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When determining the consequences of the Respondent's policy decision to terminate the Contract, one must, as least as an initial matter, look at the provisions of the Contract itself.

While the Contract provides for the consequences of the121 Contractor's default and of force majeure, it contains no provision that deals directly with the consequences of the Respondent's right to make such a policy decision and to terminate the Contract unilaterally. It is to be noted that the Contract does not contain a clause which allowed the Respondent to terminate it for its own convenience. Article 2.8. permitted the "Employer, at any time, (. . . ) to change the required services up to a reasonable and suitable amount and omit or add some services". This provision gave the Respondent only the right to change the scope of the services required under the Contract, but did not confer on it the right to terminate it for its convenience. As the Claimant noted at the Hearing, a prior contract between it and the Imperial Iranian Air Force contained a clause permitting termination whenever the Air Force determined it was in its best interests. The absence of such a clause in Contract No. 114 confirms that the Parties to this Contract did not intend the Respondent to be able to terminate it for its convenience.

There is indication in the Contract, however, that the Parties recognized that the Respondent might cancel the Contract even in the absence of either force majeure or default by the Claimant. Article 7.4. of the Contract reads:

In the event the Contract is cancelled due to Force Majeure or the Employer cancels the Contract for any reason except the Contractor's negligence, all Bank guarantees of good performance of work will be immediately released.

This provision, while not offering a comprehensive set of legal consequences for any unilateral termination of the Contract, shows that the Parties envisaged that the Respondent could cancel the Contract for other reasons than the ones explicitly stated in the Contract.

In this context, it is first to be noted that the Contract at issue here is a private law contract which pursuant to its Article 10. is governed by Iranian law. Second, the Contract being part of the IBEX program was rooted in military cooperation, and even belonged to a highly secret intelligence gathering system. As such it touched on especially sensitive aspects of the State partner's defence interests and policy. In this particular situation the political relationship between the States concerned was of greater importance than in ordinary commercial relations, and in this case even more than with regard to contracts for the sale of less sensitive military equipment or services. If, during the 122 performance of a contract like the present one, these circumstances undergo fundamental changes which the parties had not foreseen, then a consequence may be that a contract party is not barred from opting for a termination of the contract in such a situation.

This concept of changed circumstances, also referred to as clausula rebus sic stantibus,12 has in its basic form been incorporated into so many legal systems that it may be regarded as a general principle of law;13 it has also found a widely recognized expression in Article 62 of the Award No. 180-64-1 of 27 June 1985 in Sylvania Technical Systems, Inc. v. The Government of the Islamic Republic of Iran .14 While it might be argued that, in view of wider and narrower formulations of the clausula in different legal systems and of certain differences in its practical application it would not be easy to establish a common core of such a general principle of law, the consideration of changed circumstances in the present context is warranted by the express wording of Article V of the Claims Settlement Declaration. That provision not only lays down the law to be applied by the Tribunal, , but it also mandates the Tribunal to "tak[e] into account relevant usages of the trade, contract provisions and changed circumstances"123 when deciding "all cases", thereby mentioning "changed circumstances" on the same level as "contract provisions" (emphasis added). In the context of the Algiers Declarations the inclusion of the term "changed circumstances" means that changes which are inherent parts and consequences of the Iranian Revolution must be taken into account.

The fundamental changes in the political conditions as a consequence of the Revolution in Iran, the different attitude of the new government and the new foreign policy especially towards the United States which had considerable support in large sections of the people, the drastically changed significance of highly sensitive military contracts as the present one, especially those to which United States companies were parties, are all factors that brought about such a change of circumstances as to give the Respondent a right to terminate the Contract. When the Ministry of Defence decided not to go on with Contract 114 and when it notified the Claimant of that decision in its letter dated 16 July 1979, it opted for the termination of a contract which the Parties probably would not have entered into had it been known that such fundamental changes would occur.

The fact that the Contract does not contain a clause authorizing the Respondent to terminate the Contract for its convenience does not change this result. The action taken here by the Respondent is not a termination for convenience as it is sometimes provided for in private law contracts. The principle of changed circumstances may be invoked in the absence of express provisions regulating the termination of a contract. Furthermore, taking into account the nature of this Contract as well as the fact that its contract Party was a government entity which would be particularly affected by potential changes of the type described above, the Claimant could have been aware that such changes in this particular area were more foreseeable than in other fields of contractual relations. The Claimant could therefore not expect that the Contract would remain unaffected by changes in such a highly sensitive military domain.

The consequence of the Respondent's termination of the Contract is that it is obliged to compensate the Claimant for the damages that the Claimant has suffered from such a termination. This compensation includes reimbursement for costs incurred, represented by invoice amounts rendered and not paid including profits to the time of termination, as well as for other direct costs. It does not, however, comprise future profits which the Claimant might have made had the Contract continued, because that would imply that 124 the Respondent was under an obligation to continue the Contract, which is not the case here, due to the described change of circumstances.15

Since Iranian law is the law expressly chosen as applicable by the Parties and since the Contract does not contain any provision designed to protect against unilateral changes by the State party, the Tribunal does not need to enter into additional considerations that may have to be taken into account in other cases including terminations of contracts to which public international law is found to be the applicable law or of contracts containing specific provisions designed to protect against unilateral changes or termination.

There is also no need to consider, in the context of this case, the legal rules applicable to expropriation or nationalization of foreign property, since the consequences described in this Section derive from the contractual relationship between the Parties and principles of contract law applicable thereto.

The Claimant seeks payment of seven invoices in a total amount of $576,439, representing compensation for work performed and costs incurred for the period from 1 December 1978 through 30 April 1979, as well as effort expended in attending the meeting in Tehran on 15 September 1979 and preparing Summary Reports dated 15 September and 3 October 1979.

Only one of these invoices - the one dated 19 January 1979 in the amount of $129,953 for services rendered from 1 December through 31 December 1978 - was processed according to the invoice certification and processing procedures agreed upon by the Parties. Those procedures required that Touche Ross & Co., the Respondent's Audit Advisory Contractor, review an invoice and recommend it be paid. In awarding compensation due to the Claimant because of a termination by the Respondent, however, invoices that record costs incurred need not have been submitted under these procedures. Otherwise, the goal of compensation could be thwarted through no 125 fault of the Claimant; in this case, for example, the invoice certification procedures ceased to function around the time of the Revolution. Rather, the Claimant must substantiate such costs to a reasonable extent, and it must satisfy the Tribunal that the Claimant incurred the costs for its performance under the Contract.

As noted, the invoice dated 19 January 1979 was reviewed and recommended for payment by Touche Ross according to the contractually provided procedures. While Touche Ross had completed its routine tests on costs only through July 1978, and not through December 1978, which is the period covered by that invoice, no objection was raised by the Respondent in the course of the contractual invoicing procedures to the figures of that invoice, nor to Touche Ross' recommendation for payment. Nor is there evidence that any adjustments of costs after an invoice was submitted and paid were ever made, let alone that they tended to be significant. In the light of this evidence and procedural posture, the Tribunal is satisfied that the Claimant incurred the costs reflected in the invoice dated 19 January 1979.

Calculated into the invoice was a deduction of five percent for a so-called "deficiency factor" of completion of the Contract which the Claimant based on the performance rating for October and November 1978, the last ones done in the course of the contractual progress of works evaluation.

The "deficiency factor" was calculated in relation to the amount of the Contract's "financial plan". Since it does not relate to actual costs incurred by the Claimant, which is what is at issue in the compensation for the damages arising from the Respondent's termination of the Contract, this deduction does not have to be applied in calculating that compensation. As discussed more fully below, the Claimant, on the instruction of the Respondent's Audit Advisory Contractor, billed the Respondent in an invoice dated 14 May 1979 for the recovery of the five percent deficiency factor, thus making up for the previous deficiencies, and the Tribunal is satisfied that the Claimant incurred the costs reflected in the amount of this invoice. Therefore the "deficiency factor" applied in the invoice dated 19 January 19'79 remains applicable as used in that invoice and it does not require a modification of the amount of costs reflected therein.

The Claimant's invoices covering the months of January, February, March and April 1979, totalling $306,713, were prepared without evaluation of its performance by the Respondent as provided for under the invoice certification procedures, because those procedures, 126 carried out by American contractors in consultation with the Program Director and his staff, were no longer operating. Invoices from after the Revolution were submitted by Touche Ross to the Respondent" "for further processing for payment", and no recommendation as to payment was made.

The evidence submitted by the Claimant, while not proving each item in detail, creates a presumption that the Claimant incurred the costs reflected in the invoices. In view of the fact that no particular item of the invoices has been objected to or challenged by the Respondent, a general allegation that those costs have not been incurred in the amounts claimed is not sufficient to nullify that presumption. As described above at III.2.a), the Claimant was performing its obligations under the Contract. The Claimant offered to present back-up material, such as time cards, expense reports, monthly reports, other supporting records, which material the Claimant had ready for review at the Hearing. The supporting records utilized in the preparation of the invoices have been audited by the Claimant's auditor Alexander Grant & Company, a certified public accounting firm, which certified that "the amounts reflected in the Summary of Damages of [the] Claimant ( . . . ) are reasonable in all material respects". The Respondent has not challenged the amount of any particular item of the invoices, nor did it request an opportunity to review the back-up material that the Claimant offered to present and had available at the Hearing. In view of this, the Tribunal is satisfied that the Claimant has incurred the costs reflected in the invoices covering January, February, March and April 1979.

The face amounts of those invoices, as stated above, were arrived at by deducting a contractually required performance withhold of five percent from the amounts owed to the Claimant for costs incurred. Since the Tribunal has found that the Claimant was performing its obligations under the Contract, the Claimant is entitled to recover the amount of the withhold which is reflected in the invoice dated 14 May 1979. By the end of April 1979, the period covered by that invoice, the cumulative amount withheld amounted to $ 117,775, which must be added to the aggregate face amount of the invoices covering the period from December 1978 through April 1979, resulting in a total amount of $554,441.

The Claimant further claims $21,998 for "partial termination costs . . . through 25 September 1979", billed in an invoice dated 30 April 1980. These costs were incurred for attendance at the 15 September' 1979 meeting in Tehran, and for preparation of a Summary Report 127 dated 15 September 1979 that was submitted at the meeting and a second Summary Report dated 3 October 1979. The Parties agree that the Respondent requested the meeting in its letter of 16 July 1979, and that it requested the 3 October report at the meeting. The Tribunal finds that these costs were fairly incurred under the Contract.

Thus, the Claimant is entitled to an award of $576,439 on the seven invoices for service performed under the Contract.

The Claimant brought a separate claim for other direct costs (later called out-of-pocket costs) for the first time in its Summary of Damages filed on 10 August 1984. At the Hearing, the Respondent requested that the claim be disallowed as an inadmissible amendment under Article 20 of the Tribunal Rules. The Claimant has shown that most of the out-of-pocket costs listed under a separate heading in its Summary of Damages were included in the amounts of a different set of invoices that the Claimant originally submitted together with its Statement of Claim, and were listed in charts attached to that original submission. In any case, these claims were first set out separately before the Respondent submitted its documentary evidence or its rebuttal evidence. Thus, the Respondent had a full opportunity to respond to them. The Tribunal does not find prejudice to the Respondent in this procedure and therefore allows this part of the claim.

The two amounts claimed as out-of-pocket costs are $16,687, the amount the Claimant paid to its in-country manager for household goods that he had to leave behind when he left Iran on 16 February 1979, and $7,869 paid to another IBEX contractor for expenses that the latter had incurred during the evacuation of the Claimant's in-country manager and of another of its employees from Tehran on 16 February 1979. Based on the evidence before it, the Tribunal is satisfied that the Claimant incurred those costs in the aggregate amount of $24,556 in the course of its performance under the Contract, and that it was justified in settling these claims against it in order to avoid higher costs that might have resulted from litigation.

The Claimant seeks $229,401 as "lost profits on the unfulfilled portion of the Contract". It calculates this by subtracting from the estimated total price of the Contract ($3,880,000) the amount billed 128 for work it had performed under the Contract, including the invoices on which it now sues ($2,377,499). It calculates the amount of profit it would have earned on the remaining $1,502,501 using a "Contract profit factor" of 18.02%. It derives this rate of profit from sheets showing the calculation of the Contract price that were submitted to the Respondent in the Contract proposal or during negotiations. These pricing backup sheets show a line for "Fee" that reflects a profit rate of 18%. The prices for each hour of professional labour and for other costs that are calculated in these pricing backup sheets were accepted by the Respondent and are incorporated in the Contract. For the reasons set forth in Section (c) above, the Tribunal concludes that no compensation should be granted for future profits lost in the particular circumstances of this case.

The Claimant offers two alternative methods of calculating the damages to it from the delay in paying its claim. The first alternative assumes that the Claimant would have invested the missing amounts in its business and would have earned on that money the return on equity shown by the company during the relevant years. Thus the Claimant applies return-on-equity rates of 23% for 1979, 16% for 1980, 18% for 1981, 14% for 1982, 41% for 1983, and 20% for 1984 to what it calls the principal amount of "impaired capital". This results in a claim of $1,012,677 for lost earnings through the end of 1984 Claimant's second alternative method of calculating costs resulting from delayed payment uses the actual cost to the Claimant of borrowing money to replace the unpaid invoices and unreleased performance bond. The Claimant has stated that its borrowing rate was one percentage point above the prime rate. Calculated at this rate, it claims a total of $585,621 through the Hearing date, which includes a deduction for interest earned on the withheld performance bond.

The Tribunal rejects the Claimant's first alternative. The Claimant cannot seek an award of earnings lost as a result of the Respondent's failure to pay amounts owed if the Claimant in fact replaced, or could have replaced, those missing amounts at less cost than it asserts it would have earned. If it replaced the amounts and invested them, as appears to be the case, it has in fact already earned what it seeks, and so would recover twice. If it had not in fact replaced the amounts but instead had absorbed the larger loss, it might well have failed to take reasonable measures to mitigate damages as required by general contract law.

The Claimant claims "[d]irect interest costs [of $495,786] incurred on unpaid invoice amounts" from three months after the date of each invoice through the Hearing date. It has submitted an Affidavit from its auditor Alexander Grant & Company stating that the interest calculations are based on the monthly prime rate then in effect plus one percent, which was the Claimant's borrowing rate, and that they "reflect a portion of the interest paid by Questech as the result of the need for working capital in part because it was not paid the seven (7) invoice amounts". In view of the evidentiary difficulties connected with awarding a Claimant interest at its actual borrowing rate, and having regard to the general considerations set forth in Award No. 180-64-1 of 27 June 1985 in Sylvania Technical Sytems, Inc. v. The Government of the Islamic Republic of Iran at 31 et seq.,16 the Tribunal finds that twelve percent is a fair rate of interest applicable to the unpaid amounts.

The Claimant is therefore entitled to twelve percent interest on the $600,995 of unpaid invoices from 16 July 1979, a convenient date that corresponds to the date of the Respondent's letter concerning termination of the Contract, until the date on which the Escrow Agent instructs the Depositary Bank to effect payment out of the Security Account.

As another element of interest the Claimant seeks differential interest with regard to the letter of credit that it had opened with the National Bank of Washington ("NBW") to secure a good performance guarantee issued pursuant to the Contract. The Claimant placed $388,000 with the bank to fund that letter of credit, and it has received interest on the face amount since that time. The differential interest that the Claimant seeks is the difference between that interest and the interest it states it had to pay to borrow on account of the Respondent's failure to release the letter of credit. The Claimant calculates the borrowing rate at the prime rate plus one percent, its borrowing rate at the time, and seeks interest from 15 September 1979 on. It does not state what it earned on the $388,000.

As described more fully below at III.2.c)ee), the Respondent was obligated to release the letter of credit. This obligation existed on 15 September 1979, and the Respondent could have effected such release. The Claimant is not, however, entitled to any more interest than it already has earned on the deposited funds. It appears that until 23 April 1980 the funds were held by NBW in the form of an 130 interest-bearing certificate of deposit. Since that date, pursuant to a stipulation in the United States litigation between the Claimant and the bank, the Claimant has had the sole right to determine the type of investment of the funds as long as that investment is with the bank. Thus, it is likely that the Claimant has earned at least interest at the rate that would be applied by the Tribunal, which is based on the rates paid on six-month certificates of deposit in the United States.

In accordance with the Contract the Claimant caused NBW to issue a standby letter of credit to secure a good performance guarantee that the Mercantile Bank of Iran and Holland (now Bank Tejarat) had provided in favour of the Respondent. The Claimant deposited $388,000 with the American bank to secure the letter of credit. The expiration date of that letter of credit was 31 August 1980. In March 1980, the Claimant filed an action against NBW in a United States District Court to prevent it from paying any calls made on the letter of credit. By agreement of the parties to that action, the letter of credit and the funds deposited by the Claimant to secure it were placed under the jurisdiction of the Court. NBW brought a claim for indemnification against the Respondent. Subsequently, by letter dated 13 May 1980, Bank Tejarat attempted to call the letter of credit, but, with the permission of the District Court, NBW refused to pay because the call did not comply with the letter of credit- These proceedings in the United States were stayed following conclusion of the Algiers Declarations, and on 18 January 1982, Bank Tejarat filed a claim with the Tribunal (Case No. 608) against the National Bank of Washington and the United States Government, in which it sought payment of $388,000 on the above letter of credit.

In its written submissions filed in this case, the Claimant sought payment of the face amount of the letter of credit from the Respondent arguing first that the letter of credit has expired according to its own terms, and second that the Claimant fully performed the Contract and the Respondent should have released the performance guarantee when it terminated the Contract. In response to questions from the Tribunal the Claimant confirmed at the Hearing that it sought payment of the face amount of the letter of credit and no other form of relief, because it apparently feared that there might be complications in securing release by NBW of the funds, deposited with it. This relief sought by the Claimant cannot be granted because the Respondent is not obligated upon termination of 131 the Contract to pay the face amount of the letter of credit. The Tribunal holds, however, that because the Contract was terminated by the Respondent and because the Claimant has performed its contractual obligations, the bank guarantee issued to secure the - Claimant's good performance has no further purpose. Moreover, under Article 7.4. of the Contract, the Respondent was obligated to release the underlying bank guarantee of good performance when it terminated the Contract .in the absence of fault by the Claimant. The Respondent is therefore obliged to refrain from making any further y demands on the bank guarantees and it is further obliged to cancel the bank guarantee and to ensure the release of the corresponding letter of credit. The Tribunal notes that the funds deposited- by NBW to secure the now purposeless letter of credit continue to be under the control of a United States court, which retains jurisdiction over that matter in an action instituted by Questech, Inc. against NBW.

The Respondent filed its counterclaims in this case on 30 March 1982. On or before 21 September 1982 the Respondent filed an action against the Claimant in the Public Court of Tehran that raised claims identical to the counterclaims then pending before the Tribunal. Both the counterclaims here and the claim in Tehran sought damages for breach of the Contract and social security premiums. (The Respondent's counterclaim for taxes was filed in the Tribunal only later, on 13 December 1983.) At the request of the Claimant, which had been summoned to appear in the Tehran proceedings, the Tribunal issued Interim Award No. ITM 15-59-1 of 1 March 1983 in Questech Inc. v. The Islamic Republic of Iran et al.,17 providing for the Government of Iran to move for a stay of proceedings before the Public Court of Tehran pending the Tribunal's determination concerning its jurisdiction over Questech's claim. Following a second summons to the Claimant to appear before the Tehran court, the Tribunal in an Order filed on 12 August 1983 "called to the attention of the Respondents" its previous Order in Interim Award No. ITM 15-59-1. On 21 September 1983, a default judgment was rendered in the Public Court of Tehran against the Claimant and in the Respondent's favour. Requested to comment on the Claimant's ensuing motion that the Respondent be directed to comply with the Tribunal's Interim Award, the Respondent stated, inter alia, that, 132 while persisting in its objections to the Tribunal's jurisdiction over Questech's claim and insisting on its "indispensable right ( . . . ) to pursue its claims in Iranian courts and to enforce the judgments, the [Respondent] out of respect for the Tribunal [would] not proceed with the enforcement of the judgment until the Tribunal's decision on its jurisdiction over Questech's claims ha[d] been taken". The Tribunal noted this statement by the Respondent in an Order filed on 11 April 1984.

The Claimant seeks "continuing relief from the Tehran proceedings". Since the Tribunal by this Award renders a final decision on the jurisdiction over and the merits of the Claimant's claims and the Respondent's counterclaims, the interim relief granted in this case expires by its terms. When assuming jurisdiction over the claims and counterclaims in this case (with the exception of the Respondent's counterclaims for taxes and social security premiums, see below at III.2.d)cc) and dd)), such claims and counterclaims, as of the date of their filing, with the Tribunal, are considered to be excluded from the jurisdiction of any other, court. This consequence of Article VII, paragraph 2, of the Claims Settlement Declaration has been confirmed by the consistent practice of the Tribunal since Interim Award No. ITM 13-388-FT of 4 February 1983 in E-Systems, Inc. v. The Government of the Islamic Republic of Iran.18 (For this purpose, the term "claims" in the Claims Settlement Declaration includes counterclaims.) The Tribunal repeated this ruling in the context of this very case in its Interim Award No. ITM 15-59-1 of 1 March 1983.19 The effect of the Tribunal's assumption of its jurisdiction in the present case is that as of 30 March 1982, the date of the filing of the Respondent's counterclaims with the Tribunal, the Tehran court is no longer considered to have jurisdiction to deal with the subject matter of the claim which the Respondent brought before that court on 21 September 1982 (except for the part concerning social security premiums), and that the judgment entered into in the Respondent's favour in the Tehran court was obtained from a court which had no jurisdiction over the case brought before it. While confirming this legal consequence of Article VII, paragraph 2, of the Claims Settlement Declaration and noting the Interim Award issued in this case, the Tribunal does not find a need or basis for the ordering of "continuing" relief or any other relief beyond that previously granted.

The Claimant seeks reimbursement for "Attorneys Fees Paid and to be Paid" in the amount of $325,060 and for its "Expenses including auditors bills" in the amount of $62,266, totalling $387,326.

The Tribunal notes that the Claimant had, in its Summary of Damages filed on 10 August 1984, claimed expenses including auditors bills in the amount of $100,000. In its Updated Summary of Damages filed for the Hearing, the Claimant reduced this amount to $62,266 which amount includes $42,266 for expenses. The Tribunal further notes that in its Summary of Damages the Claimant had claimed $300,000 for attorneys fees. In an Affidavit filed on 16 November 1984, the Claimant's counsel stated that his law firm had devoted total billable time worth $266,060 until 1 November 1984 in connection with this case, but the Claimant has not submitted that it has actually been billed in that amount. In its Updated Summary of Damages the Claimant has claimed $325,000 for attorneys fees, but no further supporting documentation has been submitted.

Having regard to criteria of the kind outlined in Award No. 180-64-1 of 27 June 1985 in Sylvania Technical Systems, Inc. v. The Government of the Islamic Republic of Iran at 35-38,20 and taking into account the above considerations and the factual and legal issues of this case, the Tribunal determines that $30,000 is a reasonable amount of the Claimant's costs to be paid by the Respondent.

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