In this article, the first issue that is tackled is related to Iran’s sovereignty over its natural resources. In the area of natural resources, a host state acting to preserve the interests of its people may adopt legal measures running counter to the terms of a pre-agreed contract. Therefore, a state may not abide by some provisions of a contract that has been entered into with foreign companies in order to protect the legitimate interests of the country. Under international law, states have the right to nationalize their own natural resources subject to the obligation to compensate the foreign investors. However, the question of whether a state may invoke its sovereign right to disregard its contractual obligations in the presence of a stabilization clause arises. The role of international law will also be examined in order to determine its application to state contracts. It can be gleaned from the material referred to in this article that international law does not have a sufficiently developed body of rules to regulate foreign investments. The second part touches upon a discussion on the applicable law of the contract with regard to the practices of Iran. In so far as the appropriate mechanisms for the settlement of disputes are concerned, foreign corporations that intend to sign agreements with the Iranian public sector must accept the respective Iranian law in their international transactions at inception. The chief justification for adopting this approach relies on the fact that the contracts entered into by the public sector corporations involve the State of Iran and consequently impinge upon its responsibilities. It is the purpose of this study to reflect on these issues and to explore the bases on which they are founded and advanced.