Can You Terminate a Non-Performing Iranian Distributor? What Foreign Companies Need to Know

Iranian contract law places strong emphasis on good faith and fair dealing. Courts expect both parties to act reasonably and to notify the other side before termination.

Therefore, before ending a distributor relationship, a prudent foreign company should:

1. Serve a formal written notice citing the specific breaches (e.g., poor performance, late reporting, unpaid invoices).
2. Allow a reasonable cure period — typically 30–60 days — to demonstrate good faith.
3. Document all communications to establish compliance and transparency.
   
   

Failure to follow these steps can make even a justified termination appear arbitrary, opening the door to damages claims.

4. Force Majeure and Sanctions-Related Performance Failures

In Iran, force majeure excuses non-performance only if the event was unforeseeable, unavoidable, and rendered performance impossible, not merely more difficult.

This is critical where distributors blame international sanctions, currency restrictions, or banking hurdles. Iranian courts distinguish between:

• Impossibility (e.g., prohibition of imports of a certain good); and
• Hardship (e.g., delayed payments due to currency volatility).

Only the former typically qualifies as force majeure. Hence, sanctions do not automatically excuse chronic under-performance or non-payment unless the contract expressly provides otherwise.

5. Compensation and Post-Termination Risks

When termination occurs, distributors often claim “equitable compensation” for investments or loss of goodwill. Although Iranian law does not grant automatic indemnities, courts may award damages under Civil Code Articles 221–226 if the termination is deemed abusive or in bad faith.

Practical risks include:

• Claims for wrongful termination or loss of business
• Retention of goods, spare parts, or marketing assets
• Refusal to deregister import or agency licenses

To mitigate these, foreign principals should:

• Ensure all invoices, taxes, and commissions are settled up to the termination date;
• Recover or document transfer of assets;
• Obtain written release and waiver from the distributor.
  
  

6. Procedural Considerations: Jurisdiction and Enforcement

a. Governing Law and Dispute Resolution

Foreign companies often include foreign governing law and arbitration clauses (e.g., ICC or LCIA). Iranian courts generally respect such clauses if at least one party is non-Iranian, provided they are explicit and in writing.

However, practical enforcement in Iran can be complex. Iranian courts may still assert jurisdiction if performance occurred domestically or if Iranian parties are involved. Arbitration awards are enforceable under Iran’s accession to the New York Convention (1958), though local enforcement requires a recognition order from Iranian courts.

b. Translation and Formalities

All termination notices, agreements, or arbitral awards must be translated into Persian by an official court translator for validity before Iranian authorities or courts.

7. Practical Strategy for Foreign Companies

A prudent exit strategy usually involves:

1. Contract Review: Examine termination clauses, notice periods, governing law, and compensation provisions.
2. Performance Documentation: Collect data on sales targets, correspondence, and breach evidence.
3. Pre-Termination Negotiation: Attempt settlement or mutual termination to preserve reputation and minimize litigation risk.
4. Formal Notice & Compliance: Deliver termination notice formally (preferably via notary or registered post) and maintain Persian translation.
5. Regulatory Closure: Deregister agency or import licenses with Iranian authorities to prevent future liabilities.

A structured, legally compliant process not only protects the company’s interests but also reinforces its reputation for fair dealing in Iran’s business community.

8. Common Mistakes to Avoid

• Relying solely on foreign law clauses without considering enforceability in Iran
• Informal termination emails without Persian notice or documentation
• Ignoring the distributor’s investment and provoking compensation claims
• Failing to deregister licenses or recover branded assets
• Delays in communication that imply continued consent or renewal
  
  

9. How MJK Law Firm Assists

Our international commercial team advises foreign companies on:

• Drafting and revising distribution and agency contracts in compliance with Iranian law;
• Structuring enforceable arbitration and governing law clauses;
• Managing termination procedures and settlement negotiations;
• Representing clients in Iranian courts and arbitral proceedings.

With deep knowledge of local practice and foreign investor needs, we ensure your exit or restructuring process is both legally defensible and commercially efficient.

FAQs

1. Can I terminate an Iranian distributor without a written contract?
   Yes, but you must prove the existence and terms of the relationship (through invoices, communications, or conduct). Termination becomes more complex without a written contract, as Iranian courts rely heavily on evidence of mutual obligations.
2. Does Iranian law require compensation after termination?
   No automatic compensation applies, but a distributor may claim damages if the termination was abrupt or contrary to good faith.
3. What if my distributor blames sanctions for non-performance?
   Sanctions only excuse performance if they make the contract impossible to perform, not merely more difficult or expensive. Each case must be assessed factually.
4. Can I include foreign arbitration in my distribution contract?
   Yes. Iranian courts generally uphold arbitration clauses, and Iran is a New York Convention member. Awards can be enforced domestically after recognition.
5. How long should I give notice before termination?
   While not fixed by law, a 30–60 day notice period is advisable to show good faith and reduce exposure to damage claims.