Navigating Contractual Obligations: Article 968 of the Iranian Civil Code and Its Global Implications

For Iranian citizens engaging in international contracts, Article 968 of the Iranian Civil Code frequently raises challenging conflict-of-law issues. Although modern contractual practice often embraces party autonomy (the right of contracting parties to choose the governing law), Iranian courts may interpret Article 968 in ways that limit this freedom. Below, we explore how these interpretations arise, the conflicts they generate, and the relevance of international customary law in navigating them.

What Does Article 968 Say?

Article 968 provides that obligations arising out of contracts are subject to the lex loci contractus (the law of the place where the contract is concluded), both parties are foreign nationals who have explicitly or implicitly chosen another law to govern their contract

. When at least one party is Iranian and the contract is concluded within Iran, some judges may regard this rule as “mandatory,” leaving little room for a foreign governing law. Others adopt a more “facultative” view, allowing greater choice of law for all parties—an interpretation that aligns better with international commercial norms.

Conflict of Laws: Mandatory vs. Facultative Interpretations

• Mandatory Interpretation

  
  

  Under this strict reading, contracts concluded in Iran are automatically subject to Iranian law if at least one party is Iranian, and no express choice of law can override that. If a dispute arises in an Iranian court that adheres to this view, the court may impose Iranian law despite any contrary governing-law clause.

• Facultative Interpretation

  
  

  A more liberal approach sees Article 968 as permitting parties—even if one is Iranian—to choose a different jurisdiction’s law, provided that choice is clearly stated. This more flexible stance reflects the reality of global commerce, where most trading partners expect to be able to select neutral or familiar legal systems.

These divergent views can cause uncertainty for Iranian citizens who enter into cross-border agreements. If a dispute ends up before an Iranian court favoring the mandatory interpretation, the parties’ choice of foreign law may be ignored—potentially overturning the basis of the contract.

International Customary Law and Party Autonomy

In modern international practice, party autonomy is often considered a cornerstone of cross-border transactions While there is no single universal rule enforcing party autonomy in all jurisdictions, many global legal systems and international instruments favor respecting the parties’ choice of law, unless it contravenes fundamental public policy or mandatory rules of the forum.International customary law generally supports the idea that states should honor freely negotiated contracts, including the chosen governing law, to promote consistency and fairness in international trade. However, it does not categorically eliminate the ability of individual states—like Iran—to insist upon applying their own mandatory statutes in certain situations.

Practical Tips for Contracting with Iranian Parties

1. Clear Choice-of-Law Clauses

   
   

   If you wish to select a foreign governing law, articulate that choice explicitly in your contract. Where possible, negotiate and sign the contract outside Iran to strengthen the argument for a foreign lex contractus.

2. Consider Arbitration

   
   

   Arbitration under Iran’s International Commercial Arbitration Act (ICAC) may offer more freedom to choose a foreign law. Article 27 of the ICAC generally respects the parties’ chosen law when at least one party is a non-Iranian.

3. Seek Specialist Advice

   
   

   Before concluding contracts, consult legal experts with experience in both Iranian and international commercial law who understand the nuances of Article 968. They can help you structure contracts—and plan dispute resolution clauses—so that you reduce the risk of an unfavorable mandatory application of Iranian law.

4. Monitor Evolving Practice

   
   

   Iranian legal practice on Article 968 can vary. Courts increasingly acknowledge the realities of international trade, suggesting a gradual shift toward more liberal interpretations. Staying informed about recent rulings and legislative changes is crucial.

Conclusion

Article 968 occupies a pivotal place in Iranian conflict-of-law rules for contracts involving Iranian citizens. Whether viewed as mandatory or facultative, it can significantly affect the enforceability of a chosen governing law. While international customary law and modern commercial principles emphasize respecting contractual autonomy, these ideals sometimes clash with deeply rooted national statutes.By understanding these nuances—especially if you are an Iranian citizen or doing business with Iranian partners—you can craft more robust, predictable cross-border agreements. In an evolving global legal environment, awareness and proactive planning help you bridge the gap between Iranian domestic rules and widely accepted international practices.