August 18, 2015

What Does the Iran Accord Mean for the Commercial Aviation Industry?

Holland & Knight Aviation Law Blog
Jonathan M. Epstein

The recent accord reached with Iran has the potential to open up opportunities to sell or lease passenger commercial aircraft to an Iranian market that is starved for modern commercial aircraft. However, the accord is far from a done deal, and implementation is many months away even under an optimistic timetable. Based on what information is currently available, we provide some preliminary answers to questions – with the caveat that the U.S. government expects to provide further guidance/clarification in the future.

What is the accord?

On July 14, 2015, the United States, France, China, Russia, the United Kingdom, Germany and the European Union (EU) entered into the Joint Comprehensive Plan of Action (JCPOA) with Iran. The basic compromise is that Iran agreed to a number of restrictions and oversight on its nuclear activities in return for the rollback of certain United Nations (U.N.), EU and U.S. sanctions. 

When will the JCPOA take effect?

There are a number of significant hurdles, including congressional approval, before the JCPOA is implemented and certain sanctions removed. In particular, because of steps Iran needs to undertake with respect to its nuclear commitments, and subsequent international verifications, U.S. officials are projecting it may take nine months or more before implementation.  

Does the JCPOA allow the sale of aircraft to Iran? 

The U.S. sanctions that would be lifted are those nuclear-related "secondary sanctions" that apply to non-U.S. companies not owned or controlled by a U.S. parent. U.S. companies remain prohibited from doing business directly or indirectly with Iran, with few exceptions. However, the accord specifically provides that the U.S. government will issue licenses for the export, reexport, sale or lease of commercial passenger aircraft to Iran for civil aviation end use (e.g., to most Iranian airlines including Iran Air). In addition, the U.S. government will license the sale of parts and repair, inspection services for commercial passenger aircraft.  We note the following points:

  • The U.S. asserts export jurisdiction over virtually all modern commercial aircraft regardless of country of manufacture because of the U.S.-origin content in such aircraft, and regardless of where it is located or who owns the aircraft. Hence, a French. entity would need a  license to sell or lease an Airbus aircraft located in France to Iran.
  • Under the interim agreement that the JCPOA would replace, the U.S. Government has licensed the sale of parts and repair services to support Iranian civil aviation.  The JCPOA would expand this to allow the sale of aircraft, and the lease of aircraft.

What are the risks in engaging in a transaction under the JCPOA? 

There are a number of risks/unknowns, including:

  • There is a risk that the U.S. could "snap back" sanctions at any time – and U.S. officials have warned that there would not be grandfathering of contracts – although the U.S. government would likely make accommodations for wind-down of businesses entered into while the JCPOA was in effect.
  • While it appears foreign subsidiaries of U.S. companies generally will be licensed to engage in many transactions with Iran, U.S. parent companies will continue to be restricted and generally cannot facilitate or approve transactions by those foreign subsidiaries with Iran, unless licensed.
  • Except for licensed transactions, U.S. banks will be prohibited from financing or processing payments related to Iran – meaning non-U.S. entities cannot be paid in U.S. dollars.

May companies start negotiating deals with Iran now?

This is a tough question. U.S. persons are not prohibited from traveling to Iran (and engaging in transactions incidental to such travel). However, until implementation, U.S. persons and their foreign subsidiaries generally cannot engage in transactions with Iran without a license. Hence activities such as hiring local counsel or a broker in Iran, or and receiving a deposit under a letter of intent, would not be authorized. Further, U.S. officials are discouraging U.S. companies from acting too quickly, and have warned that such companies run the risk of crossing the line of what is allowed - and that "executory contracts" contingent on implementation the JCPOA may cross that line.

Domestically, the JCPOA has become a major political issue to be addressed  when the U.S. Congress returns to session in September.  As a result, U.S. government officials are constrained, even more so than normal, in advising and interpreting the JCPOA with regard to sanctions relief.  However, the U.S. government has committed to publishing guidance ahead of the implementation date.

For additional information on this topic, please contact Jonathan Epstein.

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