Wednesday, May 12, 2004
Trade Sanctions Bar Action for Breach of Contract to Manufacture Computers in Iran, C.A. Rules
By DAVID WATSON, Staff Writer
A breach of contract suit by California residents against two Chinese companies was properly dismissed, since the contract contemplated illegally setting up a computer manufacturing plant in Iran, this district’s Court of Appeal ruled yesterday.
Div. Five said Los Angeles Superior Court Judge S. James Otero was right to grant the companies’ summary judgment motion. Though the contract was allegedly formed in China, performance would have violated U.S. presidential executive orders and implementing regulations barring trade with Iran, the court said.
Justice Richard M. Mosk said nearly all of the actions Mir Kazem Kashani, Manoutcher G. Nikfarjam, and Shantia Hassanshahi claimed they undertook in reliance on the contract violated U.S. law.
The plaintiffs asserted they undertook to establish a plant in an Iranian free trade zone for the two companies and related U.S. entities. The companies wanted to sell their notebook computers in Iran, but found the import duties made doing so impractical, Kashani and the others alleged.
The plant would have manufactured notebook computers for sale in Iran and elsewhere, including to the Iranian government.
The plaintiffs said they established an Iranian corporation, obtained permissions from the Iranian government, and had begun negotiating financing and setting up the plant when the Chinese companies backed out of the agreement, deciding to abandon their computer manufacturing business.
Kashani and his colleagues claimed they never intended to import any U.S. products or technology into Iran. But Mosk said that made no difference.
The trade sanctions adopted in the wake of the 1979 Iran hostage crisis—and later renewed by President Bill Clinton—apply to any “United States person,” Mosk pointed out, and broadly prohibit supplying “any goods” to Iran or its government except under a federal license.
He conceded that under some circumstances the law of the place where the contract was formed may, in the absence of a specific contractual provisions, be the most appropriate law to apply in a contract dispute. But he commented:
“Notwithstanding these general principles, the forum state will not apply the law of another state to enforce a contract if to do so would violate the public policy of the forum state.”
The public policy of California includes enforcing federal law, Mosk declared.
Both the agreement itself and the actions that were taken and contemplated to carry it out violated the presidential orders and implementing regulations, Mosk said.
“The express purposes of the agreement were to supply goods, technology, and services to Iran and even to sell products to the Government of Iran,” he wrote. “These purposes violate the Orders and Regulations.”
Mosk rejected the argument of Kashani and his partners that enforcement of the contract should not be barred since it was possible they could have obtained a U.S. government license which would—perhaps even retroactively—have permitted performance. While a contract may be valid despite the fact that the parties must obtain licenses or permits to legally perform their obligations under it, Mosk conceded, he said that principle did not outweigh the public policy embodied in the trade sanctions provisions.
“In this case, the regulatory interests far outweigh any interest in enforcing the agreement,” the justice explained. “Once the technology and product are provided to those in Iran, the anticipated harm intended to be prevented has occurred. That a license might theoretically be obtained thereafter cannot undo that harm. Moreover, there is no evidence that the parties contemplated obtaining a license. The agreement does not impose this requirement, and there is no evidence that plaintiffs ever applied for a license.”
The plaintiffs’ illegal activities in beginning their performance of the contract also barred them from relying on the principle that a contract will not be found void if it can be performed in a legal manner, Mosk said. Citing Platt v. Wells Fargo Bank (1963) 222 Cal.App.2d 658, the justice declared:
“This principle ‘does not apply where the one seeking to enforce the contract participates in the illegal performance.’”
Mosk also rejected the contention that the defendants were precluded from raising the defense of illegality by provisions of the executive orders and regulations stating that they do not “create any right or benefit, substantive or procedural, enforceable by any party against the United States, its agencies or instrumentalities, its officers or employees, or any other person.”
“To conclude that the President intended to preclude any civil consequence of the Orders would lead to far-reaching and absurd results. For example, to read the Orders to preclude any ‘right or benefit’ that arose from any other law would mean that a party could not rely upon the Orders for purposes of invoking such traditional contract principles as impossibility, impracticality, frustration, force majeure, and unclean hands.”
Los Angeles attorney Mir Saied Kashani represented the plaintiffs on appeal, while the defendants were represented by Jeffrey J. Parker and Zareh Jaltorossian of Sheppard, Mullin, Richter & Hampton.
The case is Kashani v. Tsann Kuen China Enterprise Co., Ltd., B166041.
Copyright 2004, Metropolitan News Company