UK Export Finance (UKEF) and defence giant BAE Systems have struck a last-minute deal to settle a £13.9mn claim by the government agency over guarantees for missile systems sold to Iran in the 1970s.

In around 1980, export credit agency UKEF paid a claim under a policy covering contracts for the supply and maintenance of the Rapier surface-to-air missile system, a deal which fell apart in the wake of the Islamic Revolution of 1979.

UKEF had argued it is owed the funds because BAE, as the successor company to the defunct British Aircraft Corporation (BAC), had won an arbitration award against Iran so was entitled to recover the funds and pass them onto UKEF as a recovery.

The two sides were set to air their arguments in a one-day trial on May 8, but a lawyer for UKEF told the judge that morning they were hopeful of securing a negotiated deal and requested an adjournment of the trial while they hammered out an agreement.

A UKEF spokesperson later confirmed to GTR that a deal was struck and the trial averted, but did not provide details of the settlement.

“The proceedings are being withdrawn,” the spokesperson said. “UK Export Finance and BAE Systems have agreed a full and final settlement of their dispute regarding historical insurance payments, with no admission of liability. The terms of the settlement are confidential.”

A spokesperson for BAE confirmed the deal.

Court documents show that UKEF, then known as the Export Credits Guarantee Department, paid BAC £27.3mn under the guarantees, which were issued between 1973 and 1977, when Iran was ruled by Western-backed autocrat Shah Mohammed Reza Pahlavi.

BAC was later merged by the British government into what became BAE Systems, and the company repaid £13.3mn to UKEF, leaving £13.9mn outstanding.

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, while Iran was awarded an undisclosed “greater amount” from BAE in relation to other contracts not covered by the UK government guarantees.

UKEF had said in its claim that it was therefore entitled to reimbursement of the remaining amount by BAE, or that BAE should allow the agency to bring its own claim against Iran.

BAE has historically been a major purchaser of UKEF’s export credit products. 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.