Contract speaks when laws become silent-Governing Law
Contract speaks when laws become silent
Determining Lex Loci Contractus
Within most legal systems, contracts and contractual obligations are subject to a law which is agreed on by parties to the contract. This is called the doctrine of mutual assent. In order to study the conflict of laws with regard to contracts, the issue of determining Lex Loci Contractus should initially be taken into consideration and then Lex Loci Contractus should be reviewed within Iran’s legal system.
- Theory of Autonomy of Will
The theory of autonomy of will in conflict of laws was first proposed by Charles Dumoulin in the 16th century. He discussed that: “Since the contract is made by the will of the parties and it is in fact a voluntary restriction of the rights of the parties to the contract; hence, legal logic suggests that parties to the contract can freely apply any governing law to their contract which they consider appropriate.” It should be taken into account that the theory of autonomy of will is divided into two parts:
- The parties to the contract have the right to freely choose the law governing the contract.
- If the parties to the contract have not expressly chosen an applicable law, it should be established whether they have implicitly accepted the application of a specific law. In other words their “tacit agreement” should be sought.
- The clear indication of determining the applicable law
If the will of the parties to the contract is not stated with regard to applicable law, Lex Loci Contractus can be determined in accordance with one of the two following solutions:
- As the parties to the contract have not exercised their authority in order to determine the applicable law, their contract will necessarily be subject to a predetermined law, as the law of the place where the contract was made with regard to contract of carriage or the law of the place where the contract is performed with regard to work contract is considered binding.
- The judge as the official authority determines the applicable law in accordance with the parties’ tacit agreement.
Among the clear indications of determining the applicable law, the place where the contract was made and the place of performance of the contract are more significant and in fact they are the two most important factors in a contract. (Accredited by Hague Convention of 15th June 1955 on the Law Applicable to International Sales of Movable Goods) The indications to be considered in a contract are as follows:
- The place where the contract was made
- The place of performance of the contract
- Other indications:
- The residence of the parties to the contract
- The nationality of the parties to the contract
- The place where the immovable property is situated (regarding contracts relating to immovable property)
- The language used to write the contract
- The parties’ consent to the state nominated for arbitration proceedings or the jurisdiction of its courts
- The currency stipulated in the contract
- The location or type of the pledge
- The reference to the legal provisions or legal terminologies of a state
- The residence of the party who has drawn up the contract
The point that should be taken into consideration is that by conducting a review of the clear indications of determining the applicable law, the presence of several factors in one country can be the cause for the preference to be given to the laws of that state. Essentially, we should realize that in this regard the analysis of the factors is more under consideration than their number and each factor must be assessed with respect to the type of the contract. For example, in respect of contracts relating to immovable property or objective law, the location of the immovable property will be a decisive factor in determining the applicable law. Furthermore, this is also true regarding interconnected contracts such as immovable property pledge contract which the law relating to the location of the immovable property will be logically applied to loan contract unless the contrary is stipulated in the contract.
Lex Loci Contractus within Iran’s Legal System
Despite disagreement among jurists, the application of the theory of autonomy of will is still taken into consideration under specific conditions and apparently parties’ right in determining the applicable law cannot be denied. However, we should realize that the doctrine of mutual assent cannot be applied to all the issues regarding the contract, because some subject matter of a contract such as the legal capacity of the parties are necessarily subject to another applicable law enacted by the legislative body.
Moreover, the mandatory or optional rule of conflict resolution (international law) are subordinate to the related mandatory or optional substantive law (domestic law). Since within any legal system the laws are divided into mandatory and optional; therefore, the rule of conflict resolution established for any area of law should also be subject to the related mandatory or optional substantive law. For example, since the laws pertaining to the legal capacity of individuals are mandatory, the rule of conflict resolution which subjects the legal capacity of individuals to their respective government is also mandatory and therefore aliens cannot reach an agreement concerning their legal capacity to be subjected to Iran’s laws. Conversely, since the provisions of the Civil Code of Iran are essentially optional with regard to sale contract obligations, the rule of conflict resolution, which for example subjects the contractual obligations to the law of the place of the contract, should also be considered optional. Consequently, it can be said that transacting parties can reach an agreement about their sale contract obligations to be subjected to Iran’s law, even if the contract is concluded outside of Iran. Hence, with respect to contract obligations the rule of conflict resolution being subjected to substantive law should be taken into consideration.
A- The law governing the formation of a contract
According to Article 968 of the Civil Code of Iran “contractual obligations are subject to the law of the place where the contract was made”. It can be observed that the law governing contractual obligations is determined by the Civil Code of Iran; however nothing is stated concerning the law governing the formation of a contract nor the essential conditions for the contract are specified. In this case, Iran’s law should be considered as applicable in accordance with the principle stated in Article 5 of the Civil Code of Iran (territorial principle) unless the contrary is stipulated. In other words, contract conditions will be governed by Iran’s law as the law of the place of the contract.
Naturally, there are exceptions to applying the law of the place to contract conditions which should be taken into consideration. The first exception is in regard to the determination of the legal capacity of transacting parties. According to Article 7 of the Civil Code of Iran, the legal capacity of transacting parties is subject to their respective government; however, Article 962 of the same law has defied this principle in some cases and has not recognized the law jurisdiction of a foreign national’s respective government. This Article states that: “For the purpose of a transaction, determining the legal capacity of any individual will be in accordance with the law of the individual’s respective government.” Nevertheless, if a foreign national performs a legal act in Iran provided that the individual is lacking legal capacity or has partial legal capacity in accordance to his/her respective government to perform the act, this individual is considered to have legal capacity to perform the act provided that regardless of his/her nationality this person can be recognized to have legal capacity in accordance with Iran’s law. The aforementioned rule will not include those legal acts concerning family or inheritance rights, and the transfer of immovable property located in Iran. This rule is introduced in order that the transactions conducted in Iran maintain their consistency and the rights of Iranian nationals are protected.
The other exception is the legitimacy of the transaction. Although the Civil Code of Iran has not expressly recognized the law of the place of performance to be applicable, this does not create a problem in the Civil Code since this is an obvious case and stipulation was not required. Naturally, Iran’s law (as the law of the place where the contract was made) should also be observed with respect to the legitimacy of the transaction. In order to apply Iran’s law to the legitimacy of the transaction, territorial principle (Article 5 of the Civil Code of Iran) can be invoked, and in order to apply the law of the place of performance of the contract, the rule of public order in the foreign country can be invoked, because even if the subject matter of the contract concluded in Iran is legitimate in respect of Iran’s law it will be enforceable in a foreign country provided that it will not be contrary to the public order of that country.
B- The law governing contractual obligations
In regard to the law governing contractual obligations, Article 968 of the Civil Code of Iran states that: “Contractual obligations are subject to the law of the place where contract was made unless parties to the contract are foreign nationals and have expressly or implicitly subjected it to another law.” This Article, embodying one of the known rules of international law, seems to be adopted from the French private international law, because according to an old French rule of the conflict of laws, the contract is subject to the law of the place where the contract was made unless parties to the contract have subjected it to another law. In the aforementioned Article the phrase stated instead of the one in the French rule of the conflict of laws is as follows:
“unless parties to the contract are foreign nationals and have expressly or implicitly subjected it to another law”
This Article has become mandatory in consequence of this change. However, since rule of conflict resolution is subject to substantive law, parties to a sale contract, for example, can create contractual obligations at their discretion and impose any condition for the subject matter of the contract which is not contrary to mandatory laws. Therefore, imposing a mandatory rule to sale contract obligations and recognizing the country’s law to be binding specifically creates a problem only in international relations, because if parties to the contract want their contractual obligations to be governed by a foreign law, they can state the provisions of that law as proviso.
In any case, considering the rule stated in Article 968 of the Civil Code to be mandatory is contrary to legal logic and creates some problems in international relations, for example, the rule of conflict resolution will only be applicable to contracts concluded in Iran. Moreover, as the contracts concluded in a foreign country will necessarily be subject to the laws of that country, Iranian nationals will not have the right to subject their contractual obligations to Iran’s law in respect of this Article. In order to solve these types of problems there is no alternative but to consider the rule stated in Article 968 of the Civil Code to be optional; namely, parties to the contract have the right to choose the law governing their contractual obligations (within the limits of mandatory laws). In other words, the meaning of this Article is that essentially contractual obligations are subject to the law of the place where the contract was made and if parties to the contract are nationals of another country, they can expressly or implicitly subject them to another law. Hence, when Iranian nationals draw up a contract with non-Iranians outside of Iran, they can subject the contract to non-Iranian laws.
SHO Attorney Group
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