Iranian courts and arbitral tribunals, as to the matter of applicable law, have different approaches. Therefore, one should take a number of considerations into account while dealing with this matter.
A. Courts and Applicable law
Iranian courts are required to consider the Iranian Rules of Conflict of Laws. Accordingly, the applicable Rules of Conflict of Law regarding the matter of arbitration applicable law in contractual relationships is stipulated in Article 968 of the Iran Civil Code. According to this article, obligations arising out of a contract will be governed by lex loci contractus (that is the law of the place where the contract is made) unless both parties are foreign citizens and expressly or implicitly have chosen a specific law to govern their contract.
Although there are different approaches in interpreting this article, in practice, article 968 of the Civil Code of Iran is compulsory for Iranian judges and the majority of the courts regard it as it reads.
Accordingly, three scenarios might arise in Iranian courts as to the matter of applicable law:
- Both parties are Iranian: The applicable law is the lex loci contractus (the law of the place where the contract is made) and therefore, parties have no option to decide otherwise;
- Both parties are foreigners: The applicable law is the law agreed by the parties. In case of no agreement, the court will fix the lex loci contractus (the law of the place where the contract is made) as the applicable law; or
- One party is Iranian and the other is not: The applicable law is the lex loci contractus (the law of the place where the contract is made) and therefore, parties have no option to decide otherwise.
B. Arbitral Tribunals and applicable law
Unlike Iranian courts, Arbitral Tribunals in international arbitrations (that is when the seat is in Iran and at least, one of the parties to the dispute is not Iranian) do not have any restriction in ruling on the matter of applicable law. Article 27 of Iran Law on International Commercial Arbitration (LICA) clearly provides that the arbitrator(s) shall issue its award in accordance with the laws mutually agreed by the parties:
- The arbitrator shall decide the dispute in accordance with rules of laws chosen by the parties to the substance of the dispute. Designation of law or legal system of a given state in any manner whatsoever shall be construed as referring to the substantive law of the state. This provision shall not cover the rules of conflict of laws unless the parties have agreed otherwise.”
- Failing designation of applicable law by the parties, the arbitrator shall apply the law which he/she considers appropriate in accordance with relevant rules of conflict of laws”
On the other hand, in Iran domestic arbitration (that is when the seat is in Iran and both parties are Iranians) there is no specific regulation regarding the choice of law. However, the principle of freedom of parties is a fundamental principle in arbitration. Therefore, parties are free to choose the applicable law to their contract and the arbitrator shall decide in accordance with such chosen law.
Article 447 of Civil Procedure Code of Iran (Chapter Seven- on Arbitration) reads: “In arbitration proceedings and issuance of awards, arbitrators are not subject to regulations provided by Civil Procedural Code; nevertheless, they are required to observe arbitration regulations.” This provision shows the legislator’s opinion regarding arbitration and its nature.
Arbitration Rules of Iranian arbitration institutions (Tehran Regional Arbitration Centre and Arbitration Center of Iran Chamber) have clear provisions regarding choice of law: parties are fully allowed to agree on the applicable law and arbitrators are to grant their awards based on the parties’ choice of law, whether in domestic or international arbitration. Failing parties to reach an agreement on the matter of applicable law, the arbitral tribunal has the required discretion to decide on this matter.
By way of example, article 30 of TRAC Arbitration Rules requires the tribunal to decide the case in accordance with the rules of law designated by the parties as applicable to the substance of the dispute. Failing such designation by the parties, the arbitral tribunal shall apply the law determined by the rules of conflict of laws that it considers applicable.