Arbitration or Court? Choosing a Forum in International Contracts

The dispute resolution clause is usually the last term negotiated and the first one read when a dispute arises. A poor choice between arbitration and the courts, or a vaguely drafted arbitration clause, can mean months of argument about jurisdiction before the real dispute is even heard.

Why arbitration is common in international contracts

• Enforcement abroad: Iran acceded to the New York Convention on the recognition and enforcement of foreign arbitral awards in 2001. The Convention makes awards enforceable in more than 170 countries, whereas foreign court judgments usually depend on a bilateral treaty or reciprocity.
• Neutrality: neither party has to litigate in the other’s home courts.
• Expertise: the parties can appoint arbitrators who know the industry, such as shipping or construction.
• Confidentiality: arbitral proceedings are generally private.

When the courts may be the better choice

In smaller contracts, institutional arbitration can cost more than the amount in dispute. If the counterparty’s assets are in Iran and urgent measures such as an attachment order may be needed, the local courts can be the simpler route. Tiered clauses also work well: negotiation, then mediation, then arbitration; or arbitration for substantive disputes and the courts for undisputed debts.

Legal limits under Iranian law

International commercial arbitration in Iran is governed by the 1997 Law on International Commercial Arbitration, while domestic arbitration is regulated by the Civil Procedure Code. For contracts with a state entity, Article 139 of the Constitution is critical: referring disputes over public or state property to arbitration requires Cabinet approval, and parliamentary approval where the other party is foreign or the matter is significant domestically. Ignoring this requirement puts the arbitration at risk.

What an effective arbitration clause contains

• The institution or rules (for example ICC, LCIA, the Arbitration Center of Iran Chamber or UNCITRAL Rules)
• The seat of arbitration, which determines the supervising court and set-aside options
• The number of arbitrators and how they are appointed
• The language of the proceedings
• The law governing the contract
• The scope: “all disputes arising out of or in connection with this contract”

Clauses such as “disputes shall be resolved by arbitration or the courts”, or naming an institution that does not exist, are common examples of defective clauses that block the path to resolution in practice.

Read more about our international trade and arbitration and commercial litigation and contracts practice.

This note is general information and is not legal advice on any particular matter. To discuss your situation, request a consultation.