Lecture notes- Handout 7 Choice of law in contract
Common law rules on law applicable to a contract:
The proper law approach- to find the proper law of the contract that would govern issues arising out of
the contract. 3 stages: express choice (have the parties includes an express choice of law? A choice of
law clause- if not made--) implied choice of law (failed to express in contract), if there is no express or
implies choice then it is the system of law that has the most real and closest connection of law to the
contract. This applies to contracts that are excluded from the Rome I regulation and the Rome
convention.
The leading case is Enka Insaat Ve Sanayi AS – the law governing an arbitration agreement- applies the
proper law approach and the old cases laid down in this approach (Amin v Rashid).
The common law rules are not as important as the Rome convention- implemented in the UK law by the
contracts (applicable law) Act. This convention was replaced by the Rome I Regulation that is binding on
EU member states- the UK is not a member but its is still relevant in the UK- this is retained EU law. This
has been achieved by the Law applicable to contract obligations and non-contractual obligations
(Amendment) Regulation 2019. The UK courts still hear EU cases and general principles related to the
Rome I regulation – but the supreme court may depart from the old cases (before 31 Dec 2020), cases
after this date do not bind the UK courts. The Uk courts can no longer submit cases to ECJ.
The Rome regulation aim to lay down uniform rules across the EU. This is achieved by the possibility of
EU member states to submit questions to the ECJ. The Giuliano Legarde report was written by academics
involved in the drafting of the Rome I regulation. This is an authoritative piece of work. This report states
the purpose of the Rome regulation is to create an internal EU market and this is achieved by unification
of choice of law rules (national laws are still different- creating problems between countries and creates
additional costs and risks- which is undesirable). The same choice of law rules applies despite where the
dispute is heard- creates forum shopping (but creates more legal certainty).
Why did the UK decide to keep the Rome I regulation even though it wanted to detach itself from EU
law- when the Rome I regulation was created, the UK was not automatically bond to this regulation and
decided to opt in as it was a good instrument and improvement to the Rome convention and English
common law rules. It provides party autonomy, legal certainty, flexibility and protection of the weaker
parties. The Rome I regulation is a modern instrument and has influenced countries even outside the EU.
In what circumstances does the Rome I regulation apply- the contract must fall within the temporal
scope and subject matter scope
The temporal scope- article 28 (when was the contract concluded? Different rules). A1(1)- applies when
there is a situation involving a conflict of laws, contractual obligations and civil and commercial matters-
cumulative requirements.
Conflict of laws- if there is a contract that has an international element- easy to satisfy generally.
Contractual obligations- autonomous EU requirement, autonomous ideas laid down by the ECJ cases- a
contractual obligation is an obligation freely assumed- a case that illustrates this is Committeri v Club
Mediterranee- concerned a dispute between a person injured in France and he was in France because
he was employed by a company that wanted to send its English employees to France for a team building
event. The contract for providing this team building event and transport to France was concluded by the
Victim’s claimant's employer with a travel organizer- hence there was no direct contractual link between
the victim employee and the travel organizer. The accident occurred in France and proceedings were
commenced in England and the question was the nature of the liability of the Defendant. In the
application of French law, the liability of the travel organizer was strict. Under English law the liability of
the defendant was not strict- the claimant would simply have to prove negligence on the part of the
defendant. The claimant said we are not dealing with a contractual obligation because there is no direct
link of a contract between the claimant and the defendant, hence they said if it is a tort, French law
should govern as that is where the tort occurred. The defendant said we are dealing with an
autonomous EU concept, and it does not matter that there was no direct contractual link as the
obligation was freely assumed and the obligation arose out of a contract entered between the employer
and the defendant, and the defendant entered into that contract freely. The courts accepted it was an
autonomous concept and had to determine if it was freely assumed, there was a freely assumed
obligation because the D had accepted to provide health and safety to the employees of the employer
for the team building exercise.
Civil and commercial matters- the matter must be private/ commercial law and not public law. However,
there are some civil and commercial matters that are excluded arbitration agreements and jurisdiction
agreements (common law rules may be applied). Exclusion in Article 1(3) for evidence and procedure.
The Rome I regulation has universal application- Art 2- the law may be that of any law of any country.
The choice of law rules of the Rome I regulation. Art 3 looks at the determination of the law by the
parties themselves, Art 4 is when the parties have not made a choice.
The principle of party autonomy- the parties are free to choose the applicable law- they may do this by
expressly choosing or an implied way. Art 3- express and implied choice.
Express choice of law- choice of law clauses. The freedom provided by Art 3 include the ability to choose
an unrelated law, but they can only choose the law of a country, the chosen law must be identified or
identifiable and may choose at any time and may even choose more than one law. Unrelated law-
nothing having to do with the party or the contract- English law is often chosen.
But the parties are only allowed to choose national law- the law of a country- Shamil Bank of Bahrain EC
V Beximco Pharmaceuticals (the parties included the choice of law clause for the ‘glorious sharia law’-
which is a non-state rule and the CoA said this was not a choice of law under Art 3. However, the
national law or domestic law that applies, allows parties to incorporate pf rules, different non state rules
in a contract as long as it is certain enough). In Halpern v Halpern whether Jewish law and sharia law
(has different schools) were certain enough? They were not, could not be given effect- sharia law. But
the Jewish law was certain, and it was incorporated into the law, but the contract was governed by
English law- but English law allowed for the incorporate of non-state Jewish rules. Recital 13.
Art 3- choice may be made at any time- before/ when the dispute arises and even proceedings are
brought before the court. May choose more than one applicable law- either the whole or parts of the
contract- different laws for different terms of a contract or different laws for different groups of
obligations- this may however create disputes within dispute. According to the report- the choice must
be legally consistent, but some parts of the contract may be severed from other parts- however could
lead to problems.
Implied choice under Art 3- sometimes parties choose a law without expressly stating it. Under the
Rome I Regulation clearly demonstrated by the terms of the contract/ the circumstances of the case. Art
3 of the Rome convention- similar meaning. ISS Machinery Services Ltd v Aeolian Shipping SA
[2001] 2 Lloyd’s Rep 641, CA Lawlor v Sandvik Mining & Construction Mobile Crushers and
Screens Ltd [2013] EWCA Civ 365-Is a real choice. The objective test: “the parties must have taken it
without saying that their contract should be governed by that law or that the contract taken as a whole pointed ineluctably to
the conclusion that the parties intended it to be governed by that law”.
What are the factors the court takes into account when deciding implied choice of law- Gan Insurance Co Ltd v Tai
Ping Insurance Co Ltd [1999] EWCA Civ 1524, Gard Marine v Tunnicliffe [2010] EWCA Civ
1052, [39]-[47] did they use a standard form of contract? If yes then there is a clear implied choice. The choice of forum
or arbitration clause?- The Komninos S, a choice of law in favour of English courts implies English
laws, it is logical as English judges best no English law. In arbitration, which is often universal- a
London arbitration clause will not be interpreted as implied choice of law however it depends of
the circumstances of the case where parties want English law. Any previous dealings? This may
show the law that applies- Marubeni Hong Kong and South China Ltd v Mongolian Government
(A foreign company that made an investment in magnolia and entered into a contract with
Mongolian government. The draft choice of law clause said that English law applied and English
choice of court clause, but this was deleted and the contract that was eventually signed did not
have a choice of law clause, but the English court clause remained. What law applied? The
English courts could see that they wanted the dispute to be resolved by a neutral court and
found that the parties wanted a neutral law to apply, and the deletion of the English law clause
did not show that English law was not wanted. So English law applied), Samcrete Egypt
Engineers and Contractors SAE v Land Rover Exports Ltd (there was contract between the
parties and the draft contained an English choice of law clause, but the parties agreed that the
English law would not apply and that’s why the deletion of this was proof that the English law
was not chosen). The existence of related contracts? It is possible that two closely connected
contracts may be governed by the law specified in one of them- Wahda Bank v Arab Bank Plc
the CoA laid down the doctrine of infection- the law of one contract will relate to a closely
connected contract. Reference to specific articles and statutes- may imply the country of the law
to apply. These are factors that the courts will assess with all of the circumstances of the case.
Applicable law in the absence of choice- the Rome convection approach- Art 4 similar but
different from the Rome I regulation, it was thought to be defective and amended. Rome
convection approach-the contract shall be governed by the law of the country with which it is
most closely connected. There are a number of prusumtions: it shall be presumed that the
contract is most closely connected with the country [of] the party who is to effect the
performance which is characteristic of the contract - must identify what is the characteristic
performance of the contract- who provides this performance- this will be the appliacle law.
Howvere, an escape clause: 5. Paragraph 2 shall not apply if the characteristic performance
cannot be determined and the presumptions…shall be disregarded if it appears from the
circumstances as a whole that the contract is more closely connected with another country – not
the law of the characteric performer if it is more closely connected to another country This is a
complicated provision.
What is the characteristic performance- Guilardo report: “in bilateral (reciprocal) contracts
whereby the parties undertake mutual, reciprocal performance, the counter-performance by one of
the parties in a modern economy usually takes the form of money. This is not of course, the
characteristic performance of the contract. It is the performance for which the payment is due.” - this
is easy to interpret in certain situations like sales contracts, service contract (service provide is a
characteristic performer), in a distribution agreement- difficult to interpret- the supplier in England
was seen as the characteristic provider (Print Concept GmbH v GEW (EC) Ltd), agreement not to
use trademarks (Apple Corps Ltd v Apple Computer Inc- no one was seen as the characteristic
performer), in an insurance policy contract- when there is an exchange in money (Credit
Lyonnais v New Hampshire Insurance Co- difficult to find characteristic performer. The court
said in these cases it is the party that bears the greater risk is the characteristic performer).
Better with simpler contracts and not with complex contracts where there will be different
opinions or the characteristic performer cannot be found.
Once the characteristic performer has been identified- you must then identify the country of the
characteristic performer- for an individual it is their habitual residence and for a corporate body it
is its central administration. However, if the contract is entered into in the course of that party's
trade or profession, that country shall be the country in which the principal place of business is
situated or, where under the terms of the contract the performance is to be effected through a place
of business other than the principal place of business, the country in which that other place of
business is situated. - quiet complicated and has given rise to litigation: Ennstone Building Products
v Stanger (commercial contract where the characteristic performer had a place of business in
england and Scotland >>>) In contract- Iran Continental Shelf Oil Company v IRI International
Corporation (principal place of business was business but it was agreed that the characteristic
performers UK office would be used even though it was not the principal place of the business).
Problematic was the escape clause- to disregard the presumption and use the law that is most
closely connected to the contract. How strong is the presumption? A weak presumption? Credit
Lyonnais v New Hampshire Insurance Co Ltd – the English court was inconsistent but generally
they tended to apply the weak assumption theory that allowed the English courts to apply
English law but this created legal uncertainty. The ECJ was asked to clarify and unfortunately
provided no clarification : Intercontainer Interfrigo SC (ICF) v Balkenende Oosthuizen BV [2009]
ECR I9687, Case C-133/08: “Article 4(5) of the Convention must be construed as meaning that,
where it is clear from the circumstances as a whole that the contract is more closely connected
with a country other than that determined on the basis of one of the criteria set out in Article 4(2)
to (4) of the Convention, it is for the court to disregard those criteria and apply the law of the
country with which the contract is most closely connected” [64]. Reason why art 4 was an
uncertain provision and the reason that the Rome I regulation changed Art 4.
Rome I regulation lays down fixed rules for specific types of contracts: sales contract → seller’s habitual
residence, services contract → service provider’s habitual residence, contract relating to a right in rem in or tenancy of
immoveable property → location of the property... But the lsit is not exhaustive and some contrcats may come under 2 of the
provsion. Para 2: contracts not covered by para 1 or covered by more than one point → characteristic performer’s habitual residence. Para 3: Escape clause the law of the
country manifestly more closely connected with the contract- this means the rome I regulation adopts the strong presumtion rule. These fixed choice of law rule may Rarey
depart from provisions of para 1 and 2- Para 4: if para 1 and 2 unhelpful → closest connection.
ARTICLE 19 DEFINES HABITUAL RESIDENCE-
1. For the purposes of this Regulation, the habitual residence of
companies and other bodies, corporate or unincorporated, shall be the place of central
administration. The habitual residence of a natural person acting in the course of his business
activity shall be his principal place of business.
2. Where the contract is concluded in the course of the operations of a branch, agency or any
other establishment, or if, under the contract, performance is the responsibility of such a branch,
agency or establishment, the place where the branch, agency or any other establishment is
located shall be treated as the place of habitual residence.
3. For the purposes of determining the habitual residence, the relevant point in time shall be the
time of the conclusion of the contract
A little clearer than the Convention.
The escape clause is used in exceptional cases only.
Molton Street Capital v Shooters Hill Capital Partners-“The
new language and structure suggests a higher threshold, which requires that the cumulative weight of the
factors connecting the contract to another country must clearly and decisively outweigh the desideratum
of certainty in applying the relevant test in Article 4.1 or 4.2.”- not all the judges have understood this Bill
Kenwright Ltd v Flash Entertainment FZ LLC “in the present case, the presumption is weak and
displaced by the fact that the Settlement Agreement is more closely connected with England than Abu
Dhabi, in particular because the key meetings and negotiations took place in England at Mr Kenwright's
offices and the invoices provided for payment in England.” the ghost of the Rome convention still haunts
us.- shows not all judges understand the rome I regulation
Ditto Ltd v Drive-Thru Records Ltd (complex contract; Arts 4(1) and (2) not applicable) deals
with a complex contract and did not fall under any of the provision and could not find the
specific performer- so closely connected to the contract was taken.