Iran and China conflict of Law; practical guide to choose governing law in contracts between Iranian and Chinese parties
- Some provisions in international contracts are more important than domestic ones.
- Among these important provisions;
- Clear determination of the parties whether they are natural persons or companies.
- The relationship between an agent and a representative with its principal.
- The scope of authorities in company agents.
- Clear determination of obligations and performance.
- Consequences. See Remedies for breach of a contract
- Dispute settlement mechanism.
- Governing law.
Each and every one of these provision are very important in international contracts. Lack of clear provisions about any part of the contract can destroy the whole purpose of the contract.
Here I will discuss the “governing law” clause in contracts between Iranian and Chinese parties
- In domestic contracts, you don’t need to choose the governing law unless you have some reasons to do so.
- For example, your contract is going to have another party from another country. In this regard, remember that most of countries don’t let you choose a foreign law for a domestic contract.
- In this regard, a domestic contract is a contract between parties with same nationality concluded in their own country. For example, Iran Civil Code states that contract between Iranian in Iran will be under Iran Laws.
- An International contract is a contract with a foreign element.
- This foreign element can be;
- Nationality of the parties.
- Place of performance.
- Place of supplied goods.
Why “governing law” matters?
Governing law or applicable law in international contract is important because;
- Every notion you used in the contract will be defined by governing law.
- Governing law will determine the rights and obligation of parties.
- Governing law sometimes affects the right of parties to seek special court or arbitration.
What makes the above mentioned effects even more sensitive is that;
- Except in some type of contracts like sale and transportation, there are always some differences between legal notions in every country.
- Performance methods are different in every country even in the most recognized contracts like sale or rent.
- Each country has its own rules about how to deal with governing law in international contracts. These rules normally are a part of legislation called Private International Law.
- In a dispute, first, the court will use the Private International Law rules to find the governing law. The court will decide about the dispute, Based on this governing law.
- So it is obvious that different courts will decide differently.
- Even in international contracts that parties did choose the governing law, the court might disregard this choice and choose a different law for the contract.
The process of choosing the governing law is a very delicate process;
- First, you should single out the countries that are related to the contract. The main elements usually are;
- Nationality of the parties;
- Country of habitual residence of the parties;
- Country of negotiation and conclusion of the contract; in contracts between Iranian and Chinese parties, if the country of negotiation is different from country of conclusion, it might result in different decisions.
- Country of performance; in some cases, this country closely relates to INCOTERMS rules;
- Country of registration for companies;
- Country of administration for companies.
Parties’ Choice of law in contracts between Iranian and Chinese parties
General rules for governing law in contracts between Iranian and Chinese parties
In an international contracts between Iranian and Chinese parties;
- Both countries have accepted that parties can choose the governing law.
- Both countries allow their nationals to choose the law of a third country as governing law.
Due to similarities between two countries, it seems easy to choose the governing law in contracts between Iranian and Chinese parties. Unfortunately, it is not so easy because there are more differences than similarities.
Difficulties regarding choice of law in contracts between Iranian and Chinese parties
- The parties’ ability to choose the governing law is different in Iran and China.
- In the other words, both countries have accepted a different notion of Parties Autonomy.
- In both countries, the choice of law extremely depends on the dispute settlement mechanism.
- The courts in both countries have created a wide authority to change the chosen law. As I witnessed, most of the times, this authority is based on the ambiguity of Laws.
When the court can choose the governing law?
Same as all other aspects of Private International Law, this question also has a lot of different answers.
Regarding to contracts between Iranian and Chinese parties the comparison between Laws reveals two certain situations in which the court can choose the governing law;
- When parties didn’t choose the governing law;
- When the chosen law is inapplicable.
1- When parties didn’t choose the governing law
- Regarding to contracts between Iranian and Chinese parties the choice of governing law must be explicit. Parties shouldn’t choose this law using implied terms and provisions. This necessity rooted in China’s Law.
2- When the chosen law is inapplicable
- First- According to Laws in both Iran and China, the parties have to choose a National Law. It means that the parties have to refer to a legislator country. For example, parties agree that the governing law will be the Singapore law, but;
- Interpretation of laws in Iran and China shows that the parties should be able to choose something other than a National Law. For example, parties agree that the disputes will be settled using General Principles of Commercial Relations but;
- Common practice of courts in both countries still hesitates to accept this type of chosen law.
- Second- This is very important– According to Iran Civil Code, a court cannot validate the parties’ choice of law. Here is why;
- According to Iran Civil Code; the governing law in contractual obligations is the law of the place where contract has been concluded. If both parties are foreign nationals, they can choose another law for the contract.
- As it is obvious, an Iranian cannot choose another law for contractual obligation if the contract was concluded in Iran.
- This provision is for 1928 and it is still in force. In 1997 “The Act of International Commercial Arbitration” was adopted. According to this Act, parties are allowed to choose the governing law. Here is the outcome;
- If contracts between Iranian and Chinese parties were concluded in Iran, the dispute settlement mechanism will determine the applicability of the chosen law;
- Courts- In the court, the Civil Code will apply. So if the chosen law in contracts between Iranian and Chinese parties is not Iran law, this choice is inapplicable.
- Arbitration- In arbitration, The Act of International Commercial Arbitration will apply. So the choice of law is applicable.
- Third- According to China laws, there are several contracts that are under China’s law;
- No matter where these contracts have been concluded, and no matter who the other party is, if the contract is going to be performed in China, the performance is under China laws.
- These contracts listed in Article Number 8 of “Rules of the Supreme People’s Court on Related Issues concerning the Application of Law in Hearing Foreign-Related Contractual Dispute Cases Related to Civil and Commercial Matters”
- See this document here: Rules of the Supreme People’s Court
How the Court chooses the governing law?
- When parties don’t explicitly choose the governing law and when the chosen law is inapplicable, it is on the court or arbitration to choose this law.
- The solution for this question is extremely different in Iran and China.
- In China laws, the court or arbitration has to go through 17 guidelines to find the governing law. The main criterion here is “the closest connection” principle. The judge has to find the country that have the closest connection to the contract. Also there are 17 guidelines suggesting this country in different contracts.
- Article Number 5 of “Rules of the Supreme People’s Court on Related Issues concerning the Application of Law in Hearing Foreign-Related Contractual Dispute Cases Related to Civil and Commercial Matters”.
- If the dispute is in the court:
- The law of the place where contract has been concluded.
- Also the judge is allowed to look for implied choices.
- If the dispute is in arbitration:
- The arbitrator choose the governing law using “Conflict of Laws” principles.
- It is as ambiguous as it sounds but among these principles is the “the closest connection” principle.
When choosing the governing law in contracts between Iranian and Chinese parties pay attention to;
1- The subject of contracts;
- Most of investment contracts that have a performance phase in China, are under mandatory governance of China laws.
- Interpretation suggests that only the performance phase of these contracts are under China laws. Choosing an acceptable law in these contracts needs a close examination.
- Employment contracts and consumer contracts have special protective rules in almost all countries.
2- Countries involved
- Normally, in contracts between Iranian and Chinese parties we can safely assume that Iran and China are only involved countries.
- In choosing the governing law in contracts between Iranian and Chinese parties there is no need to go for a third choice. Choose one of these two countries. Exception can be in case of absolute necessity.
- Generally, the courts rather to apply their national law. A close examination on relation between the chosen law and the competent court is necessary.
3- Closest connection
- Normally, in contracts between Iranian and Chinese parties we can safely assume that the contract has a closer connection to one of these countries.
- In general, if the contract has a construction phase, the place of construction has a closer connection.
4- Harmonize the governing law with the competent court
- Iranian courts have fewer options in applying the chosen law.
- Iranian courts apply Civil Code. In Civil Code, the law of place of conclusion is the governing law. Contracts between Iranian and Chinese parties we that concluded in Iran, are under Iran laws.
- If contracts between Iranian and Chinese parties concluded in Iran, China law cannot be governing law unless;
- The contract has an arbitration clause.
- What if in contracts between Iranian and Chinese parties concluded in Iran, China law is the governing law and Chinese courts are competent courts?
See also Remedies for breach of a contract