This article sets out one of the major issues which always play a vital role in doing business with Iran for Multinational Corporations i.e. contractual freedom of the contract parties relating to designation of governing law and arbitration procedure. The main purpose of this article is drawing your attention to the three important topics in this respect as hereunder:
Under Iranian law rules, the parties may agree to choose a foreign law as the governing law of a contract subject to mandatory provisions of Iranian law. In the absence of a treaty, to the extent that foreign courts reciprocate the enforcement of foreign judgments by Iranian courts, foreign final judgments which are not against public policy in Iran are enforceable.
- To establish whether a judgment is against public policy in Iran or its mandatory provisions, some review of the merits may take place.
- Under Iranian conflict of law rules, the law governing a contract is the law of the place of execution of the contract. For this reason, many Iranian attorneys advise their clients who wish to subject their contracts to a foreign law, to sign the contract abroad. Notwithstanding the adopted practice for the place of signature, it is usually advisable that contracting parties may decide to submit to foreign law to the extent that it is not contrary to Iranian public policy.
- However, the Iranian conflict of law rule is arguably not a mandatory rule to the extent that it applies to commercial transactions. Even if one of the parties to a contract happens to be Iranian, they may elect for the contract to be subject to a foreign law even if the contract is signed in Iran, provided the provisions of the foreign law not against Iranian mandatory laws. In general, however, it would be advisable for the contract to be signed abroad in order to avoid possible conflicting rulings and interpretations in this regard. Under Iranian conflict of law rules, where a contract is concluded outside Iran, it may be made subject to foreign law even if the parties are Iranian.
- However, performance of the contract will be subject to any mandatory laws of Iran which may be applicable.
- Iranian conflict of laws rules are based on the distinction between rules relating to choice of law in the instance where the underlying law is a mandatory substantial law (e.g. legal personality) and the choice of law rules related to supplementary substantial law (such as those related to commercial contracts). In the case where an Iranian choice of law rule is related to supplementary commercial laws, the choice of law rule follows the supplementary nature of the underlying contract. The same line of argument applies to the choice of law related to the form of contracts. Therefore despite the provisions of Iranian Civil Code to the effect that “Documents as to their form are subject to the laws of their place of formation”, Iranians residing abroad may enter into contracts written in the Farsi language and without observing the foreign applicable form. This is because the conflict of law rule is related to the designation of a supplementary law.
- Conflict of laws
- Under Iranian law, a treaty duly entered into and ratified by Iran has the force of law and takes precedence, in case of a conflict over any laws enacted prior to the treaty going into effect. A subsequent law in specific conflict with a treaty provision would prevail from a domestic Iranian point of view although all such laws are to be interpreted to the extent possible in the light of treaty obligations. In any case, Iranian law does not necessarily affect the liability of the Iranian State in respect of treaty obligations under international law. Although there is no theory of supremacy of international law recognised under Iranian Constitution as Iran has not ratified the Vienna Treaty on Interpretation of Treaties, it is our understanding of public international law that a treaty may prevail given the applicable rules of interpretation on international law.
- Under Iranian law, the hierarchy of laws is therefore as follows:
- The Constitution – all legislation must be in accordance with the Constitution and Sharia’a law. The Council of Guardians determines whether any new legislation is in accordance with the Constitution and Sharia’a law. Once approved by the Council of Guardians, the relevant legislation cannot be challenged as being unconstitutional or against Sharia’a law.
- Laws passed by Parliament and International Treaties.
- By-laws, regulations and decrees passed by the Council of Ministers.
- Five year plans
- Old Five Year Plans are still used to justify new investments notwithstanding the existence of a later Five Year Plan. Our understanding is that new Five Year Plans include the provisions from previous Five Year Plans which are still intended to be applicable. Therefore our understanding is that only provisions applicable to new contracts are those in the current Five Year Plan to the extent that the current five year plan has not repealed the authorities under previous plans. Many matters set out in a Five Year Plan are not self–executing as they require further legislation.
- A new Five Year Plan would only cancel a decision made under an old Five Year Plan if it expressly specified such cancellation or, as a matter of public policy, such cancellation should be implied. This has to be regarded in the same way as any change of law risk.
- Iran is a member of the 1958 New York Convention relating to enforcement of foreign arbitral awards (the Convention). Convention awards are accordingly enforced in Iran. In the case where the award is rendered in a country which is not signatory to the Convention, enforcement requires compliance with procedures set out under the Iranian Code of Civil Procedure.
- There have been very few awards that have required a party to seek enforcement in Iran under the Convention and there are no reported cases on them. There has not been any history of difficulties in enforcing NY convention awards under the Iranian Code of Civil Practice.
- It might be possible to provide for international arbitration (with arbitrators e.g. in Switzerland under UNCITRAL or ICC rules) between two Iranian companies, although there are conflicting provisions in this regard and the law in this area remains unsettled. In accordance with Article 454 of Iranian Code of Civil Procedure “all persons who have the capacity to file law suits may, pursuant to their own agreement…refer their disputes to one or several arbitrators“.
- The only restriction to appoint a foreign arbitrator is that the parties to a dispute may not, before the dispute arises, refer their potential disputes to arbitration by an arbitrator or an arbitral body with the same nationality as the foreign party to the agreement. (Article 456 of the Iranian Code of Civil Procedure). Therefore, under Iranian law there is no restriction for appointing a foreign arbitrator to act as an arbitrator in disputes with two Iranian companies. However, there are judicial decisions which seem to disallow submission to international arbitration by two Iranian entities. The main reason for such decisions is likely to have been the improper drafting of the arbitration clause.
- Under the provisions of the law passed in 1997 (the Model Law) which adapts the UNCITRAL model law (with some modifications) of international commercial arbitration, the Model Law defines international commercial arbitration as “disputes where one of the parties is a non-Iranian national“. Where disputes between two Iranian companies are to be referred to arbitration, if the parties wish to adapt UNCITRAL rules to apply to the arbitration), the relevant provisions of the UNCITRAL rules should be expressly provided in the finance documentation or other relevant agreements and should not refer to the provisions of the Model Law. This means that the parties will have to stipulate the rules of arbitration and appointment of arbitrators and attach the stipulated Rules to the contracts themselves.
- A foreign party wishing to pursue a claim before the Iranian courts may be required to deposit an amount (sized at the court’s discretion, but in practice between 10 to 15%) to cover the damages that an Iranian party may accrue in respect of such claim. The percentage is at the discretion of the court but in exercising the discretion the sum of the claim in question will be a major factor.
- The Company may also refer its disputes with an Iranian entity to an arbitration conducted outside Iran and to a non-Iranian arbitrator. In this regard, the provisions of the Iranian Code of Civil Procedure related to arbitration in general shall be applicable.
- The relevant provisions of the Iranian Code of Civil Procedure do not contain any restriction as to place of arbitration and appointment of a foreign arbitrator.
 The Iranian Code of Civil Procedure relieves arbitrators from complying with Procedural law in such instances (Article 477 of the Iranian Code of Civil Procedure). Some Iranian courts have recently ruled that arbitration between two Iranian entities may not be made subject to the UNCITRAL rules. This view is based on the definition of international commercial arbitration under the Model Law. In a recent case, two Iranian companies tried to subject themselves to the UNCITRAL rules, without observing the Iranian Code of Civil Procedure’s provisions regarding municipal arbitration. Due to this fatal drafting issue it is believed by some lawyers that Iranian companies are not allowed to submit their disputes to arbitration of a non-Iranian national. However, the misconception appears to be created due to poor drafting of the arbitration clause and not the Iranian law per se. Therefore a clear submission to the UNCITRAL rules should work between two Iranian companies under Iranian law.
 Public and Revolutionary Courts Procedure Act on Civil Matters (approved on April 10, 2000)