From Courts to Tribunals: Navigating Foreign Law in Iran

THE AUTHOR:
Kamyar S. Oladi, Senior Associate at Rezvanian International Law Firm

Introduction

It is internationally accepted that the parties’ freedom shall be extended to their capability to choose the law governing their disputes. However, in Iran, the parties are not entirely free to choose the applicable law. In litigations, the judge who is bound to the provisions of the Civil Code of Iran (“CCI”), does not necessarily allow the parties to opt for the applicable law. On the other hand, in arbitrations, the parties are free to apply any law. Below, the circumstances under which the parties are free to opt for a foreign law will be elaborated on, as well as how this law shall be proved and applied.

Choice of Law in Litigation and Arbitration

Article 968 of the Iranian Civil Code

According to the principles of conflict of laws, it is an established rule that a judge is bound to the rules of private international law of its own country (i.e. the lex fori). The Iranian judge, therefore, facing a dispute arising out of a contract involving a foreign element, shall resort to Article 968 of CCI. This article vaguely acknowledged the parties’ freedom of choice regarding the law applicable. According to this article:

“Obligation arising out of contracts shall be governed by the laws of the place of the conclusion of the contract; except in cases where the parties to the contract are foreign nationals and have explicitly or implicitly agreed on another law.”

The interpretation of this article is controversial among Iranian scholars. A group of scholars believe that the contract issues are mostly directory rules and not mandatory, and accordingly, the conflict of laws related to it shall be deemed directory. Therefore, if the parties agreed on a provision other than what is set forth in Article 968, the same agreement will be applicable. On the other hand, the second group believes that the rules of the conflict of laws are mandatory, regardless of their content, and therefore cannot be derogated. The latter group also relying their opinion on the wording of Article 968, which clearly acknowledges the possibility of choice of law for foreigners. To shed light on this interpretation, it is worth noting that the Farsi word used in that article (i.e. TARAFEIN) means “both parties”. This technicality results in accepting the interpretation, which leads to the limited scope of parties’ freedom in choosing the law governing their disputes. Therefore, merely, in case when “both” parties are not Iranian, it will be possible to opt for a law other than the law of the place of conclusion of the contract. The outcome, regrettably, is against international practice.

To conclude, the court’s approach is to approve the above outcome. As a way of example, in decision number 9209970221200879, the appeal court, by reference to Article 968 of CCI, stated that, since both parties are Iranian, the applicable law chosen by the parties (Law of England) is disregarded and therefore, the Iranian law shall be applied (To see another court decision in which the law of England applied because London was the place of conclusion of contract, see decision number 9209970221500851).

Article 27 of the Iran Law on International Commercial Arbitration

Contrary to the approach of the Civil Code (which was elaborated above), in arbitration, the parties are free to agree on any law or legal principles. In other words, with regards to the applicable law, Iran has two different conflict of laws provision; one in Article 968 of the Civil Code, which is binding for the Iranian courts and the other one, is Article 27 of the LICA which deals with the choice of law in arbitration.

Despite Article 969 of the Civil Code, LICA, in accordance with international laws and practices, adopted the widely accepted principle of freedom of parties to choose the law applicable to their dispute. Article 27 of LICA is derived from Article 28 of the UNCITRAL (United Nations Commission On International Trade Law) Model Law on International Commercial Arbitration (2006) (“UNCITRAL Model”). According to this article, the parties are free to agree on the laws or the legal principles to be applied into their disputes. The provision does not clarify the necessity of explicit agreement on the governing law. However, according to the general principle of contract law in Iran, a contract, as in this case, is associated with the intention of the parties, and anything that demonstrates such intention shall be accepted as the agreement of the parties. Therefore, the agreement on the applicable law can be either explicit or implicit. The arbitrator, in determining the governing law, shall consider the parties’ implicit intention.

It is worth mentioning that the freedom acknowledged in this Article is for the parties, not the arbitrator. In other words, the arbitrator, in case of a lack of agreement between the parties, is bound to two limitations in deciding the governing law:

First, applying the appropriate conflict of law rules;
The arbitrator is only able to apply a national law, not legal principles.

To elaborate further, according to this article, when the parties do not agree on the applicable law (neither explicitly nor implicitly), the arbitrator, contrary to the UNCITRAL Model Law, shall apply the law that the appropriate conflict of laws rule will determine, rather than the “proper law”. In other words, the translation from the UNCITRAL Model Law constitutes two different meanings. The exact interpretation of the LICA stipulates that the arbitrator shall first determine the applicable conflict of law rules and then apply the said rules without expressing any opinion on the appropriateness of the applied law. Therefore, once the appropriate conflict of law rules were determined, then, as a result, the mandate of those rules shall apply. For instance, for the contract-related issues, in case the parties did not agree on the applicable law, the arbitrator shall first find the rules of conflict of law applicable to contract issues. In doing so, the arbitrators would refer to Article 968 of CCI. Accordingly, the arbitrator does not have any other option but to apply the law of the conclusion of the contract.

Proof of Foreign Law in Iran Legal System

Judges’ Approach Toward the Foreign Law

After comprehending the application of Article 967 of the Civil Code, the court’s duty towards the application of a foreign law shall be examined. Contrary to national law, application of a foreign law, according to the Iranian scholars, is a question of fact (question de faits) and not a question of law (question de droit). Therefore, the judge, faced with the application of a foreign law, might have two options; the first is the Adversarial approach and the second is the Inquisitorial approach (it is worth mentioning that the existence of Adversarial or Inquisitorial approach is mostly discussed under the subject of question of facts).

In Iran, some scholars believe that judges should stand completely neutral. They further state that the judge is an “ear” whose neutrality guarantees judicial security and justice. Therefore, according to this approach, the court shall not initiatively try to consider any possible argument which assists the parties’ position. This approach (adversarial), however, was based on the Iranian previous acts.

In the latest Civil Procedural Codes (“CPC”) enacted in 2002, in Article 199, it is established that in all legal issues, the court, in addition to examining all the parties’ submitted reasons, will conduct any examination which it deems appropriate to discover the truth. Accordingly, the judge was acknowledged as an “active judge”. This is the inquisitorial approach which demonstrates that a judge is not merely bound to the reasons presented by the parties. In other words, the judge may resort to further action that it finds necessary to reveal the truth. This approach is also accepted in the practice of the Iranian high court.

With this introduction to the court’s approach to the factual issues, the important question arises: how shall the judge react to the application of a foreign law? As stated above, it is accepted that the foreign law is considered a question of fact. Therefore, the parties are responsible for submitting the relevant reference to the foreign law. The judge may employ an expert or examine the laws, etc.

The question that remains unanswered is the obligatory or optional nature of the courts’ approach to the application of foreign law. Is the judge obligated to dig into the provisions of foreign law, or is he to decide as to the accepting parties’ submission or digging itself? To answer this question, it should be said that since the foreign law provision is deemed as a factual issue, the judge, contrary to the application of national law, is not obligated to scrutinize the content of the foreign law. However, it can be understood from the spirit of the CPC that the criteria for such a judge’s obligation or option lies in the “judge’s satisfaction”. The judge’s satisfaction is one of the grounds upon which the court decision may be based. Therefore, the court, as far as it finds it necessary to be satisfied, can dig into the foreign law provision by employing experts.

There is a court decision (number 9209970221201337), in which the judge states that the appellant was unable to “prove the existence of the foreign law” provision supporting its claim. This clearly means that the judge was of the opinion that at least existence and reference to the specific provision of foreign law are necessary.

A more illustrative decision can be found in Award No. 9209970221201337 (confirmed by the Appellate Court of Tehran in Appeal No. 12), which involved the off-plan sale of an apartment in Ajman, UAE. The buyer sought to invalidate the agreement due to the seller’s inability to deliver the property. However, the court classified the contract not as a sale of a specific object under Article 348, but as a binding obligation under Article 10 of the Civil Code. More importantly, the appellate court emphasized that under Article 966, the applicable law was that of the UAE, and the buyer had “failed to prove the existence or content of any UAE law that would invalidate the transaction”. This case clearly affirms that under Iranian law, foreign law is treated as a factual matter, and the burden lies on the invoking party to prove its content and applicability.

Arbitrators’ Approach Towards the Foreign Law

In LICA, there is no specific provision as to the application of foreign law. In this regard, since the arbitrator is appointed by the parties and not by the government (contrary to the judges), they might be deemed to initiateively consider the applicable law. However, the international arbitration practices demonstrate that the adversarial approach is accepted. It is accepted that the arbitrators will accept the reasons presented by the parties and only examine the validity and value of those reasons. Additionally, it is common for parties to employ professional lawyers who regularly examine the foreign laws relevant to the disputes. Therefore, with such active counsel, the necessity for the arbitrator’s active role would diminish.

All in all, the arbitrator is not obligated to actively examine the foreign law provisions to base its award on them. However, this does not mean that the arbitrator cannot employ a foreign law expert to act as a witness in the arbitration proceedings. The arbitrator’s power to appoint an expert is illustrated in Article 25 of LICA. Therefore, the arbitration, at its own discretion, may appoint an expert on any foreign law agreed upon by the parties.

Conclusion

Iran has a dual approach as to the parties’ autonomy to agree on the applicable law on their disputes. First is Article 968 of the Civil Code of Iran, which limits the parties ‘ ability to agree on the applicable law, and second, Article 27 of the Law on International Commercial Arbitration, which entirely accepts the parties’ autonomy.

ABOUT THE AUTHOR

Kamyar S. Oladi is a Senior Associate at Rezvanian International Law Firm where he specializes in international construction arbitration and commercial law. With a strong background in legal advising. Kamyar supports companies in navigating the complexities of business operations in Iran, focusing on contract drafting and legal opinions. He was Senior Legal Counsel at the Tehran Regional Arbitration Centre (“TRAC”) and an accomplished legal advisor with over five years of experience. Kamyar holds an LL.M. in International Trade Law from Shahid Beheshti University, Iran. He is fluent in English and a native speaker of Farsi. Previously, he served as the Legal Manager at British American Tobacco (“BAT”).

*The views and opinions expressed by authors are theirs and do not necessarily reflect those of their organizations, employers, or Daily Jus, Jus Mundi, or Jus Connect.