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 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.

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