Legal Ramification of Article 968 of the Civil Code of Iran

Executive summary
The interpretations of article 968 of the Civil Code of Iran (CCI) can be subdivided into two groups. Under the first one that is supported by few lawyers, article 968 is a mandatory provision of the CCI. This means that all obligations arising out of contracts are subject to lex loci contractus, wherever they are concluded. The only exception to this rule is where both of the parties are foreign citizens who have explicitly or implicitly declared that their contract shall be subject to a law other than lex loci contractus. The second interpretation is a more liberal and more popular one. Under this interpretation, article 968 is a facultative provision of the CCI authorizing the Iranian as well as the foreign citizens to subject their contracts to any law that they deem appropriate.

It is evident that the first interpretation ties the hands of Iranian juridical and natural persons because if they conclude their international commercial contracts inside Iran, the law of Iran shall apply to the contracts without any exception. On the other hand, they can adopt any law as the governing law of their contracts that are concluded outside Iran. However, if a party brings a case before an Iranian court, the judge who believes in mandatory nature of article 968 may impose the law of Iran on all aspects of the dispute. This normally happens where Iranian parties to international commercial contracts find it beneficial to have their disputes decided by an Iranian judge under the law of Iran.