Pil 1335

CHOICE OF LAW IN CONTRACT AND INTERNATIONAL CONVENTION RELATED TO CONTRACT

SUBMITTED BY KUMAR NARUN ROLL NO. 1335, 9TH SEMESTER, B.A.LL. B (Hons.) SUBMITTED TO Dr. P. P. RAO

FINAL DRAFT SUBMITTED IN PARTIAL FULFILLMENT OF THE COURSE OF PRIVATE INTERNATIONAL LAW FOR THE COMPLETION OF THE B.A.LL. B (Hons.) COURSE.

SEPTEMBER, 2019

CHANAKYA NATIONAL LAW UNIVERSITY PATNA (BIHAR)

Contents ACKNOWLEDGMENT............................................................................................................ 3 RESEARCH METHODOLOGY............................................................................................... 4 INTRODUCTION ..................................................................................................................... 6 1.

COMMON LAW PRACTICE ........................................................................................... 7

2.

ROME CONVENTION ..................................................................................................... 8 2.1 Scope ................................................................................................................................ 8 2.2. Principle of part autonomy.............................................................................................. 9 2.3. Choice of law in absence of express or implied choice .................................................. 9 2.4. Limitation on party autonomy ...................................................................................... 10 2.5. Material and formal validity ......................................................................................... 12

3. HAGUE PRINICPLES ON CHOICE OF LAW IN INTERNATIONAL COMMERCIAL CONTRACTS.............................................................................................. 13 3.1.Scope .............................................................................................................................. 13 3.2. Depecage ....................................................................................................................... 13 3.3. Selection of Non-State Law .......................................................................................... 14 3.4. The Expression of the Choice of Law........................................................................... 14 3.5. Severability of a Choice of Law ................................................................................... 14 3.6. Exclusion of Renvoi...................................................................................................... 15 3.7. Scope of the Chosen Law ............................................................................................. 15 3.8.Public Policy .................................................................................................................. 15 CONCLUSION ........................................................................................................................ 17 BIBLIOGRAPHY .................................................................................................................... 18

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ACKNOWLEDGMENT

I take this opportunity to express our humble gratitude and personal regards to faculty of Private international law for inspiring us and guiding us during the course of this project work and also for his cooperation and guidance from time to time during the course of this project work on the topic The Present Project Report is attempted to explain for the benefit of the general readers. Dealing with this topic in a material form has naturally involved a great deal of compression and omission of many matters of interest. I hope that my selection of material will give a fair outline of the general picture. “CHOICE OF LAW IN CONTRACT AND INTERNATIONAL CONVENTION RELATED TO CONTRACT” “I EXPRESS OUR GRATITUDE TO THE FACULTY OF, PRIVATE INTERNATIONAL L AW FOR THE CONCEPTS GIVEN BY HIM IN THE SUBJECT WHICH HAS BEEN THE BASE FOR THIS SMALL PIECE OF WORK.”

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RESEARCH METHODOLOGY CONCEPT: As business transactions and contractual obligations may cross jurisdictional borders within a nation, as well as international borders, both physically and electronically, choice of law issues may arise in the event that it is necessary to interpret the terms of a contract or in the event of litigation over a contract dispute. As laws vary between jurisdictions, it is possible that contract terms could be interpreted differently between jurisdictions, or that portions of a contract that are enforceable in one jurisdiction would not be enforceable under the laws of another. The parties may therefore agree in advance to interpret the contract in accord with the laws of a jurisdiction that is identified within their contract. In some situations a court may find that there are public policy reasons to disregard a choice of law clause, and instead interpret a contract under the laws of the jurisdiction in which a lawsuit is filed. For example, a jurisdiction may find as a matter of public policy, it will apply its own consumer protection laws to a dispute between a consumer and a business even if the contract calls for the application of the laws of a different jurisdiction AIMS AND OBJECTIVES: the researcher intends to find out the following during the course of research: i) The choice of law in contract. ii) The international convention related to contract. iii) The common law practice in conflict cases of contract. LIMITATIONS: The researcher has undergone time limitation. RESEARCH QUESTIONS: The researcher has formulated the following research questions, the answer for which has been found during the course of research: i) What is the position of choice of law of contract in common law jurisdiction? ii) What is the purpose and scope of Rome convention related to conflict cases of contract? iii) What is party autonomy principle and its limitation? iv) What are the various provisions related to commercial, employment and other contract in the convention?

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RESEARCH METHODOLOGY: The researcher will use only doctrinal method of research. SOURCES OF DATA: PRIMARY SOURCES: Convention on the Law Applicable to Contractual Obligations 1980, (Rome Convention), Hague principles SECONDARY SOURCES: Books, Articles, Weblogs METHODS OF DATA COLLECTION: The researcher will make use of doctrinal methods that includes library work.

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INTRODUCTION The choice of law in contract has emerged from three main factors the first factor is the place where contract is made, the performance of the contract and the nationality or the place where contract is made. The issue of choice of law in contract becomes more pertinent when there are number of connecting factors involved in the contract. This issue is very common in all countries and almost all countries have tried various methods to solve it out. The English law has applied “the proper law of contract” which is almost sufficient to ascertain the factor which covers the contract. The doctrine of proper law is of common law origin the main feature of this theory is that the parties to contract can chose it with very little restrictions and if there is no expression of choice and the choice cannot be inferred by court than the problem can be solved by looking for the system of law with which the transaction is closely related. In these cases proper law is relevant but the court can go beyond the proper law while taking in to considerations various other issues such as illegality in this scenario the court will not only concerned with illegality of proper law but also with the act of illegality at the place of action. The above mentioned three factors laid the foundation on which the common law laid the structure. In common law the choice of contract has emerged from Rome convention and Rome One regulation. This assignment will explain certain features of Rome convention and Rome One Regulation and in the end of assignment critical evaluation will be given to explain why this convention and regulation has failed to lived up to expectation. 1 A contract may have a different meaning in English conflict of laws compare to its meaning in domestic law. When a contract is materialized due to common law than this contract is know as proper law of contract, Lord Diplock has defined proper law as that law through which the rights of parties can be judged and both the parties have chosen that law. As explained above there are number of factors through which are consider hallmark of the proper law of the contract but the two most important factors are, the law of place where contract was concluded and the law of the area where action of contract was done.

1

Collier, J.G. (2001). Conflict of Laws. Cambridge University Press, Cambridge, England. (377)

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1. COMMON LAW PRACTICE

A contract may have a different meaning in English conflict of laws compare to its meaning in domestic law. When a contract is materialized due to common law than this contract is know as proper law of contract, Lord Diplock has defined proper law as that law through which the rights of parties can be judged and both the parties have chosen that law. As explained above there are number of factors through which are consider hallmark of the proper law of the contract but the two most important factors are, the law of place where contract was concluded and the law of the area where action of contract was done. Both these factors are not absolute as both have certain limitations. One such limitation of the contracts on which law of a place applies may have no saying or affect in a scenario when a Arab business man who is from Saudi Arabia and a Turkish business man agree a deal in London to the sale of Goods located in Italy. In this case the English law has no real or close link but it will be proper law of contract. The law of the place for performance of the contract was due may be not be appropriate for two reasons, the first one is that parties respective obligations may take place in different countries e.g. the seller agrees to deliver goods in Germany in exchange for the buyers promise to pay the price in New York . it would be illogical for the parties to have their respective obligations governed by different laws secondly at the time of the formation of the contract the place of the formation of contract may not be have been determined than in this case it will be determined unilaterally, e.g. a port for the delivery may not be known until or unless that vessel is at sea. Keeping in view the above points it can be ascertained that there is no connecting factor that can be used in English Law as Lord Wright has said English law has refused while determining connecting factors to treat Lex loci contracts and lex loci solutionis as rigid or arbitrary standard and has treated the matter on the intention of the parties to be ascertained in each case on the consideration of the terms of the contract, the situation of the parties and generally all surrounding facts 2

2

Lowenfeld, A. (1996). International Litigation and the Quest for Reasonableness: Essays in Private International Law. Clarendon Press, Oxford. (230)

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2. ROME CONVENTION On the 19th of June 1980 in Rome, the European Union, together with some other nations, ratified a unification system for the application of contractual obligations that would be followed for the European Economic Community and its members. The Rome Convention, as it came to be known, is the Applicable Law to Contractual Obligations and was convened to create at least a harmonized, if not a unified, body of law within the scope of the European Union. The text of the Convention has a total of 33 articles, and a preamble. Although the system was set up in 1980, it was not until 1 April 1991 that the Convention came into force. Like other Conventions, the Rome Convention was established in order to address specific issues that involve the legal relations among organisations and other parties that are protected by different national laws. The Rome Convention can be considered as a further step in the unification process of the European Community. 2.1 Scope3 The convention applies to contractual obligations in situations involving a choice between national laws even where the law it designates is that of a non-contracting country with the exception of: 

questions involving the status or legal capacity of natural persons;

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contractual obligations relating to wills, matrimonial property rights or other family relationships;

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obligations arising under negotiable instruments (bills of exchange, cheques, promissory notes, etc.);

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arbitration agreements and agreements on the choice of court;

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questions governed by the law of companies and other corporate and unincorporated bodies;

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the question of whether an agent is able to bind a principal to a third party (or an organ to bind a company, or a corporate or unincorporated body);

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the constitution of trusts and questions relating to their organisation;

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evidence and procedure;

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contract of insurance that cover risks in the territories of the EU countries (excluding reinsurance contracts).

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Article 1, Rome Convention,1980

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2.2. Principle of part autonomy4 Article 3 is the first uniform rule under the Rome Convention. Article 3 expresses the general rule that the parties to a contract have the freedom of choice over the Applicable Law. This can be expressed either in words or by the terms of the contract or the circumstances of the case. The choice may apply to the whole or just a part of the contract and the choice can be revoked The important aspect of this provision is that the contracting parties can initially clarify the scope and the limitations of the contract within the context of a particular law. The presence of different contracting parties represented by different laws can somehow challenge the stability of the contract especially if the laws of contract of a particular jurisdiction are not as favourable towards the nature of the business and transaction of the Rome Convention. In this regard, through express selection, there is an initial agreement as to how the contract generally works within the legal context. The advantage in this is that both parties have established a sense of harmonization, especially when it comes to referring to a certain set of laws throughout the course of the contract. An example of this is the case between a German company and a Dutch construction company who got into a dispute on the remaining remuneration for a project. In order to resolve the dispute, a solution is to identify which applicable law would serve best the interests of the contracting parties. In the end, both companies agreed to apply the German DIN rules (general standards for construction works) and the German Civil Code. According to the Rome Convention, such exercise is allowed since both parties agreed as to which jurisdiction would govern the contract and which system would resolve the conflict. Based on this, the choice of law is up to the contracting parties. Although there can be some form of influence, the Convention basically demonstrates that contract cases are not automatically subject to a specific set of laws, and that the involved parties have the freedom to choose the jurisdiction that would be most applicable to the case. 2.3. Choice of law in absence of express or implied choice5 In the absence of the expressed or an implied choice of the law the article 4(1) of the regulation provides that the contract shall be governed by that law of contract with whom the 4 5

Article 3, Rome Convention,1980 Article 4, Rome Convention,1980

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contract is closely related and at common law this close relationship refers to the country with which the contract is closely connected and not the legal system with which the common law provision is associated. There is also a presumption in Rome convention provisions to determine the closest connection. The relevant provision which deals with this presumption is article 4(2) which explains that the contract is closely connected with the country where the party at the time of conclusion of contract resides or he is habitual resident of that specific country and this presumption has turned the clock back as far as English law is concerned. The article 4 of the convention further explains that if the contract is made in the course of party’s trade or profession than in this case the country of closest connection 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 transaction other than the main place of business However: where the contract concerns immovable property, the law applicable by default is that of the country in which the property is situated; where the contract concerns the transport of goods, the applicable law is determined according to the place of loading or unloading, or the principal place of business of the consignor. 2.4. Limitation on party autonomy The Rome convention has certain provisions which limits the party autonomy and more specifically these provisions are article 5 and 6 which relate to consumer contracts and individual contracts of the employment and these provisions have the effect of either limiting the ambit of general choice of law provisions or excluding the provisions and this limitation was not the part of the pre existing English Conflict of laws rules. According to article 5 of the Rome convention consumer contract is that type of contract whose main aim is to provide goods or services to a person for a purpose which can be regarded as being outside his trade or profession or a contract for the provision of credit for that object. And where a consumer contract exists the article 5 provides that a choice of law by the parties shall not have the result of depriving the consumer of the protection afforded to him

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by the mandatory rules of law of the country in which he has his habitual residence and one must not forget that this type of protection is only given to the consumer only. In a case, a French couple filed a loan from a German bank, with the contract initially establishing that it would refer to German laws. However, the court decided that this situation should not utilize German laws given that the transaction took place within French jurisdiction, in addition to the fact that the consumers are subject to the French consumer law. Although it can be argued that Article 3 allows the freedom of choice in terms of the applicable law according to the Rome Convention, Article 4 actually applied because of the principle behind Article 5 in which consumers are given the right to preserve consumer protection and rights which are usually found in the consumer’s home country.

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Under Article 6, the rights of the employees are emphasized. Again, there is the consideration with respect to Articles 3 and 4 when the selection of laws becomes an issue. Article 6 states: Notwithstanding the provisions of Article 3, in a contract of employment a choice of law made by the parties shall not have the result of depriving the employee of the protection afforded to him by the mandatory rules of the law which would be applicable under paragraph 2 in the absence of choice. Notwithstanding the provisions of Article 4, a contract of employment shall, in the absence of choice in accordance with Article 3, be governed: (a) By the law of the country in which the employee habitually carries out his work in performance of the contract, even if he is temporarily employed in another country; or (b) if the employee does not habitually carry out his work in any one country, by the law of the country in which the place of business through which he was engaged is situated; unless it appears from the circumstances as a whole that the contract is more closely connected with another country, in which case the contract shall be governed by the law of that country. Evidently, the provision on employment contracts in the Convention can be seen in the initiative to simplify this complex of laws, especially since the movement of labor within the European region has become more dynamic as brought by the recent expansion. There is also the similarity between this article and the provision on consumer contracts 7

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Article 5, Rome Convention,1980 Article 6, Rome Convention,1980

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2.5. Material and formal validity Material validity Under Article 8, the material validity of a contract, or of any term in a contract, shall be determined by the law which would govern it under the Convention if the contract or term were valid (i.e. the putative Applicable Law). But, if this would produce an obviously unfair result, a party may rely upon the law of the place of habitual residence to establish that he did not give a free consent.8 Formal validity Under Article 9, a contract concluded between persons who are in the same country is formally valid if it satisfies the formal requirements of either the Applicable Law or the law of the country where it is concluded. A contract concluded between persons who are in different countries is formally valid if it satisfies the formal requirements of either the Applicable Law or the law of one of those countries. Where a contract is concluded by an agent, the country in which the agent acts is the relevant country for the purposes of the earlier tests. But a contract relating to immovable property is always subject to the mandatory provisions of the lex situs.9

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Article 8, Rome Convention,1980 Article 9, Rome Convention,1980

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3. HAGUE PRINICPLES ON CHOICE OF LAW IN INTERNATIONAL COMMERCIAL CONTRACTS

3.1.Scope The Hague Principles apply to international contracts of a commercial nature in respect of which the parties have chosen a system of law. This scope of operation parallels that of the Hague Convention, which generally applies in international cases to exclusive choice of court agreements concluded in civil or commercial matters. The enactment of these two instruments in a single International Civil Law Act may result in some cross-pollination in the course of judicial construction of the provisions as to scope. This section outlines the kinds of cases which will be captured by the Hague Principles. First, a contract must be ‘international’ in order to fall within the Principles’ scope. This requirement limits the application of the Principles to circumstances to which private international law would apply; that is, to cases with a foreign element. Article 1(2) defines ‘international contracts’ as excluding purely domestic contracts, capturing circumstances in which either party, the relationship between the parties, or other relevant elements, have some connection with more than one state. Secondly, the principles are limited to ‘commercial’ contracts. Although the title and the Preamble each refer to ‘commercial contracts’, the term is not explicitly defined. Instead, art 1(1) refers to contracts in which each party is ‘acting in the exercise of its trade or profession’. Article 1(3) provides a laundry list of specific exclusions, including in respect of the contractual capacity of individuals, jurisdiction and arbitration clauses, companies and trusts, insolvency, proprietary effects of contracts, as well as the issue of whether an agent is able to bind a principle to a third party. 10 3.2. Depecage Parties to a contract captured by the Hague Principles may select either the applicable law for the whole contract, or the law applicable to only part of it. They may also explicitly select different laws for different parts of the contract. This gives rise to the prospect of depecage

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Article 1, Hague principles on choice of law in international commercial contract

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where a court applies more than one system of law to the same dispute in a case with a foreign element.11 3.3. Selection of Non-State Law The very term ‘choice of law clause’ indicates that law is the subject chosen by such a clause, but under art 3, that ‘law’ need not be created by any kind of government institution. The law chosen may be ‘rules of law that are generally accepted on an international, supranational or regional level as a neutral and balanced set of rules, unless the law of the forum provides otherwise’. The broad language is consistent with the approach of some arbitration rules. The language might capture non-state law, such as the law promulgated by an intergovernmental organisation, like the UNIDROIT Principles of International Commercial Contracts; or the law of a religion, like sharia; or even lex mercatoria. Whether such principles are ‘generally accepted’ as neutral and balanced in the appropriate geographical region is a difficult question, and one which may invite some kind of empirical emphasise. 12 3.4. The Expression of the Choice of Law The first sentence of art 4 provides that a choice of law must be made expressly or clearly. If the parties’ intentions are neither expressed explicitly nor appear clearly from the provisions of the contract or from the particular circumstances of the case, there is no choice of law agreement. In such a case, the Principles do not determine the law governing the contract. The second sentence of art 4 provides that a jurisdiction or arbitration agreement is not ‘itself equivalent’ to a choice of law. 13 3.5. Severability of a Choice of Law Article 7 provides that a ‘choice of law cannot be contested solely on the ground that the contract to which it applies is not valid’. The common law recognises the same principle in relation to jurisdiction and arbitration agreements, which will only be amenable to rescission if the jurisdiction or arbitration agreement itself, rather than the broader contract, was vitiated.14

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Article 2, Hague principles on choice of law in international commercial contract Article 3, Hague principles on choice of law in international commercial contract 13 Article 4, Hague principles on choice of law in international commercial contract 14 Article 7, Hague principles on choice of law in international commercial contract 12

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3.6. Exclusion of Renvoi For private international law enthusiasts, art 8 is perhaps a lamentable aspect of the Hague Principles because it removes an opportunity to talk about renvoi. Renvoi is a notorious doctrine of private international law that involves a court applying the choice of law rules of a foreign system of law because a forum choice of law rule provides that the foreign system is the applicable law. The Hague Principles were crafted with such sentiments in mind: renvoi is excluded, but may apply if the parties expressly provide that is should.15 3.7. Scope of the Chosen Law Article 9 is an important provision which details, in a non-exhaustive manner, the subject matter that shall be governed by the system of law chosen by the parties. The provision is broad: it provides that the chosen law ‘shall govern all aspects of the contract between the parties’ before enumerating specific examples. The inclusion of certain matters within the ‘scope of the chosen law’ is predictable, and consistent with common law principles; for example, the rights and obligations arising from the contract, and performance, are each subject to the law chosen by the parties. But there are a few respects in which art 9 extends the application of the proper law to issues that might otherwise be subject to the lex fori Consider the law applicable to the assessment of damages under art 9(1)(c). Another point of note is art 9(1)(f), which provides that burden of proof and legal presumptions are subject to the chosen law. At common law, whether such things ought to be characterised as procedural will vary between cases.16 3.8.Public Policy Once an International Civil Law Act is in force, the most frequently-litigated aspect of the enacted Hague Principles is likely to be art 11, the provision which gives effect to the core principle that the autonomy of parties to choose the proper law of the contract is not absolute. Article 11 is comprised of five paragraphs but it contains a core theme: a choice of foreign law will not be upheld where to do so would contravene certain forum policy. The difficult question is what kinds of public policy will warrant the invocation of the escape device in the face of a contrary choice of foreign law, and what policies would not. On this issue, state

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Article 8, Hague principles on choice of law in international commercial contract Article 9, Hague principles on choice of law in international commercial contract

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practice and the views of commentators ‘vary wildly’, particularly in respect of the proper approach to so-called ‘mandatory’ forum statutes. 1 Mandatory Forum Law Article 11(1) makes it clear that mandatory law can justify a court applying its own law rather than the chosen law. This should be taken as a reference to principles of statutes which prohibit ‘contracting out’ of the operation of the statute, or provide that they apply irrespective of parties’ choices to the contrary. An example is s 11 of the Carriage of Goods by Sea Act 1991, which provides that an agreement has no effect so far as it purports to preclude or limit the application of the law of the place of shipment to certain kinds of contracts, and mandates the application of the law of the place of shipment to those kinds of contracts. These Principles shall not prevent a court from applying overriding mandatory provisions of the law of the forum which apply irrespective of the law chosen by the parties. 2. The law of the forum determines when a court may or must apply or take into account overriding mandatory provisions of another law. 3. A court may exclude application of a provision of the law chosen by the parties only if and to the extent that the result of such application would be manifestly incompatible with fundamental notions of public policy (ordre public) of the forum. 4. The law of the forum determines when a court may or must apply or take into account the public policy (order public) of a State the law of which would be applicable in the absence of a choice of law.17

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Article 11, Hague principles on choice of law in international commercial contract

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CONCLUSION The Rome Convention provides a charter which serves as a legal reference for cases in which contractual obligations and relations involve parties from different national jurisdictions. Given the differences of laws, the Convention therefore provides a venue where courts find applicable laws in order to come up with means to resolve any disputes or conflicts. However, although there is a strong legal nature of the Convention as agreed by the participating nations, legal systems and courts are still left with the discretion as to how applicable laws can be utilized depending on the case at hand. This is why the Convention is not absolutely exclusive in addition to the fact that there are other applicable conventions that can be referred to. The Hague Principles’ enactment would remove some eccentricities in private international law, bringing it closer to international practice. The Hague Principles have sought to address the fundamental tension between party autonomy and public policy in favour of the former, although the tension would remain under an International Civil Law Act. The scope of the public policy exceptions in art 11 is likely to be a focus of choice of law disputes under the Act. The Hague Principles’ character as a non-binding instrument is a novel move for the Hague Conference, and one which will hopefully drive their uptake by states. The soft law model avoids some of the pitfalls of binding instruments like the Hague Convention: states may be reluctant to join a certain convention as a party, notwithstanding their substantive agreement with the text, on the basis of some particular sticking point. Where unification is not possible, the harmonisation of international commercial law is a desirable alternative.

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BIBLIOGRAPHY Books 

Lowenfeld, A. (1996). International Litigation and the Quest for Reasonableness: Essays in Private International Law. Clarendon Press, Oxford

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North, P. (1993). Essays in Private International Law. Clarendon Press, Oxford

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Collier, J.G. (2001). Conflict of Laws. Cambridge University Press, Cambridge, England.

Websites 

http://www.hcch.net/index_en.php?act=text.display&tid=26

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http://www.rome-convention.org/instruments/i_conv_orig_en.htm

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http://curia.europa.eu/common/recdoc/convention/en/c-textes/brux-idx.htm

Journals 

Hill, J. “Choice of Law in Contract under the Rome Convention”, Journal: The International and Comparative Law Quarterly Publication: Oxford: Apr 2004. Vol. 53, Iss. 2; p. 325

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Atrill, S. "Choice of Law in Contract" Author: Simon Atrill. Journal: The International and Comparative Law Quarterly, Publication: Oxford: Jul 2004. Vol. 53, Iss. 3; p. 549

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Harris, J. "Contractual Freedom in the Conflict of Laws“Journal: Oxford Journal of Legal Studies, Publication: Oxford: 2000. Vol. 20, Iss. 2; p. 247

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