UK Export Finance (UKEF) is suing BAE Systems, one of its biggest clients, over contracts for the supply of missiles to Iran in the 1970s.

The UK’s export credit agency is trying to recover £13.9mn it paid to the defence and aerospace giant in the 1980s, under three export credit insurance policies issued between 1973 and 1977. A trial is set for London’s High Court on May 8.

The case is an unusual public spat between UKEF and a company which has been a frequent user of its products for decades and is one of the UK’s largest defence exporters. Between 2018 and 2022 alone, UKEF extended £3.5bn in support to BAE through direct lending and buyer’s credit, according to the agency’s data.

The dispute stems from guarantees provided by UKEF – then known as the Export Credits Guarantee Department – to the now-defunct British Aircraft Corporation (BAC), a court document shows.

The government guaranteed contracts for the supply of weapons, spares and maintenance for BAC’s Rapier surface-to-air missile systems to Iran, then led by the Western-backed autocrat Shah Mohammed Reza Pahlavi.

In around 1980, BAC called on the guarantees due to “their Iranian counterparty’s non-performance” under the contracts, according to UKEF’s statement of claim in the case.

The document does not describe the reason the contracts fell apart but in 1979 the Shah was overthrown by a popular uprising that became the Islamic Revolution, and was replaced by a clerical regime hostile to the UK.

The UK government paid BAC £27.3mn under the guarantees, £13.3mn of which was later repaid by BAE, leaving £13.9mn outstanding. BAE was created through the merger of BAC and another defence firm by the government in the mid-1970s.

But in 1991, Iran’s defence ministry launched arbitration proceedings in The Hague against BAE for alleged non-performance of defence contracts, which triggered a counterclaim by the UK firm.

Almost two decades later the arbitration panel awarded BAE £28.8mn from the Iranian defence ministry. The court document also says Iran was awarded an undisclosed “greater amount” from BAE in relation to other contracts not covered by the UK government guarantees.

Between 2011 and 2015 BAE mounted three challenges to the award in the Dutch courts, but all were rejected.

UKEF says in its statement of claim that it “infers” that BAE has not tried to recover the sums owed to it by Iran due to sanctions on the defence ministry imposed by the European Union in 2008, which remained in UK law after Brexit.

UKEF is demanding BAE pay the outstanding amounts under the guarantees. Failing that, it seeks to be subrogated to the firm’s claim against Iran, meaning it will be able to directly pursue Iran for payment.

Or, UKEF argues, “if the sums credited do not represent liquid debts in BAE’s hands and must therefore be set off by payment to [Iran] so as to be secured”, the court should order the firm to seek a sanctions waiver to make the payments to Iran.

The document also says that BAE has refused to confirm to UKEF whether it is indeed the legal successor to BAC.

According to UKEF, BAE acknowledged it had “assumed the debts” of BAC during the arbitration proceedings, but has “failed to confirm this to UKEF, despite repeated requests”.

BAC was restored to the UK companies register in February this year following a court application by UKEF, allowing the agency to bring its claim against both companies. Companies House filings show BAE was BAC’s “beneficial and legal shareholder” before it was liquidated in 2015.

Both UKEF and BAE declined to comment on ongoing court proceedings when contacted by GTR.

UKEF is not alone among export credit agencies in seeking to recover funds paid out decades ago involving countries with which it has frosty relations.

Sweden’s EKN still reminds North Korea twice a year that it has not yet paid Volvo for some 1,000 sedans delivered in 1974 under an EKN-backed transaction, the Swedish foreign ministry said in 2017. According to the agency’s annual report, that debt has now ballooned to SEK2.8bn (US$276mn).