Economic Analysis of the Transaction Intended to Escape from Payment in the Iranian Legal System

Economic analysis of law is globally recognized in all the main legal systems. This approach is specially known to be efficient in the common law countries. In the contrary, in civil law countries such as Iran, where the judgments must be backed by legal provisions, the role of economic analysis of law appears to be less important. Despite this fact, these analyses are of paramount importance in the legislation phase or in the fields where the judges have a wider margin of appreciation such as in contracts.

Theoretical frame work:

One of the important issues that can be tackled with the economic analysis of law is the transaction intended to escape from payment. In these transactions, debtors hold the real intention to conclude the contract, but the motivation of their conduct is to escape from the payment of their debts.

From the economic point of view, sometimes third parties are affected by the contract. Although not having been considered in the estimated transaction costs and benefits, these effects can influence the welfare of the society either positively or negatively. In economics, these unaccounted effects are known as "externalities". Since, from the microeconomic point of view, the markets are competitive, such externalities can result in the market failure. Transactions intended to escape from payment are one of the main examples of these contracts that can influence potential third parties. The creditors may in fact be the third parties to this type of contracts, which thereby causes them externality. This situation can become even more complicated and vague when there is an asymmetric information distribution or access between the parties, which can in turn bring about the opportunism, too.

There exist some laws and provisions that deal with the transactions intended to escape from payment. Amongst the relevant provisions, article 21 of the procedure of financial penalties enforcement enacted in 2015 and the uniform judicial precedent rendered in 2020 related to the aforementioned issue are of paramount importance. Taking these laws and provisions into account, the main question that arises here is whether these available rules, provisions and jurisprudences regarding the transactions intended to escape from payment are effective and sufficient if one takes an economic point of view.Although there exists a relatively good literature on this issue, including “Protection of Creditors against Contracts with Intention of Escape from Payment of Their Depts In Iran and France’s Legal Systems” in 2012 by Qaboli Derafshani et al.  and“The Economic Rights of Trade Creditors in Order to Avoid Debt” in 2013 by Saberi et.al., the adopted economic approaches are not sufficient or not in accordance with the current changes of the law. Therefore, conducting a new and thorough research on the different aspects of the formation of such contracts and their validity as well as adopting the best fit economic approach to analyze the adequacy of the existing law and provisions and their efficiencies are inevitable. In order to answer the aforementioned questions, the research methodology adopted in the present study will be mainly desk-based and the results will be synthesized using qualitative and descriptive research methods. In this regard, the authors will first examine the transaction intended to escape from payment from a general point of view. In the second place, each principal element for the formation and validity of such contracts will be economically analyzed separately and thoroughly. It should be noted that the present study will not consider the economic analysis of the criminal, as it needs to be addressed in a separate paper.

Conclusions & Suggestions:

the research show that there are two types of solutions to deal with the effects caused by the transactions intended to escape from payment. The first one is the private solution. Through this solution, parties shall try to settle their dispute by means of negotiations and / or renegotiations. If the negotiations are vain, then the second solution, namely the public solution, comes to play.  By means of such solution, parties shall bring their case before the court for judgment. If such contracts are considered as enforceable, there would be the possibility to recognize their validity, however, if they are considered as incomplete, such possibility does not exist as their legal life is not fully formed.In addition, it is noted that the cost of applying article 21 of the procedure of financial penalties enforcement enacted 2015, which is applicable in the case of the transaction intended to escape from payment, is normally very high for the creditors. This clearly renders such a solution economically inefficient. The other drawback of this article is the fact that the good faith of the counter party of the debtor in the transaction intended to escape from payment also can play a role; however, by adopting such an approach in reality, the debtor will benefit from the transaction and prejudice the creditors.Overall, the authors are of the opinion that despite the numerous economically important provisions, these solutions are not effective enough to deal with such transactions in the Iranian legal system.