of compensation payable against nationalization of foreign investment or the breach of investment contract, is one of the most important issues discussed in the international arbitration precedents. The standard of compensation developed from full to appropriate compensation. Currently, the concept of "legitimate expectation" of the parties is the criteria for calculations of the appropriate compensation.
Now, the question is what will be the scope of "legitimate expectation" of the parties in buy-back contracts, if the contract is revoked or terminated by the state party.
To respond, one must first examine the arbitration precedents in regard to payable compensation. The legal analysis of such precedents will certainly enable us to predict the financial features of buy-back contracts in the eyes of a proposed international arbitral tribunal engaged in examination of disputes arising out from such contracts.
The subject matter of this writing is a thorough study and analysis of arbitration precedents on the question of compensation, in order to pave the way for an objective prediction of a buy-back contract, if it is the subject of dispute due to termination or nationalization.