Remedies for breach of contract in Iran contract law
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Remedies for breach of a contract

  • Facts

    • Parties: 1- A Chinese businessman and 2- An Iranian Company.

    • Parties concluded three different contracts:

      • An Investment contract with Director of Iranian Company.

      • A sale contract with the Director of Iranian Company.

      • A Contract with the Company for sharing the profits of the Investment Contract in the form of transferring a percentage of company’s shares.

    • Chinese party started to ship the goods under the sale contract for the director of company. After a set of shipments, Iranian party started to pay the price of goods and refused to pay the profit of investment contract.

  • Holding and Decision

    • This dispute settled through negotiation but its legal implications are worth to mention:

      • In investment contracts, the parties should be same.

      • Normally, the Director of a company cannot sign a contract for the company unless this authority clearly stated in statute of company.

      • An investment contract does not need a sub contract for sale.

      • And finally, a company does not own its shares so it cannot sign a contract to transfer its shares.

  • General rules about breach of contract

    • What is “Breach of contract”? When “Breach of contract” occurs?

    • Similar to the most domestic and regional legal systems, answer to these questions mostly depends on contract itself. Parties can describe situations and conditions in which Breach of contract occurs and also they can determine applicable law. In all legal systems around the globe as well as in Iran legal system, there are restrictions on parties’ choice about applicable law.

    • In general, parties cannot determine the applicable law unless the dispute refers to an arbitration settlement. In other words, only in arbitration the chosen applicable law is applicable not in courts procedures. This statement clarified in case law. see What Case Law Does in Iran Law?

    • As mentioned above, the notion of Breach of contract depends on the contract. Any failure to fulfill duties might be considered as a breach. In some cases, breach of contract terminates the contract and in others, it results in compensation or remedy. “Grave breach” is a notion that exists in many domestic legal systems but it has a special Feature in Iran legal system. In Iran legal system, any contract has a soul or a core. The core of a contract has two effects;

      • Only reversal in this core considers as a grave breach.

      • Any subsequent agreement which disregards this core, will nullify the contract and subsequent agreement.

    • “Core of a contract” is a notion in Islamic contract law. In Islamic contract law, there are only few types of contracts and any contract has a definition which determines the core of contract. In modern ages, there are hundreds of contracts that do not have any definition in Islamic jurisprudence. In these new contracts, this core can be understood by parties obligations reflected in contract.

    • Practical tips:

      • If you want to sign a contract that has a definition in Islamic contract law, make sure that your rights and duties in contract do not conflict with core of contract.

      • Only breach of this core is a grave breach otherwise the contract is valid and must be continued by the parties.

      • In modern contracts, connections between parties obligation is a primary rule in recognizing the core of contract.

      • According to Iran civil code, any breach of a contract does not nullify the contract except breach of the core notion of contract, so if a party does not fulfill the duties, the other party has three sequenced options;

        • Should seek the public power to force other party to fulfill obligations.

        • Should substitute someone else to do it.

        • Should do it himself or herself.

      • In any case, if it was impossible to apply these three steps, the contract can be revoked.

    • Practical tips:

      • Applicable law can change the whole notion of Breach and its results.

      • A Breach cannot nullify the contract unless it is about the core obligation of contract.

      • If a party failed to fulfill his/her obligations, the other party should pass three steps before revoking the contract: one- force the obligator, two- substitute the obligator and three- fulfilling the obligation by him/herself.

      • To escape these general rules, parties can determine the breach and its results. The most important restriction in the regard is about applicable law.

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