Choice of law: Contracts

The Rome Convention was implemented by the Contracts (Applicable Law) Act 1990 and came into force on 1 April 1991.

The Rome Convention was replaced by the Rome I Regulation, which applies to contracts concluded on or after 17 December 2009. 

This post will focus on Rome I Regulation. 

You can download Contracts (Applicable Law) Act 1990 here: http://www.legislation.gov.uk/ukpga/1990/36/pdfs/ukpga_19900036_en.pdf

You can download Rome I Regulation here: http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32008R0593&from=EN

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Preliminary provisions

Article 1(1) provides that Rome I Regulation applies in situation involving a conflict of laws, to contractual obligations in civil and commercial matters.

The Regulation does not define contractual obligation, but the court held that it shall be given a wide and autonomous meaning (Raiffeisen Zentralbank Österreich v Five Star Trading (2001)).

Article 2 mentions that the Regulation shall be applied whether or not it is the law of Member State. In Iran Continental Shelf Oil V IRI International (2002), the English court applies the Rome I Regulation to determine the applicable law of the contractual dispute between a US corporation and an Iranian company (neither is connected to the law of a Member State).

Article 20 makes it clear that the doctrine of renvoi has no role to play in relation to choice of law in contract.

Applicable law chosen by the parties - Article 3(1)

Article 3(1) provides that the parties are free to choose the law to govern their contractual relationship. The choice shall be made expressly or clearly demonstrated by the terms of the contract or the circumstances of the case. The parties could select the law applicable to the whole or to part only of the contract.

The Regulation allows the choice of law which has no connection with the contract or parties.

Article 3(1) allows parties to have different rules governing different parts of the contract. Giuliano-Lagarde Report states that the parties’ choice of law must be logically consistent in the sense that it must related to elements in the contract which can be governed by different laws without giving rise to contradictions.

Article 3(2) allows the parties to change their choice of law after the conclusion of the contract. The variation of choice of law is effective as long as it does not prejudice its formal validity or adversely affect the rights of third parties.

The English common law did not recognise the possibility of a floating applicable law, but according to the Article 4 of the Rome Convention and Rome I Regulation, a floating applicable law may not be fatal in the absence of choice of law. How the possibility will be addressed by the English courts remain to be seen.

Choice of law expressly made - Article 3(1)

If the choice of law which is expressly made by the parties by way of a contractual term, Article 3(1) is satisfied even if the contract has been concluded by reference to one of the parties’ general conditions, which including a choice of law clauses, as long as there is consensus that the contract is concluded on those contractual terms (Iran Continental Shelf Oil v IRI International (2002)). 

Hence, if the parties delete the relevant clause before signing the contract, Article 3(1) is not satisfied (Samcrete Egypt Engineers v Land Rover Exports (2001)).

A choice of non-national system of law (for example Sharia law or Jewish law) does not constitute a choice of law for the purpose of Article 3(1) (Shamil Bank of Bahrain v Beximco Pharmaceuticals (2004)).

Under the common law, a floating applicable law is unenforceable (Armar Shipping Co Ltd v Caisse Algerienne d’ Assurance (1981)). An example would be a contractual clause allowing the law to be governed, at the option of the parties, either by the law of the country X or country Y.

In The Mariannina (1983), there was a clause provides that if provision for arbitration in London is unenforceable, then the contract should be governed by Greek law. The CoA held that the clause is valid because it is merely choices of law based upon the objectively ascertainable event, rather than a floating applicable law.

Under the common law, a choice of law that is expressly made could be ineffective if it is ‘meaningless’. In Maritime SA v Compagnie Tunisienne de Navigation SA (1971), there was an express choice of law which referred to the law of the flag. But the cargo in question was to be carried by several ships each flying a different flag (5 different flags in total). The clause was held to be incapable of application.

More recently, in Sonatrach Petroleum v Ferrell International (2001), the court stressed that if the applicable law cannot be identified with certainty, the alleged choice of law is unenforceable.

Choice of law clearly demonstrated - Article 3(1)

It shall be noted that the Rome Convention used the term ‘demonstrated with reasonable certainty’; but the Rome I Regulation used the term ‘clearly demonstrated’.

Giuliano-Lagarde Report gives a number of examples where a choice of law may be implied:

(a) Dispute-resolution clauses

A choice of jurisdiction or arbitration (jurisdictional clause and arbitration clause) is not, in itself, a choice of law.

The Giuliano-Lagarde Report states that the choice of law does not necessarily be implied by the choice of jurisdiction or choice of arbitration and this must always be subject to other terms of the contract and all the circumstances of the case.

There used to be a presumption under the common law that choice of law is implied by the choice of jurisdiction (The Komninos S (1991)), even though the contract or the parties have no connection with England. The maxim qui elegit iudicem elegit ius (if you choose a judge you choose his law) if often cited.

Similarly, a choice of law can also be inferred from an arbitration clause, depending on the circumstances of the case (The Parouth). The case decided under the regime of Rome Convention, for example Egon Oldendorff v Libera Corperation (1995), appears to follow the common law approach, but in a more cautious sense.

At common law, the jurisdiction clause or arbitration clause is not conclusive. In Maritime SA v Compagnie Tunisienne de Navigation SA (1971), there was an express choice of law which referred to the law of the flag. But the cargo in question was to be carried by several ships each flying a different flag (5 different flags in total). There was also a clause that which provided that any dispute should be settled by arbitrators in London. The court disregarded the arbitration clause and held that French law was the applicable law. There are several factors have been taken into account by the court, which included that the parties negotiated the contract in French language, contract was made in France through French brokers, payment was in French currency and one party was a French company.

(b) Standard form

A use of standard form could imply a choice of law, particularly where certain types of standard form which are draft against the background of a particular system.

In Amin Rasheed v Kuwait Insurance (1983), the insurance policy was based on a Lloyd’s form set out in a schedule to the Marine Insurance Act 1996. House of Lords held that English law was the law governing the contract.

In Gard Marine v Tunnicliffe (2010), the contracts of insurance follow the English standard form and it was held that the English law is the applicable law.

(c) Previous course of dealing

If there is any previous contract between the same parties contained express choice of law, and the present dealing does not indicate any deliberate change of policy, the choice of law followed by the previous course of dealing would prevails.

(d) Express choice of law in related transaction

A choice may be implied into a contract from an express choice of law in related transactions between the same parties (FR Lurssen v Hallen).

(e) Reference to particular rules

The contract may imply a choice of law by references to the law of a particular country.

The example given by the Giuliano-Lagarde Report is that ’references in a contract to specific articles of the French Civil Code may leave the court in no doubt that the parties have deliberately chosen French law, although there is no expressly stated choice of law’.

This must not be confused with a mere incorporation of foreign law, by which the parties are merely incorporating specific rules under the foreign law into their contract (Stafford Allen & Sons Ltd v Pacific Steam Navigation Co (1956)). The choice of law would not be implied by the incorporation of foreign law.

(f) Other considerations

The Giuliano-Lagarde Report makes it clear that these factors are not conclusive.

At common law, where a contract is valid under one law but invalid under another, the court may imply a choice of the validating law (Re Missouri Steamship (1889)).

It shall be noted that currency is a doubtful factor because the parties may have choose a particular currency for many reasons. The currency is often chosen without the intention for the law of the country to be the applicable law. It was submitted that a particular currency could be chosen because of the international character of the currency, or its stability of international market, or negotiation between the market, or even merely for the purpose of convenience.

Applicable law in the absence of choice - Article 4

(i) Stereotyping scenarios - Article 4(1) & 4(2)

Article 4(1) lays down a series of general choice of law rules which determine the applicable law in cases involving a variety of typical contract.

The determining element is a party’s habitual residence (except for a contract involving immovable property). Article 19(1) defines the habitual residence of a company as the place of central administration, habitual residence of a natural person acting in the course of business as his principal place of business. Article 19(2) defines the habitual residence of a branch, agency or any other establishment as the place where they located.

Article 19(3) provides that the determination of habitual residence shall refer to the time of the conclusion of the contract.

In situation where the contract does not fall within the scope of Article 4(1) or is governed by more than one category, Article 4(2) provides that the contract is governed by the law of the country where the party required to effect the characteristic performance of the contract is habitually resident.

The idea of characteristic performance is derived from Swiss law and is not defined in the Regulation. Article 4(2) makes reference to the law of the country where the characteristic performer is habitually resident. A characteristic performer is a person who is to effect the performance which is the characteristic of the contract.

Generally a characteristic performance is easy to identify if only one party has to perform. Giuliano-Lagarde Report suggested that the characteristic performance is usually the performance for which payment is due. Hence in a contract for the sale of goods, the presumption identifies the seller’s law; in banking contract, the bank’s law; in a broking contract, the broker’s law.

Where there are two performances involving the payment of money, the characteristic performer is the party carrying the greater risk. Hence, in a banking contract, the banker will be the characteristic performer (Bank of Baroda v Vysya Bank (1994)).

Recital 19 provides that if the contract consists of a bundle of rights and obligations capable of being categorized as falling within more than one specified types of contract, the characteristic performance of the contract should be determined having regard to its centre of gravity. 

The problem may arise when both parties undertake to perform obligations of the same type, for instance, a contract of exchange (Apple Corp v Apple Computer (2004)). Besides, in a complex joint-venture agreement it is impossible to identify the characteristic performer.

(ii) Non-applicability of Article 4(1) & (2) - Article 4(4)

Article 4(4) provides that the contract shall be governed by the law of the country with which it is most closely connected, if the Article 4(1) & (2) is not applicable. For example, when it is possible to identify the characteristic performer. 

It shall be noted this is a sort of clarity of law as Rome Convention does not provide much guidance in the event where there is difficulty in determining habitual residence and characteristic performance.

(iii) Manifestly more closely connected (Escape Route) - Article 4(3)

Article 4(3) provides that Article 4(1) & (2) could be aside if the contract is manifestly more closely connected to another country. The law of the particular country shall apply.

Rome I Regulation constructs the word ‘manifestly’, which raise a question that whether it sets a higher or lower standard, as compared to the Rome Convention.

In ICF v Balkenende BV (2010), which is a case held under the regime of Rome Convention, the ECJ accepts that where it is clear from the circumstances as a whole that the contract is more closely connected with a country other than the characteristic performer’s country, the exception will be applied. The ECJ also points out that the Rome Convention seeks to balance the requirements of legal certainty, with the necessity of providing for certain flexibility, in determining the law which is actually more closely connected with the contract in question. It is unclear whether the ECJ now will follow this reasoning or be more restrictive with Article 4(3) since the word ‘manifestly’ is added.

In Definitely Maybe v Marek (2001), the English co contracted with a German organizer to provide service of the pop group Oasis to play in German pop festivals. Oasis’s guitarist did not play and the German organizer refused to pay the full price on the strength of this. The court held that the German law is the applicable law. The decision was influenced by the many factors, inter alia, the place of performance is Germany.

Clarkson and Hill opined that Article 4(3) shall be treated as an exception rather than a rule. For the escape route to be applied there must be a combination of connecting factors which causes the balance to be clearly tilted in favour of a law other than the characteristic performer’s law.

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Mandatory provisions

There are several mandatory rules are designed either to protect a specified group (consumer and employee) or the national economic system.

By virtue of Article 3(3), when the parties have actually chosen an applicable law, but all other elements relevant to the situation relevant to the situation are connected with another country, the chosen law will not be effective. This mandatory rule has an effect to limit the freedom of choice by the parties.

Rome I Regulation draft special rules for consumer contracts (Article 6) and individual employment contracts (Article 8), with the intention to provide protection to the weaker party (the consumer and the employee).

Mandatory provisions - Article 9

Article 9(1) provides that if there is a matter which is regarded as crucial by a country for safeguarding its public interests, such as its political, social or economic organisation, to such an extent that they are applicable to any situation fall within their scope, irrespective of the law otherwise applicable to the contract under the Regulation. 

Article 9(2) upheld the effectiveness of the overriding mandatory provision of the law of the forum. A country may, from the point of view of public interests, has an interest in how a contractual relationship is to be regulated.

By virtue of Article 9(3), if the overriding mandatory provisions of the law of country render the performance of the contract unlawful, the court may give effect to the provisions in question after considering the nature and purpose and to the consequence of their application or non-application.

It shall be noted that the wording of the Article 7(1) of the Rome Convention was open-textured and broader in scope (Clarkson and Hill). Article 7(1) was badly drafted and attracted many criticisms. Article 9(3) of the Rome I Regulation limits its operation to situations where the contractual performance is illegal under the law of the place of performance (lex loci solutionis).  

Mandatory provisions - Article 21 (Public policy)

Article 21 provides that the applicable law under the Regulation may be refused (chosen law by the parties or inferred choice) if it is manifestly incompatible with the public policy of the forum.

Under the common law, English court appears to recognise three categories of cases where a valid contract may be refused on the ground of public policy:

1. Where enforcement of the contract would infringe fundamental English ideas of justice or morality. Examples would be contracts for slavery, bribery, etc. In Kaufman v Gerson (1904), the French defendant promised to pay the French plaintiff money in return for him to refraining from instituting criminal proceedings against her husband in France. The agreement was valid in France. The English court held that the contract is not enforceable in England because the agreement between the parties was going against English law as it is considered as infringing the essential moral interest. It shall be noted that, as in this case itself, there is no requirement that the contract has any connection with England. The doctrine can come into play as long as England is the forum.
2. Where the enforcement of the contract would infringe English interest and the contract has a connection with England. In Regazzoni v KC Sethia (1944), the House of Lords refused to enforce a contract for the sale of jute bags (which amounted to smuggling). In Duarte v Black & Decker (2007), the English court relied on Article 16 of the Rome Convention, held that a restrictive covenant in a contract is unenforceable in England as the application of law would be incompatible with the public policy of England. Other examples would be a contract involving agreement in restraint of English trade (Roussillon v Roussillon (1880)), trading with the enemy (Dynamit AG v Rio Tinto Co (1918)), as well as making contractual payments in violation of UN sanctions enacted into Dutch law was akin to trading with the enemy (Royal Boskalis NV v Mountain (1997)).
3. There were also cases where English courts refused to enforce contracts said to be against public policy because they envisaged breaking the law of a friendly foreign state. In Foster v Driscoll (1929), the English court refused to enforce a contract involving the importation of whisky into the USA during prohibition. The alleged prohibition was not part of the English law but the court refused to enforce the contract on the ground of public policy. It is doubtful whether it would be manifestly contrary to English public policy to break the law of a friendly foreign state.   

Consent and material validity - Article 10

Article 10(1) provides that the existence and validity of a contract shall be governed by the applicable law under the application of the Regulation. This covers the formations of contract (offer, acceptance, consideration and ITCLR), as well as its validity (mistake, misrepresentation, duress and undue influence).

In relation the issue of consent of the parties, Article 10(2) provides that if the application under Article 10(1) would be unreasonable to determine the effect of his conduct, the law of country which he has his habitual residence may be applicable. The effect is only to negate the consent, rather than validate or invalidate a contract.

The Regulation does not give any guidance on the reasonable test. The English court in the case of Egon Oldendorff v Libera Corp (1996) has taken a restrictive approach. In the case itself, since there was an English arbitration clause concluded in the contract by the parties, it was not reasonable to rely on the arbitration clause.  

Formal validity - Article 11

Giuliano-Lagarde Report defines formal validity as every external manifestation required on the part of a person expressing the will to be legally bound, and in the absence of which such expression of will would not be regarded as fully effective. For example, contract for sale of land must be made in writing is a formal requirement.

Article 11(1) provides a contract, which is concluded between the parties or their agent in the same country, at the time of the conclusion of the contract, is formally valid if it satisfies the formal requirements of, either the applicable law under the Regulation, or the law of the country where the contract is concluded (lex loci contractus).

Article 11(2) provides a contract, which is concluded between the parties or their agent in the different country, at the time of the conclusion of the contract, is formally valid if it satisfies the formal requirements of, either the applicable law under the Regulation, or the law of the country where either party located when contract is concluded, or the law of either party’s habitual residence at that time.

Article 11(3) provides that a unilateral act (for example offer & ITT) is formally valid if it satisfies the formal requirements of, either the applicable law under the Regulation, or of the law of the country where the act was done, or of the law of the country where the person by whom it was done had his habitual residence at that time.

Capacity

By virtue of Article 1(2)(a), the question of capacity are generally excluded from the Regulation on the ground that it is necessary to look to common law principles to decide what law governs capacity. 

The capacity under the common law is unsettled. There were cases suggested it to be governed by ‘lex domicili’ (Cooper v Cooper, in the context of marriage and marriage settlements), ‘lex loci contractus’ (Male v Roberts), and the law of the country with which the contract is most substantially connected, i.e. ‘proper law’ (Charron v Montreal Trust Co (1958), a Canadian decision). The proper law was supported by the Brightman J’s obiter dicta in the case of Bodley Head v Flegon (1972).

Dicey and Morris prefer the objectively ascertained proper law because it is fairer to the parties concerned.

Article 13 provides that the incapacity under the law governing that question should be disregarded, if the other party to the contract was aware of that incapacity at the time of the conclusion of the contract or was not aware thereof as a result of negligence. The Article only applies where the parties are in the same country and where there is a conflict of laws in relation to the issue of incapacity.  

The purpose of Article 13 is to protect a party who is in good faith believed himself to be contracting with a person of full capacity and who, after the contract has been entered into, is confronted by his incapacity.

Scope of the law applicable - Article 12

Article 12(1) lays down a non-exhaustive scope of the applicable law.

Article 12(2) provides that in the event of defective performance, the court has discretion to apply the law of the country in which the performance takes place (lex loci solutionis).

The consequences of breach include the liability of the party to whom the breach is attributable, and claims to terminate the contract for breach.

In Buenaventura v Ocean Trade Company (1984), the court relied on Article 10(1) of the Rome Convention, ordered the striking crew members to return to work on the basis that the strike was unlawful under the expressly-chosen applicable law.

The question of causation, and whether the defendant can rely on a defence such as set-off to limit his liability, are also fall within the applicable law (Meridien BIAO Bank GmbH v Bank of New York (1997)).

The circumstances in which a contract comes to an end, for example frustration, insolvency and novation, are also for the applicable law to determine.

7. The applicable law also determines whether a claim is barred by lapse of time (Article 12(1)(c), as well as the Foreign Limitation Periods Act 1984, which re-conceptualised the limitation period as a substantive matter).

Illegality

The Rome I regulation offers no guidance on illegality of contracts.

Where the applicable law is foreign law and particular contract is illegal by the foreign law (as in the case of Foster v Driscoll (1929) (supra)), the court could rely on Article 21 and the contract would not be enforceable on the ground of public policy.

Where applicable law is English law:

• Clearly there will be no difficulty in situation where the place of performance is England. The contract is simply not enforceable in England if it is illegal by English law.
• In a situation where the contract is valid under English law, but is rendered illegal under the law of the country where the performance takes place, the contract is void. The party can rely on Article 9(3) (supra).  

In Ralli Bros v Cia Naviera Sota y Aznar (1920), which is a pre-Rome I Regulation decision, an English firm chartered a Spanish ship to carry a cargo of jute from Calcutta to Barcelona at an agreed freight, part of which was to be paid in Barcelona on the arrival of the ship there. There was a change of Spanish legislation which limits an amount that is payable on jute imported into Spain, and made it an offence to pay and receive freight above that amount. The freight agreed by the parties exceeded the statutory rate. The Court of Appeal held that in the view of the Spanish legislation the excess was not recoverable; the contract, which was governed by English law, was not enforceable to the extent that it required a performance in Spain which was prohibited by Spanish. The excess amount was therefore not recoverable.


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Please read the disclaimer (at the top of the page) before proceeding.

Please do not take this note as the sole and only sources to study. It is only a guidance which may assist you in drawing out the full picture of the particular area of law. It is never meant to be a comprehensive text.

Feel free to comment if you find any mistakes, or if you have anything to share.


COPYRIGHTS © 2017 WALLACE LEE CHING YANG. ALL RIGHTS RESERVED.

Renvoi

Conflict of law (procedural) rules and domestic (sunbstantive) law

At this point of time I suppose you are aware that the rules of conflict of laws (hereinafter referred to as COL rules) are a set of unique procedural rules, which is to be distinguished with domestic law (e.g. contract law, criminal law, company law, etc). The COL rules only come into operation when the claim contains a foreign element. To sum up, COL rules determine:

• Firstly, the question of jurisdiction is basically whether the English court has power to deal with the cases (whether the English court is the appropriate forum).
• Secondly, if the English court does assume jurisdiction, the question of choice of law is to determine which set of rules would apply: the English law, or those of a foreign country with which the case has connections?
• Thirdly, the questions of recognition and enforcement of foreign judgments concerns with the issue whether a foreign judgment can be recognised and enforced by action in England.

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‘Renvoi’

‘Renvoi’ is a French term which means ‘sending back’.

In the context of conflict of laws, the English courts are often face difficulties in dealing with questions regarding to jurisdiction and applicable law, especially where there are more than one legally relevant foreign elements, which resulting in more than one different laws and it is doubtful that which law should be applied.

For example when an English court decides that the lex causae is French law, the problem arises as to whether Italian law means the French domestic law alone, or it is including the French COL rules. If French law carries a wider sense including French COL rules, the situation is even much complicated as the French COL rules may refer back to the English law again.

The interminable cycle give rises to the doctrine of renvoi. Renvoi refers to the process of a court to consult and adopt the COL rules of foreign judgments. Under the doctrine of renvoi, English court treats the reference to a foreign law as the domestic law of the foreign country, as well as the COL rules of the foreign country.  

Forms of renvoi

In the academic literature and the decided cases, various solutions to the problem of renvoi have been suggested.  The solutions may be understood best by using an illustration.

Suppose Kai dies intestate and a question arises concerning succession to his estate. Kai is British but has died domiciled in Italy, leaving movables in England. English COL says that succession to his movables is governed by lex domicilii, which is the Italian law. According to Italian COL rules, succession is governed by the lex patriae, which is the English law.

What should the court do? There are three possibilities.

• First, the English court might immediately apply English COL rules, apply Italian domestic law accordingly. This requires proof of the French domestic law, but not of the Italian COL rules (which possibly involve the application of renvoi). In such situation there is no renvoi, which means that English court is ‘rejecting the renvoi’.
• Second, the English court might interpret the English choice of law rule, which is the lex domicilii, as the French law including its conflict of laws rules. Thus by looking at the Italian COL rules, which refers to the lex patriae, English court will then apply English domestic law accordingly. This method requires proof of Italian COL rules, but not the Italian domestic law. This method is known as a single renvoi, which means that English court is ‘accepting the renvoi’.
• Third, the English court might decide the case exactly as it would be decided by the Italian court. If the Italian court would refer to English and would interpret that reference to mean English domestic law, then the English court would apply English domestic law. However, if the Italian would refer to English law and would interpret that reference to mean English COL rules, and would ‘accept the renvoi’ from English law and apply French domestic law, then the English court would apply French domestic law. This method requires proof of the Italian COL rules, Italian domestic law and Italian COL rules about renvoi. This method is known as total renvoi or double renvoi or multiple renvoi.

The third approach represents the present doctrine of the English courts and French court.

Countries such as Spain, Italy, and Luxembourg operate a ‘Single Renvoi’ system.

Countries such as Denmark, Greece and the US do not accept renvoi (first approach).

English cases applying renvoi

In Collier v Rivaz (1841), the court was concerned with the formal validity of a will and the six codicils made by a British person died domiciled in Belgium. Under the strict conflict of rule then in existence, formal validity of wills was governed exclusively by the law of domicile of the testator at the date of death. The will and two of the codicils complied with domestic Belgian law and were therefore valid. The English court applied the Belgian COL rules, which is law of nationality, by which the remaining four codicils were valid by English domestic law. It could be seen that the doctrine of renvoi was applied by the English court to achieve the ‘just’ result.

Collier v Rivaz was disapproved by Bremer v Freeman (1857). Here the British testatrix died domiciled de facto in France, made a will in France in English form. The will concerned with movables property, mostly situated in England. It was submitted that she did not obtain effective French domiciliary, for the reason that she did not obtain governmental authorization. She was domiciled in France, only in the context of English COL rules. Privy Council expressly disagreed with the approach taken by the court in Collier v Rivaz, held that the will was invalid under the law of France. They refused to consider the French COL rules and directly apply French domestic law.

The first English case in which the question of renvoi was actually considered was the case of. Re Johnson In Re Johnson (1897), a British woman, whose domicile of origin was Malta, died intestate in Grand-Duchy of Baden, Germany. She left movables in England and Baden. Farwell J held that the movables in England are to be distributed according to Maltese law. The decision was based on two alternative grounds.

• First, under the English law, it is impossible to acquire a domicile of choice in a foreign country unless the domicile of choice was acquired according to the law of the foreign country. Here the litigant has failed to obtain an effectual domicile of choice of Baden (a foreigner could not acquire a domicile of Baden under the law of Baden). The court assumed that the Baden court would decline the jurisdiction. In the event that a person has failed to acquire an effective domicile of choice, his domicile of origin will revive. Hence the issue is governed by Maltese law.
• The second line of reasoning is based on the assumption that the litigant was at her death domiciled in Baden, and that the law of Baden governed the succession to her movable property. Evidence in the case established that by the law of Baden, the succession to her property was governed by the law of the country of which she was a subject at the time of her death, which is the English law.

NB: The first line of reasoning was considered to be inconsistent with the well settled rule under English law which says that for the purpose of English COL rules, domicile means domicile in the English sense.

Total renvoi was first applied by Russell J in the case of Re Annesley (1926). Here a British died domiciled in France, leaving movable property in England. Her will was valid by English domestic law, but invalid by French law to the extent that she had failed to leave two-thirds of her property to her children. Under English COL rules the essential validity is governed by lex domicilii, which is the French law. Under French COL rules it is governed by English law, which is the law of her nationality. Russell J took the view under the English COL rules (lex domicilii) the English court must decide the case as French court would decide it. However it is unclear that how the French court would deal with the issue of renvoi, as the issue was unsettled. Experts on French law suggested that French court would reject the renvoi and simply apply French COL rules. However, the English court held that the better view was that the French court would accept the renvoi. Hence, the English court applies the English COL rules and then applies the French domestic law accordingly.

In Re Ross (1930), a British died domiciled in Italy, leaving movable and immovable property in Italy. The will was valid by English domestic law but invalid by Italian domestic law. The English COL rules pointed to the Italian law (lex domicilii for movable property and lex situs for immovable property) and the Italian COL rules referred back to English law. It was submitted there was evidence that the Italian court would reject the doctrine of renvoi and would simply apply English domestic law. Accordingly, English domestic law was applicable.

None of the above decision has provided a plausible justification for the application of renvoi. It appears that English courts are allowed to apply renvoi in the interest of justice.  

Application of renvoi

It shall be noted that the doctrine of renvoi is not used in the vast majority cases. It can only possibly be utilized if one party to the litigation expressly pleads it. However, there has been case where the English court has seen fit to continue to make reference to the doctrine even when it has not been pleaded (Vervaeke v Smith (1983)).

The doctrine of renvoi has been applied to formal and essential validity of wills (Re Annesley), cases of intestate succession (Re O’Keefe) and retrospective legitimation by subsequent marriage (Re Askew (1930)). There are indications that it might apply to formal validity of marriage (Taczanowska v. Taczanowski (1957)) and capacity to marry after a foreign divorce (R v Brentwood Superintendent Registrar of Marriage, ex p Arias (1968)).

There has been first instance decision where it shown not to apply renvoi to moveable property. In Islamic Republic of Iran v Berend (2007), the court did not introduce renvoi although they have an opportunity to do so. The judge said ‘Whether or not renvoi should apply in any given circumstance is largely a question of policy’. 

The application of renvoi is rejected in the fields of contracts (Article 20 of the Rome I Regulation) and torts (Article 24 of Rome II Regulation).

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Argument for renvoi

It was claimed that it is self-defeating to apply the domestic law of foreign country, without considering what the COL rules of the foreign court. This argument may attach some importance, especially when the COL rules of the foreign court do point to lex fori and not their domestic law. In fact, as Briggs commented that, if an English court is making a judgment based on foreign law, it would be reasonable for the English court to make reference to what it understands to be the law which the foreign courts would themselves apply. Clarkson and Hill argued that the argument is flawed on the basis the nature of the choice of law is based on the idea that the territorial sovereignty of states must be respected, by which their laws shall be applied for a dispute that is closely connected to them (for example lex loci damni) and appropriate to be applied (for example lex situs). The COL rules of the foreign country, is immaterial.   

It was claimed that the application of renvoi will, in some situation, protect the reasonable expectations of the parties. There has been some illustration provided by academic, but the argument is again misconceives the nature of choice of law. A reasonable person shall presumably aware of his domicile and nationality, and shall hold their expectation in accordance to the relevant COL rules and the following domestic law. Thus a man, who national is Nigeria but domiciled in England, should have known that he is not permitted to marry a woman below 16, and shall not hold his expectation on the application on renvoi and hope that the matter would eventually be governed the law of nationality.

It was claimed that the concept of total renvoi is to achieve uniformity of decision of the case, irrespective of the country in whose court it is brought. However, the COL rules are designed to select the applicable law that is appropriate, rather than achieve uniformity of decision. In fact a uniformity of decision is impossible, by which every country, or system of law, shall have the autonomy to design their COL rules based on their policy.

The fourth argument for total renvoi was based on the strength of title to immovable property situated abroad. The lex situs rule is designed for the reason not only it is the most appropriate rule, but also the fact that the property in question is under the control of authorities of the situs. Thus an English judgment would be redundant without the concurrence of these authorities. In Re Ross, the COL rules of forum refer to the law of the situs, by which the will is invalid under it, but following the COL rules of the situs, the will is valid by the domestic law of the forum. It could be said the authorities of the situs are likely to concur with the judgment since by applying total renvoi, the case is decided according to the same domestic law that the court of the situs would apply. However, as Dicey and Morris argued that, the lex situs rule for immovable property has been abandoned in most civil law countries. Furthermore, the draft of Hague Convention, which did not came into force as expected due to the World War I, similarly suggests the abandonment of the lex situs rule for immovable property.

The doctrine of renvoi can be utilized as a convenient expedient to avoid the application of a foreign law that would lead to an undesirable result. The English court in the case of Collier v Rivaz has taken into account the Belgian COL rules to achieve the ‘just’ result, without mentioning the term ‘renvoi’. Abhishek Bharti in his research pointed out that the result in Collier v Rivaz could not have been arrived if the English had refused to take into account the Belgian COL rules, and had merely applied Belgian domestic law.  Collier v Rivaz was disapproved by the Privy Council in the case of Bremer v Freeman, nevertheless, it demonstrates how the doctrine can be a useful tool in enabling courts to reach what they perceive to be a just result. Briggs also suggested that renvoi is a way of avoiding an unattractive and unjust result.

Briggs, in defending the doctrine of renvoi, was of the opinion that the doctrine of renvoi shall be added to fixed rule of jurisdiction. It was claimed that it could enhance the role of choice of law rules in preventing unwarranted forum shopping. Furthermore, by referring both of the COL rules and domestic law of the foreign country, English court would have a clear pointer in the direction of the natural forum. He viewed the choice of law not merely as the appropriate applicable law, but also a stepping stone to determine jurisdiction. For example, if the English COL rules refer to the French law, but the French choice of law tends to invalid a will, then we may treat the French COL rules, which refer to the English law, as a sign to the application of renvoi.   

Argument against renvoi

Dicey and Morris have pointed out that there is a major difficulty in the application of renvoi, namely the application of renvoi requires proof not only of foreign choice of law rules, but also of the foreign rules about renvoi. There is difficulty for English court in proving this. As Wynn-Parry J in Re Duke of Wellington commented that the doctrine makes everything dependent on the evidence of foreign expert. Furthermore, the evidence of foreign experts on foreign law will significantly increase the cost of litigation.

Clarkson and Hill have pointed out two practical difficulties in the application of renvoi. 

• As far as COL concerns, a ‘country’ is any territorial unit having its own separate system of law, whether or not it constitutes an independent state personality. England, Scotland and Northern Ireland are separate countries because they have separate legal systems. Hence, if the COL rules of the foreign country refers to the lex patriae, and the person concerned is a national of the UK or some other state consisting of more than one country in the context of COL, it would be uncertain that which system of law is applicable. In fact, many continental lawyers do not even understand the difference between ‘British’ and ‘English’ (for example the expert witness in the case of Re Askew), especially for those who came from a country which runs only one system of law.
• Another practical difficulty that Clarkson and Hill have mentioned is that, as in the case of Re Annesley, it would be ridiculous for the English law to assume what the French court would have decide, on an issue that is not even settled by the French court themselves.  

The application of renvoi may result in an outcome that is not predictable. It is clear that all countries have adopted their respective COL rules to settle the questions of jurisdiction and applicable law, for example lex domicilii for England and law of nationality for many civil countries such as France and Italy. The matters would be well-resolved by referring at the COL of the lex fori alone. However the application of renvoi allows the forum to apply the COL rules of foreign country, which would defeat the reasonable expectations of the person that the forum will apply their COL rules, rather than COL rules of a foreign country.

The doctrine of total renvoi, which is the one represents the present doctrine of the English courts, only apply if the foreign court is either rejecting renvoi or applying single renvoi. If the foreign court also applies total renvoi, the English court would have to attempt to resolve the case as the foreign court would do, only to discover that the foreign court would try to decide the case as the English court would do. This would create an inextricable circle and lead to a result that is, as described by Clarkson and Hill, a stalemate one.


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Please read the disclaimer (at the top of the page) before proceeding.

Please do not take this note as the sole and only sources to study. It is only a guidance which may assist you in drawing out the full picture of the particular area of law. It is never meant to be a comprehensive text.

Feel free to comment if you find any mistakes, or if you have anything to share.


COPYRIGHTS © 2017 WALLACE LEE CHING YANG. ALL RIGHTS RESERVED.

Promoters and pre-incorporation contract

Company formation and promoter

A promoter is a person who takes the necessary steps to incorporate a company (Twycross v Grant (1877)).

The promotion period continues until the board of directors is elected (Robinson v Randfontein Estates Gold Mining Co Ltd (1921)).

A promoter is a fiduciary who owe a duty of loyalty (act in the best interest) to his principal, which is the unformed company in question. On the other hand, he must not allow his own self-interests, or the interests of others, to govern his behaviour in any way that would conflict with the principal’s best interest (Erlanger v New Sombrero Phosphate Co (1873)).

Where a promoter sells property to the company in which he has a personal interest, he is required to make full and frank disclosure of any profit derived from the sale (Re Lady Forrest (Murchison) Gold Mine Ltd (1901)).

In Erlanger v New Sombrero Phosphate Co, Erlanger purchased a mine for £55,000. He then promoted the company and sold the property to it for £110,000. All of the directors of that company were his nominees and two of them were directly under his control. The mining operations were fruitless and the shareholders removed the original directors and the new board successfully brought an action to have the sale rescinded. The court held that there had been no adequate disclosure of the sales, thus the company was entitled to rescind it.

It was accepted by the House of Lords in Salomon v Salomon & Co Ltd that in the absence of an independent board of directors (as in the previous case), the full disclosure of all material facts must be made to the original shareholders.

However the House of Lords in Gluckstein v Barnes (1900) further stressed that the disclosure to the original shareholders would not be sufficient, if the original shareholders are not truly independent and the scheme as a whole is designed to defraud the investing public. 

The common law position on pre-incorporation contract

A pre-incorporation contract is contract entered into by promoters on behalf of the unformed company.

It is clear that a company does not come into existence until the promoters have completed the registration requirements and the Registrar of Companies issues a certificate of incorporation. Prior to this time a company cannot enter into a contract in its own name, but it may be necessary for a company to contract with a third party before its incorporation. Hence, the promoters will enter into the contract on behalf of the company.

However, according to the doctrine of privity in the law of contract, a person who is not a party to the contract cannot acquire any rights under that contract or be subject to any of its burden. Hence an unformed company would be considered as a stranger to the pre-incorporation contract and not subject from any rights and liabilities derived from the pre-incorporation contract (Kelner v Baxter (1867)).

The law of agency takes the view that a person cannot be an agent of a non-existent principal. Hence, a promoter cannot be considered as an agent to the unformed company (Kelner v Baxter).

On the strength of these, the promoters will be held personally liable for the pre-incorporation contract.

There are several ways for a promoter to avoid personal liability to the pre-incorporation contract.

First, if the third party, after the incorporation of the company in question, substitutes the original pre-incorporation contract with a new contract on similar term with the company (Natal Land Co & Colonization Ltd v Pauline Colliery and Development Syndicate Ltd (1904, Privy Council)). This is known as novation.

Novation can also be inferred by the conduct of the parties such as where the terms of the original agreement are changed (Re Patent Ivory Manufacturing Co, Howard v Patent Ivory Manufacturing Co (1888)).

Novation will not be effective if the company adopts the contract due to the mistaken belief that they are bound by it (Re Northumberland Avenue Hotel Co Ltd (1886)).

Second, a promoter will not be personally liable on a contract where he signs the agreement merely to confirm the signature of the company because in doing so he has not held himself out as either agent or principal. The signature, and indeed the contractual document, will be a complete nullity because the company was not in existence (Newborne v Sensolid (Great Britian) Ltd (1954)). 

However, the promoter may be liable to the other party for breach of warranty of authority on the principle of Collen v Wright (1857), in that he misrepresented his authority by purporting to represent a director of a non-existent company which, lacking legal existence, had no validly appointed officers.

The common law has now been modified by section 51 of the Companies Act 2006.

You can download Companies Act 2006 here: http://www.legislation.gov.uk/ukpga/2006/46/pdfs/ukpga_20060046_en.pdf

Section 51 of the Companies Act 2006

Section 51 provides that ‘a contract which purports to be made by or on behalf of a company at a time when the company has not been formed has effect, subject to any agreement to the contrary, as one made with the person purporting to act for the company or as agent for it, and he is personally liable on the contract accordingly’. In short, promoters contracting on behalf of a putative company will be held personally liable.

Section 51 is enacted with the objective to protect third parties who contracted in the belief that they were dealing with registered companies by making pre-incorporation contract legally enforceable as personal contracts with promoters unless the personal liability of the latter has been unequivocally excluded.

Lord Denning MR in Phonogram Ltd v Lane (1982) took the phrase ‘subject to any agreement to the contrary’ to mean that for a promoter to avoid personally liability the contract must expressly provide for his exclusion. It is not necessary for the company to be in the process of creation at the time the contract was entered into.

In Royal Mail Estates Ltd v Maple Teesdale (2015), the contract was signed ‘for and on behalf of the buyer’ and ‘the benefit of this contract is personal to the buyer’. The ‘buyer’ was defined in the contract as being the company. The contract was signed on behalf of the company by its solicitors. The contract did not complete and the claimant brought an action against the solicitors. The question arose as to whether the terms amount to ‘an agreement to the contrary’ under section 36C(1) of the Companies Act 1985 (now section 51(1) of the Companies Act 2006).

The court held that a contrary agreement had to be a clear agreement to exclude section 36C(1) and should not be inferred from other terms of the contract. Here the parties were unaware that the company in question had not been incorporated, they cannot have section 36C(1) in mind when they were signing the contract. In addition, the terms in question were clearly intended for a different purpose, which were to prevent or restrict a third party from becoming a buyer by way of an assignment of sub-sale, rather than exclude the personal liability of the solicitors.

In Braymist Ltd v Wise Finance Co Ltd (2002), a form of solicitors contracted as agents on behalf of a company yet to be incorporated, in which the putative company agreed to sell land to property developers. Subsequently, the developers changed their minds and the solicitors sought to enforce the contract. The issue for the Court of Appeal is whether a person acting as agent of an unformed company could enforce a pre-incorporation contract under section 51. It was held that they could do so, even though the terms of the first Directive referred only to liability and not to enforcement. Thus, section 51 has dual effect: a promoter is personally liable to the contract, and the promoter can personally enforce the pre incorporation contract.

Remedies

The company may have a claim for equitable compensation for breach of fiduciary duty (Erlanger v New Sombrero Phosphate Co).

The court may order the promoter to restore the trust assets. If this is not possible, he may be ordered to pay sufficient compensation to the trust assets to put it back to what it would have been had the breach not been committed (Target Holdings Ltd v Redferns (1996)).

Where a promoter fails to make a full and frank disclosure of his interest in a pre-incorporation with the company, its principal remedies are rescission and an accounting of secret profits. 

If it is satisfied that there is no effective disclosure made to the company, the contracts is voidable at the company’s option (Erlanger v New Sombrero Phosphate Co). The company therefore has the option either to rescind the contract or to affirm it.

However the right to rescind the contract will be lost where the company affirms the contract, or delays in exercising its right to rescind the contract.

If the company by its actions, after it becomes aware of the promoter’s breach of duty, shows an intention to affirm the contract, rescission will not be available (Re Cape Breton Co (1885)).

Similarly, the company’s delay in rescinding the contract may also bar its right to the remedy (Lloyd v Lloyd).

The contract is considered as valid until it was rescinded, that being said, if a third party bona fide without notice and for value acquires rights in the contract’s subject matter, those rights are valid against the company, provided it has not rescinded the contract before that time (Re Leeds and Hanley Theatres of Varieties Ltd (1902)).

For rescission to be available there must be restitutio in integrum. In other words, it must be possible to restore, at least substantially, the parties to their original position unless, due to the fault of the promoter, this possibility has been lost (Lagunas Nitrate Co v Lagunas Syndicate (1899)).

Even though the contract has been affirmed, or the company elects not to rescind the contract, the company can nevertheless sue the promoter to account for the secret profit (Gluckstein v Barnes).

Where a promoter has been offered but not yet received a bribe or some other benefit, the company may itself enforce his claim for payment against the promisor, on the ground that the promoter holds the claim as constructive trustee for it (Whaley Bridge Calico Printing Co v Green (1879)).

It should be noted that the company may have an action against the promoter in the tort of deceit. 

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Please read the disclaimer (at the top of the page) before proceeding.

Please do not take this note as the sole and only sources to study. It is only a guidance which may assist you in drawing out the full picture of the particular area of law. It is never meant to be a comprehensive text.

Feel free to comment if you find any mistakes, or if you have anything to share. 

COPYRIGHTS © 2017 WALLACE LEE CHING YANG. ALL RIGHTS RESERVED.