Freedom of contract is an important legal principle. Giving effect to it involves determining whether the parties reached agreement, and what it was they agreed to. It also involves filling in the gaps in their agreement and deciding what to do if they fail to carry it out. In all these matters, the policy of the law should be to give effect to what the parties intended or would have intended if they had considered the matter. As far as choice of law is concerned, this policy involves determining the system of law that they might reasonably have expected to apply. The purpose of choice-of-law rules in this area should be to identify this system.
There is, however, another aspect of the law of contract. In some situations, the law is not concerned with discovering what the parties intended (or might have intended). Its purpose is to override their intention: it prohibits them from agreeing to certain terms or imposes certain terms on them. This is done either to protect the weaker party or to give effect to some governmental policy. Consumer-protection rules are an example of the former; export embargoes adopted for foreign-policy reasons are an example of the latter. These are sometimes called mandatory rules. Where they are in issue, it makes no sense to select the applicable law on the basis of the intention, actual or presumed, of the parties: their intention is not relevant. Rather, one should consider whether it is reasonable for the system of law in question to impose itself on the contract against the will of the parties.
This chapter is concerned with the first of these two aspects of contract law, the area where freedom of contract is the guiding principle. It may in some ways be regarded as the primary aspect, since, if no contract exists, there can be no question of mandatory rules. The second aspect will be considered in the next chapter.
What system of law should apply to determine the issues described above as following from the principle of freedom of contract? In the past, attempts were made to find a simple, easy-to-apply formula. The first solution was to choose the law of the place where the contract was made (lex loci contractus). This was simple. However, it was not always easy to apply. If the parties meet face to face to conclude the contract, there is no problem; but, if they are in different countries, it is not obvious where the contract is made. For example, assume that X in England writes to Y in Germany to make him an offer. Y receives the letter and accepts the offer in another letter, posted in Germany. Is the contract made in England, where X receives the acceptance, or in Germany, where it is posted? Though many legal systems have developed rules to answer this question, they are artificial: there is no obvious answer.1 The English rule is that, where the parties communicate by instantaneous (or near-instantaneous) means of communication (for example, telephone, fax or e-mail), the contract is made where the offeror receives the acceptance (England, in the example). Where, on the other hand, it is by non-instantaneous means of communication (for example, by post), it is where the letter of acceptance is mailed. In the example, this would be Germany. See Entores v. Miles Far Eastern Corporation [1955] 2 QB 327 (CA). Moreover, the place of making the contract may be a matter of chance: the parties may happen to be in the same city for different reasons, and agree to meet there.
A later solution was to apply the law of the place of performance (lex loci solutionis). This was thought to provide a more substantial connection. However, the contract may be performed in different places – for example, the seller in a contract of sale may agree to deliver the goods in Mexico, and the buyer may agree to make payment in New York. What law should apply?
In the nineteenth century, English courts decided that the parties to a contract should be entitled to choose the governing law for themselves.2 For some earlier cases which might be regarded as taking the first hesitant steps in this direction, see Gienar v. Meyer (1796) 2 Hy Bl 603 (126 ER 728), a case mainly on choice of court, and Robinson v. Bland (1760) Black W 257 at p. 259 (96 ER 141 at pp. 141–2). This was the beginning of the doctrine of the ‘proper law’. The proper law was the system of law that applied in general to a contract: it governed the ‘freedom-of-contract’ aspects of a contract. If the parties agreed on what it was to be, and expressed that agreement in the contract, the law thus chosen was the proper law.
In England, it has never been necessary for there to be any connection with the chosen law. The parties have always been completely free in their choice. This was established in Vita Food Products Inc. v. Unus Shipping Co. Ltd,3 [1939] AC 277 (PC). a case decided by the Privy Council on appeal from Nova Scotia.4 Nova Scotia is a province of Canada. At that time, the Privy Council (which sits in London) heard appeals from Canada. Most of the members of the Privy Council in its judicial capacity were Law Lords (judges from the House of Lords in its judicial capacity), though sometimes senior Commonwealth judges also sat. Appeals to the Privy Council from Canada have now been abolished. Today, the Supreme Court of Canada is the highest court in Canada. It concerned a contract to carry goods from Newfoundland to New York on a ship owned by a Nova Scotia corporation. The bills of lading, issued in Newfoundland, contained a choice-of-law clause in favour of English law. There was no apparent connection with England. Nevertheless, the Privy Council held that the choice of law was valid.
What if there was no express choice? In such a case, the courts looked for an implied choice. However, ‘implied choice’ can mean different things. On the one hand, it can mean that both of the parties thought about the matter, they both thought the answer was so obvious that it was not necessary to state it, and they had the same view as to what the answer was. However, ‘implied choice’ can also mean something different. It can simply mean that a reasonable person would have thought that a particular system of law was obviously applicable. In the latter case, the parties might not have thought about the matter at all. The difference between these two approaches is that the former is subjective, while the latter is objective. In the former, the test is what the parties actually thought; in the latter, it is what is reasonable. In practice, of course, the two approaches may often lead to the same conclusion.
In some cases, the English courts seem to have applied the objective test to ascertain the choice of the parties, or at least not to have distinguished clearly between it and the subjective test. The Assunzione5 [1954] P 150 (CA). is one example. This concerned the law applicable to a charterparty entered into between Italian shipowners and French charterers for a voyage from France to Italy. Birkett LJ began his judgment by saying:6 At p. 180.
The principle upon which that kind of question has to be determined is really not in doubt; it has been laid down in a long line of cases. If the intention of the parties is not expressed in the contract itself, the court must ascertain as best it can what is the implied or the presumed intention to be gathered from the whole of the facts.
He concluded, however, by saying:7 At pp. 185–6.
I have been confronted from the very beginning of this case with a sense of unreality. If parties do express in their contract the law by which they desire the contract to be governed, well and good; but if, as in this case (and I rather gather in the majority of cases), no thought whatever is given to it, and it is said to a court, ‘You have to discover and ascertain, if possible, what it would have been if these people had really considered it’, then this situation arises, [counsel for the charterers] saying with great force: ‘I cannot conceive [the charterers] ever agreeing to Italian law under any circumstances’, and [counsel for the shipowners] saying with equal force: ‘I cannot conceive [the shipowners] ever accepting French law’. One side urges French law, the other Italian law; but, of course, no one has said expressly which is to apply, and this court has therefore to examine the facts of the case and to consider what inference or presumption arises from those facts, and then, regarding the parties as just and reasonable people, to say after that full consideration what is the reasonable inference to be drawn and what was the probable intention of the parties.
In this passage, Birkett LJ seems to acknowledge that the concept of presumed intention is not really apt to describe what the court is doing in such a situation. It is really applying a wholly objective test.
This was recognized in a later case, Coast Lines Ltd v. Hudig & Veder Chartering NV,8 [1972] 2 QB 34 (CA). For an earlier case, see Bonython v. Commonwealth of Australia [1951] AC 201 at p. 219 (PC). which also concerned a charterparty, this time between English shipowners and Dutch charterers. In his judgment, Lord Denning MR said:9 At p. 44.
In order to determine the proper law of the contract … we have to ask ourselves: What is the system of law with which the transaction has the closest and most real connection? This is not dependent on the intentions of the parties. They never thought about it. They had no intentions upon it.
Megaw LJ said:10 At p. 46.
What is the proper law of the contract? In this charterparty the parties did not express their actual intention as to the proper law. No inference can be drawn from any one or more of the express terms of the contract as to the actual common intention of the parties. Hence the question to be answered is: what is the system of law with which the transaction has its closest and most real connection?
And Stephenson LJ said:11 At p. 50.
What is the proper law of this contract? English or Dutch? This question cannot be answered by ascertaining the actual intention of the parties. If they had applied their minds to it the English shipowners would probably have answered ‘English’ and the Dutch charterers ‘Dutch’. If they had been asked to agree on the application of the other’s law to the charterparty each would probably have refused and there would have been no contract; but there is a contract … The parties have not expressed their actual choice of the proper law to govern this contract. So the court has to infer the intention, which they have not expressed and one of them would probably disclaim, from the terms and the nature of the contract and from the relevant contemporary circumstances; or, if that is impossible, to ascertain the country and system of law with which the contract and transaction have the closest and most real connection.
As a result of this shift, it became clear that there was a three-step approach. The first step was to determine whether there was an express choice of law. If there was, that applied. If there was no express choice, the court had to consider whether there was an implied choice. If there was, that determined the proper law. However, the concept of an implied choice was now restricted to cases in which the court believed that the parties had genuinely considered the matter. If there was no implied choice under this more limited concept, the court would apply the objective test of the closest and most real connection.
The difference between the second step (implied choice) and the third step (objective test) was important when the grounds for believing that the parties intended a particular system of law to apply were based on the terms of the contract, rather than on external factors. This is illustrated by Amin Rasheed Shipping Corporation v. Kuwait Insurance Co.,12 [1984] AC 50 (HL). discussed in § 4.5, below. The case concerned a contract of marine insurance between a Kuwaiti insurance company and a shipping company incorporated in Liberia with its head office in Dubai. The basic facts surrounding the contract indicated little contact with England, certainly not enough to say that the closest and most substantial connection was with England. However, at the time in question, Kuwait had no law of marine insurance; moreover, the contract, which was written in English, used obsolete language that had little meaning in modern English. However, the relevant words and phrases were all found in the Lloyd’s SG policy, as scheduled to the Marine Insurance Act 1906, a British statute. Thus, the contract could be interpreted only on the basis of English law. It was for this reason that the House of Lords held that English law was the proper law. The parties must have intended it to govern.
The courts used to apply a number of presumptions to determine the objective proper law. Once the proper-law theory had become well established, however, these presumptions largely fell away: they tended to get in the way of the search for the closest connection. However, in the case of certain specific contracts, they continued to have some effect. For example, a contract concerning rights in rem in land was presumed to be governed by the law of the place where the land was situated (lex situs) and a contract for the carriage of goods by sea was presumed to be governed by the law of the flag of the ship carrying the goods. Outside these rather specific instances, however, presumptions were rejected by the English courts.
The theory of the proper law in many ways constituted a significant advance, since, if used with skill, it permitted a court to apply the system of law most likely to accord with the parties’ reasonable expectations. However, there was a price to pay: its very flexibility could lead to uncertainty. This is illustrated by Whitworth Street Estates Ltd v. Miller,13 [1970] AC 583 (HL). a case concerning a building (construction) contract between the English owner of property in Scotland and the Scottish builder. The contract contained no express choice of law. There was an arbitration clause, and the actual point at issue was the law governing the procedure of the arbitration. The arbitration took place in Scotland, and their lordships were unanimous in saying that it was governed by Scots law. However, they also considered the law governing the contract. Here, they were divided. Two judges said it was Scots law and three said it was English law. The two judges favouring Scots law14 Lord Reid and Lord Wilberforce. did so on the basis of the objective test: they considered that there was no implied choice of law and that the closest and most real connection was with Scotland. Of the three judges favouring English law, two considered that there was an implied choice in favour of English law.15 Viscount Dilhorne and Lord Hodson. The contract was based on a form, drafted in terms of English law, recommended by the Royal Institute of British Architects. It was adopted because the architect was English. The remaining judge (Lord Guest) said that the parties had not indicated any intention to be bound by English law; he nevertheless held that the applicable law was English law, apparently on the basis of the objective test.
One of the judges who considered that there was an implied choice of English law,16 Viscount Dilhorne. said that, if the case had been decided on the basis of the objective test, the closest and most real connection was with Scotland. Thus, three judges thought that there was no implied choice and that the objective test should be applied. Moreover, three judges considered that, if the objective test were applied, the closest and most real connection was with Scotland. Nevertheless, the majority held that the proper law was that of England. This difference of opinion among Britain’s most respected judges highlights the level of uncertainty inherent in the doctrine.
The common law no longer applies in England. It was almost entirely replaced, first by the Rome Convention, and now by the Rome I Regulation.17 Regulation 593/2008. The common law may still apply in some of the special cases in which the Rome I Regulation does not apply: see Article 1. However, it continues to apply in the Commonwealth – for example, in Canada and Australia. Similar principles apply in the United States, though there are differences of detail.18 Some American lawyers think that the parties should not have a completely free choice of the applicable law: see Uniform Commercial Code, section 1–105(1) (the parties may choose the law of a state only if the transaction ‘bears a reasonable relation’ to that state), but see the New York General Obligations Law, Title 14, § 5–1401, in which this restriction is rejected in most cases; see also the American Law Institute, Restatement of the Law Second: Conflict of Laws, § 187(1); cf. ibid Regulation 593/2008. The common law may still apply in some of the special cases in which the Rome I Regulation does not apply: see Article 1.., § 187(2). As regards the applicable law in the absence of a choice, the Restatement lists the contacts to be taken into account: see § 188. Moreover, the three-step approach outlined above has been adopted by the Rome Convention and now by the Rome I Regulation, so it continues to apply in England as well.
The Rome Convention19 The Convention on the Law Applicable to Contractual Obligations 1980. was negotiated after the United Kingdom had become a Member of the European Union, so its provisions represent something of a compromise between the approaches of the common law and the civil law. It remained in force for a number of years, but ceased to apply when the Rome I Regulation became applicable.20 Article 24 of the Regulation. It will not be discussed here. However, most of its principles have been taken over by the Regulation. When the latter is discussed, the main differences between it and the Convention will be explained. It should, however, be mentioned that there was an official report on the Convention, the Giuliano–Lagarde Report,21 Giuliano and Lagarde, ‘Report on the Convention on the Law Applicable to Contractual Obligations’, OJ 1980 L 282. which provided valuable guidance on the interpretation of the Convention and, today, on those provisions of the Regulation that are derived from it.
The Rome I Regulation22 Regulation 593/2008, OJ 2008 L 177, p. 6. was negotiated in the course of 2007, and formally adopted on 17 June 2008. It came into force on the twentieth day following its publication in the Official Journal of the European Union,23 It was published in the Official Journal of the European Union dated 4 July 2008. and applies to contracts concluded as from 17 December 2009.24 Article 28. This Article originally said that it applied to contracts concluded ‘after’ 17 December 2009, but a corrigendum changed this to ‘as from’ 17 December 2009: OJ 2009 L 309, p. 87. Contracts concluded before that date are governed by the Convention.
The subject-matter scope of the Regulation is set out in Article 1 (Panel 23.1). Article 1 contains a positive definition and exceptions. The former makes clear that it is limited to contractual obligations (thus excluding torts and other non-contractual obligations such as unjust enrichment) in civil and commercial matters (thus excluding public law).
1. This Regulation shall apply, in situations involving a conflict of laws, to contractual obligations in civil and commercial matters.
It shall not apply, in particular, to revenue, customs or administrative matters.
2. The following shall be excluded from the scope of this Regulation:
(a) questions involving the status or legal capacity of natural persons, without prejudice to Article 13;
(b) obligations arising out of family relationships and relationships deemed by the law applicable to such relationships to have comparable effects, including maintenance obligations;
(c) obligations arising out of matrimonial property regimes, property regimes of relationships deemed by the law applicable to such relationships to have comparable effects to marriage, and wills and succession;
(d) obligations arising under bills of exchange, cheques and promissory notes and other negotiable instruments to the extent that the obligations under such other negotiable instruments arise out of their negotiable character;
(e) arbitration agreements and agreements on the choice of court;
(f) questions governed by the law of companies and other bodies, corporate or unincorporated, such as the creation, by registration or otherwise, legal capacity, internal organisation or winding-up of companies and other bodies, corporate or unincorporated, and the personal liability of officers and members as such for the obligations of the company or body;
(g) the question whether an agent is able to bind a principal, or an organ to bind a company or other body corporate or unincorporated, in relation to a third party;
(h) the constitution of trusts and the relationship between settlors, trustees and beneficiaries;
(i) obligations arising out of dealings prior to the conclusion of a contract;
(j) insurance contracts arising out of operations carried out by organisations other than undertakings referred to in Article 2 of Directive 2002/83/EC of the European Parliament and of the Council of 5 November 2002 concerning life assurance1 OJ L 345, 19.12.2002, p. 1. Directive as last amended by Directive 2008/19/EC (OJ L 76, 19.3.2008, p. 44). the object of which is to provide benefits for employed or self-employed persons belonging to an undertaking or group of undertakings, or to a trade or group of trades, in the event of death or survival or of discontinuance or curtailment of activity, or of sickness related to work or accidents at work.
3. This Regulation shall not apply to evidence and procedure, without prejudice to Article 18.
1 OJ L 345, 19.12.2002, p. 1. Directive as last amended by Directive 2008/19/EC (OJ L 76, 19.3.2008, p. 44).
The exceptions are largely self-explanatory. For our purposes, the most important are:
obligations under bills of exchange, cheques and promissory notes
obligations under other negotiable instruments to the extent that those obligations arise out of their negotiable character
arbitration and choice-of-court agreements
company law – for example, the creation, legal capacity, internal organization and winding up of companies and the personal liability of their officers and members for the obligations of the company
whether an agent is able to bind a principal and
obligations arising out of dealings before the conclusion of a contract.
Like the Rome II Regulation (discussed in the previous chapter), but unlike the Brussels I Regulation (considered in Part II of this book), the Rome I Regulation does not apply only to conflicts between the legal systems of the European Union. A choice between the laws of Mexico and Peru falls just as much within its scope as one between the laws of France and Germany. This is expressly laid down in Article 2, which provides: ‘Any law specified by this Regulation shall be applied whether or not it is the law of a Member State.’
However, it does not, as a matter of Union law, apply to conflicts between the laws of different units within a Member State. This is laid down by Article 22(2), set out in Panel 23.2. Thus, there is no Union obligation on the United Kingdom to apply it between England and Scotland, but it is so applied as a matter of United Kingdom law.25 Law Applicable to Contractual Obligations (England and Wales and Northern Ireland) Regulations SI 2009 No. 3064. The only exception is Article 7 of Rome I, which concerns insurance contracts. This does not apply as between the different parts of the United Kingdom.
1. Where a State comprises several territorial units, each of which has its own rules of law in respect of contractual obligations, each territorial unit shall be considered as a country for the purposes of identifying the law applicable under this Regulation.
2. A Member State where different territorial units have their own rules of law in respect of contractual obligations shall not be required to apply this Regulation to conflicts solely between the laws of such units.
Article 22(1) (set out in Panel 23.2, above) defines ‘country’ for the purposes of the Regulation. This definition is identical to that in Article 25(1) of the Rome II Regulation, except that ‘contractual’ replaces ‘non-contractual’. The problems raised by this definition were discussed in Chapter 22, § 2.2.3, above. It need only be repeated here that England (including Wales) and Scotland are separate countries for this purpose.
The right of the parties to choose the applicable law is recognized by Article 3(1), set out in Panel 23.3. There is no requirement that the law chosen should have any connection with the parties or the contract. The choice is completely free.26 For exceptions, see Article 5(2) (carriage of passengers), discussed in § 4.6.7, below, and Article 7(3) (insurance).
The original Commission proposal permitted the parties to choose a system of ‘law’ that was not in force in any country – for example, a code drawn up by some international body, but never adopted. This was rejected by the Member States. So the law chosen must be in force in some country in the world.
However, there is nothing to prevent the parties incorporating such a code (or, indeed, any other set of rules) into their contract by reference.27 Recital 13 in the Preamble. Where a set of rules is incorporated by reference into a contract, it is as if those rules were set out in the contract. They then take effect as terms of the contract. There is an important difference between this and choice of law. It is the latter that gives legal force to the former.28 The law applied under a choice-of-law clause is that law as it exists from time to time. Relevant changes after the contract is made are applied unless the applicable law itself provides otherwise. Where, on the other hand, a set of rules is incorporated by reference, subsequent changes are not taken into account – except perhaps where the contract expressly so provides.
1. A contract shall be governed by the law chosen by the parties. The choice shall be made expressly or clearly demonstrated by the terms of the contract or the circumstances of the case. By their choice the parties can select the law applicable to the whole or to part only of the contract.
2. The parties may at any time agree to subject the contract to a law other than that which previously governed it, whether as a result of an earlier choice made under this Article or of other provisions of this Regulation. Any change in the law to be applied that is made after the conclusion of the contract shall not prejudice its formal validity under Article 11 or adversely affect the rights of third parties.
Under Article 3(1) (Panel 23.3, above), the choice must be made expressly or ‘clearly demonstrated by the terms of the contract or the circumstances of the case’.29 Under the English text of the Convention, it had to be ‘demonstrated with reasonable certainty by the terms of the contract or the circumstances of the case’. In the French text, the word ‘reasonable’ was omitted: ‘Ce choix droit être exprès ou demonstré de façon certaine des dispositions du contrat ou des circonstances de la cause.’ It seems that this discrepancy was deliberate: the negotiators agreed on the two texts as part of the compromise that brought a successful conclusion to the negotiations. Thus, an implied choice is possible, but such a choice must nevertheless be real in the sense explained in § 2, above. This was made clear in the Giuliano–Lagarde Report.30 Paragraph 3, p. 17.
Our next case illustrates this. It was decided under the common law, but it applies the same principle.
The case concerned a contract of marine insurance between a Kuwaiti insurance company and Amin Rasheed Shipping Corporation, a shipping company incorporated in Liberia with its head office in Dubai. Amin Rasheed insured its ships through the London office of an English company that was a member of the Amin Rasheed group. Insurance was effected through London brokers. Premiums were paid through the brokers in London. Policies were issued in Kuwait and sent to London to be passed on to the English company. Claims, though expressed in the policies to be payable in Kuwait, were in practice settled in London.
The case arose when the Al Wahab, a ship belonging to Amin Rasheed, was seized by the Saudi authorities. Amin Rasheed claimed under the policy, but the insurance company was unwilling to pay: they said that the ship was engaged in smuggling. Amin Rasheed wanted to sue the insurance company in England. To obtain jurisdiction, it argued that the applicable law was English law.31 This is a ground of jurisdiction under the traditional English rules: see Chapter 6, § 4.2.3, above. The trial judge rejected this: he held that it was the law of Kuwait. Amin Rasheed’s appeal was dismissed by the Court of Appeal. The case then came before the House of Lords.
[A]lthough the policy contains no express provision choosing English law as the proper law of the contract, nevertheless its provisions taken as a whole, in my opinion, by necessary implication point ineluctably to the conclusion that the intention of the parties was that their mutual rights and obligations under it should be determined in accordance with the English law of marine insurance.
…
The crucial surrounding circumstance … is that it was common ground between the expert witnesses on Kuwaiti law that at the time the policy was entered into there was no indigenous law of marine insurance in Kuwait. Kuwait is a country in which the practice since 1961, when it began to develop as a thriving financial and commercial centre, has been to follow the example of the civil law countries and to embody the law dealing with commercial matters, at any rate, in written codes. In Kuwait there had been in existence since 1961 a Commercial Code dealing generally with commercial contracts but not specifically with contracts of marine insurance. The contract of marine insurance is highly idiosyncratic; it involves juristic concepts that are peculiar to itself such as sue and labour, subrogation, abandonment and constructive total loss; to give but a few examples. The general law of contract is able to throw but little light upon the rights and obligations under a policy of marine insurance in the multifarious contingencies that may occur while the contract is in force. The lacuna in the Kuwaiti commercial law has since been filled in 1980 by the promulgation for the first time of a code of marine insurance law. This code does not simply adopt the English law of marine insurance; there are significant differences. However, it did not come into operation until August 15, 1980, and it is without retrospective effect. It does not therefore apply to the policy which was entered into at a time before there was any indigenous law of marine insurance in Kuwait.
…
Turning now to the terms of the policy itself, the adoption of the obsolete language of the Lloyd’s SG policy as scheduled to the Marine Insurance Act 1906 makes it impossible to discover what are the legal incidents of the mutual rights and obligations accepted by the insurers and the assured as having been brought into existence by the contract, unless recourse is had not only to the rules for construction of the policy contained in the first schedule, but also to many of the substantive provisions of the Act which is (accurately) described in its long title as: ‘An Act to codify the law relating to marine insurance.’ To give some examples: the policy is a valued policy; the legal consequences of this in various circumstances are prescribed by sections 27, 32, 67 and 68. The policy contained two type-written insertions ‘Warranted Lloyd’s class to be maintained throughout the policy period’ and ‘Warranted trading in Arabian Gulf waters only’; the legal consequences of the use of these expressions in a policy of insurance is laid down in sections 33 to 35. On the other hand, the printed words include the so-called memorandum: ‘NB The ship and freight are warranted free from average under three pounds per cent. unless general, or the ship be stranded, sunk or burnt’, where ‘warranted’ is used in a different sense; to ascertain the legal effect of the expression in this context recourse must be had to sections 64 to 66 and 76. The legal effect of the sue and labour clause included in the policy is laid down in section 78. These are but a few examples of the more esoteric provisions of the policy of which the legal effect is undiscoverable except by reference to the Marine Insurance Act 1906; but the whole of the provisions of the statute are directed to determining what are the mutual rights and obligations of parties to a contract of marine insurance, whether the clauses of the contract are in the obsolete language of the Lloyd’s SG policy (which, with the FC & S clause added, is referred to in the Institute War and Strikes Clauses Hull-Time, as ‘the Standard Form of English Marine Policy’), or whether they are in the up-to-date language of the Institute War and Strike Clauses that were attached to the policy. Except by reference to the English statute and to the judicial exegesis of the code that it enacts it is not possible to interpret the policy or to determine what those mutual legal rights and obligations are. So, applying, as one must in deciding the jurisdiction point, English rules of conflict of laws, the proper law of the contract embodied in the policy is English law.
How then did it come about that two such experienced commercial judges as Robert Goff LJ and Bingham J came to the conclusion that the contract embodied in the policy was not governed by English law? There was evidence, and even in the absence of evidence your Lordships could I think take judicial notice of the fact, that the Standard Form of English Marine Policy together with the appropriate Institute Clauses attached, was widely used on insurance markets in many countries of the world, other than those countries of the Commonwealth that have enacted or inherited statutes of their own in the same terms as the Marine Insurance Act 1906. The widespread use of the form in countries that have not inherited or adopted the English common law led both Bingham J and Robert Goff LJ to conclude that the Standard Form of English Marine Policy and the Institute Clauses had become internationalised; the ‘lingua franca’ and the ‘common currency’ of international insurance were the metaphors that Bingham J used to describe it; while Robert Goff LJ [1983] 1 WLR 228, 249, identified what he described as the basic fallacy in the argument of counsel for the assured as being:
‘that, although the historical origin of the policy may be English and although English law and practice may provide a useful source of persuasive authority on the construction of the policy wherever it may be used, nevertheless the use of a form which has become an international form of contract provides of itself little connection with English law for the purpose of ascertaining the proper law of the contract.’
My Lords, contracts are incapable of existing in a legal vacuum. They are mere pieces of paper devoid of all legal effect unless they were made by reference to some system of private law which defines the obligations assumed by the parties to the contract by their use of particular forms of words and prescribes the remedies enforceable in a court of justice for failure to perform any of those obligations; and this must be so however widespread geographically the use of a contract employing a particular form of words to express the obligations assumed by the parties may be. To speak of English law and practice providing a useful source of persuasive authority on the construction of the policy wherever it may be used, begs the whole question: why is recourse to English law needed at all? The necessity to do so is common ground between the experts on Kuwaiti law on either side; it is because in the absence of an indigenous law of marine insurance in Kuwait English law was the only system of private law by reference to which it was possible for a Kuwaiti court to give a sensible and precise meaning to the language that the parties had chosen to use in the policy. As the authorities that I have cited earlier show, under English conflict rules, which are those your Lordships must apply in determining the jurisdiction point, that makes English law the proper law of the contract.
Result: Amin Rasheed thus won on the choice-of-law point; however, the House of Lords still dismissed the appeal: they held that the English courts should not take jurisdiction on forum-non-conveniens grounds.32 On the doctrine of forum non conveniens, see Chapter 9, § 2.1, above.
It is likely that the authors of the Giuliano–Lagarde Report had this case in mind when, in the passage33 Page 17, paragraph 3. quoted in the Oldendorff case (below), they said that the use of a standard form of contract, such as a Lloyd’s policy of marine insurance, could indicate an implied choice of law.
According to Recital 12 in the Preamble to the Regulation, ‘An agreement between the parties to confer on one or more courts or tribunals of a Member State exclusive jurisdiction to determine disputes under the contract should be one of the factors to be taken into account in determining whether a choice of law has been clearly demonstrated.’ English courts have long taken the view that a choice-of-court agreement is an important pointer to an implied choice of law. If a particular court is to have jurisdiction, it would make sense for that court to apply its own law, the only system with which it is really familiar. So such a clause could indicate an implied choice of law, but it is not conclusive: it is just one factor to be taken into account.
The Recital does not mention arbitration clauses. In our next case, the court had to decide whether they too could constitute an indication of an implied choice of law. The case was decided under the Rome Convention, which is the same as the Regulation, except that it says (in the English text) that the choice must be demonstrated with ‘reasonable’ certainty, a word omitted in the French text of the Convention and in the Regulation.
Is it right to conclude that the parties intended their contract to be governed by English law just because it was necessary to consider certain provisions of English law to interpret it? Can a contract be interpreted by one law even though it is governed by (derives its validity from) another? A contract drafted in, say, Arabic can still be governed by English law, while a contract drafted in English does not necessarily have to be governed by English law (or the law of some other English-speaking country). In both cases, however, recourse must be had to the language in which the contract is drafted in order to interpret it. These appear to be the considerations on the basis of which the Court of Appeal concluded that the contract was not governed by English law. The fact that a contract must have a governing law does not affect these arguments.
This case concerned a contract between a German partnership and a Japanese corporation for the ten-year time-charter by the Germans of two ships to be built in Japan. The German charterers had an option to purchase the ships. The contract (charterparty) was in a well-known English-language form and contained standard clauses with well-known meanings in English law. It contained no express choice of law, but there was an agreement providing for arbitration in London.
[After referring to Article 3 of the Convention, said:]
The question is therefore whether the choice of English law is demonstrated with reasonable certainty by the terms of the contract or the circumstances of the case.
The plaintiffs [the German partnership] say that it is. Their case may be summarised as follows. The agreed form of charter-party incorporated a London arbitration clause, providing for disputes to be resolved by arbitrators conversant with shipping matters. The inference in all the circumstances is, they say, that the parties intended English law to govern … [The court then quoted from the Giuliano–Lagarde Report]:1 Page 17, paragraph 4.
The choice of law by the parties will often be express but the Convention recognizes the possibility that the Court may, in the light of all the facts, find that the parties have made a real choice of law although this is not expressly stated in the contract. For example, the contract may be in a standard form which is known to be governed by a particular system of law even though there is no express statement to this effect, such as a Lloyd’s policy of marine insurance. In other cases a previous course of dealing between the parties under contracts containing an express choice of law may leave the court in no doubt that the contract in question is to be governed by the law previously chosen where the choice of law clause has been omitted in circumstances which do not indicate a deliberate change of policy by the parties. In some cases the choice of a particular forum may show in no uncertain manner that the parties intend the contract to be governed by the law of that forum, but this must always be subject to the other terms of the contract and all the circumstances of the case. Similarly 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. Other matters that may impel the court to the conclusion that a real choice of law has been made might include an express choice of law in related transactions between the same parties, or the choice of a place where disputes are to be settled by arbitration in circumstances indicating that the arbitrator should apply the law of that place.
This Article does not permit the court to infer a choice of law that the parties might have made where they had no clear intention of making a choice. Such a situation is governed by Article 4.
…
The plaintiffs add these considerations. Charter-parties normally have provisions for the resolution of disputes. Where parties reside and carry on business in countries which have different systems of law it is not uncommon for parties to agree a forum which is as between them ‘neutral’. Having agreed a neutral forum it is highly unlikely that they would expect that tribunal to apply other than a ‘neutral’ law. Moreover, having agreed a particular forum it is unlikely that the parties would agree that that forum would apply a law which was foreign to it, especially a law which was the law of the country of one of the parties but not of the other.
On the facts of the instant case the plaintiffs say as follows. London is a neutral forum. It would make no sense for them to have agreed either Japanese law or German law. Moreover, having agreed arbitration in London by arbitrators conversant with shipping matters, it is equally unlikely that the parties intended not to make any choice of law. The obvious inference is that the parties intended that the arbitrators would apply English maritime law. That is especially so having regard to the fact that the parties chose an amended NYPE form of charter-party and an amended Norwegian Saleform, both of which are well known English language contracts which have been subject to settled and widely known interpretation under English law. There is no evidence that either of them has been the subject of interpretation under either German or Japanese law.
The dealings between the parties as set out above show that they were conducting their negotiations by reference to English rather than Japanese or German law. They used expressions with established meanings in English maritime law. So for example the expression ‘subject to details’ has a well settled meaning in English law …
…
[T]he party relying upon Article 3 must demonstrate with reasonable certainty that the parties have chosen a particular law as the governing or applicable law. I accept the submission that, as the Giuliano-Lagarde report says, it must be a real choice which the parties had a clear intention to make …
…
Before turning to the question whether the parties chose English law in the instant case, it is appropriate to give some consideration to the significance (if any) of an arbitration clause in this connection, both at common law and under the Convention.
…
[Clarke J then considered the common-law English authorities and referred to Dicey & Morris (12th edn, 1993), which, after stating that whether an implied choice of law can be inferred from an arbitration clause will depend on the circumstances, says (at pp. 1226–7):]
[S]econdly, an arbitration clause which clearly demonstrates that the arbitration will take place in a particular country and that the arbitrators will be of that nationality or carrying on business in that country will permit an inference that the parties intended that the law of that country should be applied; thus an arbitration clause providing for arbitration in London by English maritime arbitrators, or by London brokers, or by a local association or exchange may be regarded as an implied choice of law; thirdly, the indication of an implied choice of law will be much weaker where the arbitration clause, although it specifies a place of arbitration, does not provide for a method of identifying the arbitrators except through an appointment by an international arbitral body such as the International Chamber of Commerce.
That approach seems to me to be correct …
[O]n all the facts of this case, when set in the context of the terms of the contract as a whole and of the circumstances of the case, the arbitration clause here is in my judgment a strong indication of the parties’ intention to choose English law as the applicable law as well as the curial law … In short, having agreed English arbitration for the determination in London of disputes arising out of a well known English language form of charter-party which contains standard clauses with well known meanings in English law, it is in my judgment to be inferred that the parties intended that law to apply. Having agreed a ‘neutral’ forum the reasonable inference is that they intended that forum to apply a ‘neutral’ law, namely English law and not either German or Japanese law.
1 Page 17, paragraph 4.
Result: English law applies.
It is hard to fault this reasoning. Businessmen, and even lawyers who are not specialists in conflict of laws, rarely distinguish between a choice of court and a choice of law. They assume that a court will apply its own law. The same is true of an arbitration clause. For this reason, it is proper to regard an arbitration or choice-of-court clause as an indication of the parties’ intention. It is not decisive, but may lead a court to a particular conclusion if other factors suggest that there was a tacit – though real – choice of law.
The rules for determining the applicable law in the absence of choice are laid down in Article 4 of the Regulation. Before analysing this, however, we will first look at the corresponding provision of the Convention in order to see what the negotiators were trying to achieve when they were drafting the Regulation.
Article 4 of the Rome Convention tried to achieve a balance between certainty and flexibility. It did this by first establishing a general principle (laid down in paragraph 1) that, if there was no express or implied choice of law, the contract would be governed by the law of the country with which it was most closely connected. It then tried to provide more predictability by laying down a presumption (in paragraph 2) as to what that law was. This was based on the theory of ‘characteristic performance’, a doctrine invented by the Swiss Federal Court. Under it, a contract is presumed to be most closely connected with the country of the party who is to effect the characteristic performance.34 This presumption did not apply to contracts the subject-matter of which was a right in immovable property or a right to use immovable property (Article 4(3)); contracts for the carriage of goods (Article 4(4)); certain consumer contracts (Article 5); or individual contracts of employment (Article 6).
The characteristic-performance doctrine, which also underlies several provisions of the Regulation, is based on the idea that, in most types of contract, one party undertakes to do no more than pay money. Since this is common to most kinds of contract, it is disregarded. The characteristic performance must, therefore, be that of the other party. In a contract of sale, for example, the characteristic performer is the seller; in a contract for the provision of services, it is the provider of the service; in a banking contract, it is the banker; in an insurance contract, it is the insurer; in a contract of employment, it is the employee. The idea is that the contract is likely to be more closely connected with that party than with the other party; so, in the absence of some indication to the contrary, it should be governed by that party’s law.
The Convention contained provisions to determine what the characteristic performer’s law was. In a commercial case, it was the law of the country in which the characteristic performer had its principal place of business; however, where, under the terms of the contract, the performance was to be effected through a place of business other than the principal place of business, it was the law of the country where that other place of business was situated.
Two things should be noted at this point. First, the doctrine does not refer to the law of the country in which the characteristic performance is to be carried out, but to the law of the country in which the party who is to carry out that performance is established. Thus, if an English company agrees to sell goods to a French company and delivery is to take place in France, the applicable law is the law of England, not that of France. However, the rule concerning branch offices (‘a place of business other than the principal place of business’) was a step towards the place of performance.
The second point is that some contracts do not have a characteristic performance. A contract of barter is one example. If company X agrees to give company Y crude oil in return for aircraft, one cannot say that either party is the characteristic performer. This was recognized by the Convention, which stated (in paragraph 5) that the presumption in paragraph 2 would not apply if the characteristic performance could not be determined. After all, it was only a presumption.
However, the Convention did not want to move too far from the closest-connection principle. So, it provided (also in paragraph 5) that the presumption was to be disregarded if it appeared from the circumstances as a whole that the contract was more closely connected with another country. This ‘escape clause’ gave the court the flexibility to apply the law that a reasonable person would have expected to apply in those cases in which the characteristic-performance doctrine did not produce an acceptable result.
The result was that the principle was that of the closest connection; there was a presumption based on the characteristic-performance doctrine; but it was made clear that this was not to be followed if in fact the contract was more closely connected with another country. However, the precise balance between the general test and the presumption became a matter of controversy. Many Continental courts applied the presumption almost as if it were the rule; English courts, on the other hand, frequently departed from it.
It seems that the EU Commission favoured the Continental approach. Certainty was, in its eyes, more important than upholding the expectations of the parties. So, in its original proposal for the Regulation, the structure of Article 4 was changed. The principle of the closest connection was replaced (in paragraph 1) by a set of rules largely based on the characteristic-performance doctrine as applied to particular kinds of contract. Thus, for example, paragraph 1(a) provided that contracts of sale were to be governed by the law of the country of the seller’s habitual residence and paragraph 1(b) stated that contracts for the provision of services were to be governed by the law of the country of the service provider’s habitual residence. Under paragraph 2, the characteristic-performance doctrine was to be applied directly to contracts not specifically covered in paragraph 1. Only where there was no characteristic performance, was resort permitted to the closest-connection principle. There was no escape clause allowing the court to disregard these rules in exceptional cases.
This proposal was felt by the United Kingdom (and others) to be too inflexible. After extensive debate, it was agreed to reinstate the escape clause. The final result is set out in Panel 23.4.
1. To the extent that the law applicable to the contract has not been chosen in accordance with Article 3 and without prejudice to Articles 5 to 8, the law governing the contract shall be determined as follows:
(a) a contract for the sale of goods shall be governed by the law of the country where the seller has his habitual residence;
(b) a contract for the provision of services shall be governed by the law of the country where the service provider has his habitual residence;
(c) a contract relating to a right in rem in immovable property or to a tenancy of immovable property shall be governed by the law of the country where the property is situated;
(d) notwithstanding point (c), a tenancy of immovable property concluded for temporary private use for a period of no more than six consecutive months shall be governed by the law of the country where the landlord has his habitual residence, provided that the tenant is a natural person and has his habitual residence in the same country;
(e) a franchise contract shall be governed by the law of the country where the franchisee has his habitual residence;
(f) a distribution contract shall be governed by the law of the country where the distributor has his habitual residence;
(g) a contract for the sale of goods by auction shall be governed by the law of the country where the auction takes place, if such a place can be determined;
(h) a contract concluded within a multilateral system which brings together or facilitates the bringing together of multiple third-party buying and selling interests in financial instruments, as defined by
Article 4(1), point (17) of Directive 2004/39/EC, in accordance with non-discretionary rules and governed by a single law, shall be governed by that law.
2. Where the contract is not covered by paragraph 1 or where the elements of the contract would be covered by more than one of points (a) to (h) of paragraph 1, the contract shall be governed by the law of the country where the party required to effect the characteristic performance of the contract has his habitual residence.
3. Where it is clear from all the circumstances of the case that the contract is manifestly more closely connected with a country other than that indicated in paragraphs 1 or 2, the law of that other country shall apply.
4. Where the law applicable cannot be determined pursuant to paragraphs 1 or 2, the contract shall be governed by the law of the country with which it is most closely connected.
It will be seen that the closest-connection principle no longer applies as such. It has been replaced by a set of eight specific rules applicable to different kinds of contract. Four of these rules35 Sub-paragraphs (a), (b), (e) and (f). The concept of ‘sale of goods’ in sub-paragraph (a) and ‘provision of services’ in sub-paragraph (b) are to have the same meaning as in Article 5(1)(b) of the Brussels I Regulation: see Recital 17 in the Preamble to the Rome I Regulation. are based on the characteristic-performance doctrine.
The second paragraph deals with two situations in which the first paragraph cannot provide a solution. The first is where the contract is not one of the specific types listed in that paragraph; the second is where the contract contains elements of two or more of those types. In both cases, the applicable law is that of the country in which the characteristic performer has its habitual residence. Here the characteristic-performance doctrine is applied directly.36 According to Recital 19 in the Preamble to the Regulation, in the case of a contract consisting of a bundle of rights and obligations capable of being categorized as falling within more than one of the specified types of contract, the characteristic performance of the contract should be determined having regard to its centre of gravity.
The third paragraph contains the ‘escape clause’.37 The phrase ‘escape clause’ is used in Recital 20 in the Preamble to the Regulation. This allows the court to disregard the rules in the previous paragraphs where the contract is ‘manifestly’ more closely connected with another country.38 Such escape clauses are to be found in other provisions of the Regulation: see Articles 5(3), 7(2) (last sentence) and 8(4). In the last of these, the word ‘manifestly’ does not appear. Apart from this word, it is the same (in this respect) as the escape clause in Article 4(5) of the Convention.
The fourth paragraph deals with cases in which the applicable law cannot be determined under paragraphs 1 and 2. It also applies the closest-connection principle.39 The word ‘manifestly’ does not apply here.
This Article was the result of much discussion and debate, discussion in which the United Kingdom played a major role. In the opinion of many, it achieves a fair balance between the conflicting concerns of certainty and appropriateness.
Several of the rules in Article 4 apply the law of the habitual residence of a particular party. Thus, habitual residence now forms the test for determining the law of the party who carries out the characteristic performance. ‘Habitual residence’ is defined in Article 19, set out in Panel 23.5. For a company, it is the place of its central administration. This is another departure from the Convention, where for a company acting in the course of business (as most companies do) it was the principal place of business.40 For the difference between these two concepts, see Chapter 3, § 6.4, above. This is in accord with what seems to be a general policy under which the personal law of a company is deemed to be the law of the country where it has its central administration.41 See ibid For the difference between these two concepts, see Chapter 3, § 6.4, above.. In the case of a natural person (individual), on the other hand, the test of the principal place of business is retained where he is acting in the course of business.
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.
The Convention had a special rule that where, under the terms of the contract, the performance was to be effected through a place of business other than the principal place of business, the law of the country in which that other place of business was situated was to apply. This rule is retained (and broadened) under the Regulation. The phrase ‘place of business other than the principal place of business’ is replaced by ‘branch, agency or any other establishment’, a phrase taken from the Brussels Regulation (see now Article 7(5) of Brussels 2012, set out in Panel 4.4, Chapter 4, § 1.3, above). Now, however, this exception applies not only where, under the terms of the contract, performance is to be carried out through the subsidiary establishment, but also where the contract is concluded in the course of the operation of that establishment.
In modern business, projects are frequently carried out by means of a set of linked contracts. Serious problems are caused if these linked contracts are governed by different laws. One result might be that some are valid and others invalid: this could mean that the contract imposing obligations on a party was valid while the contract giving that party rights was invalid. This is a situation in which resort to the escape clause could be justified. Recital 20 to Rome I acknowledges this: it says that, when the escape clause is applied, account should be taken, inter alia, of whether the contract in question has a very close relationship with another contract or contracts.42 See also Recital 21. Here we consider the use of the escape clause in this rather special situation. A more general discussion of the escape clause follows in § 4.6.4.
Our first case was decided under the Convention, where (as we have seen) the provisions are slightly different; nevertheless, the problem of linked contracts raises the same issues.
The case concerned obligations under a letter of credit payable in London. The underlying contract (for the sale of goods) was between an Irish company, acting through its London office (the seller), and an Indian company (the buyer). The buyer had contracted with an Indian bank called Vysya Bank to issue the letter of credit. Vysya had no branch in London, so it contracted with another Indian bank, the Bank of Baroda, for the latter to confirm the letter of credit. It did so, thus concluding a contract with the seller to pay in London.
One of the features of a letter of credit is that, though there is in essence one commercial transaction, there are a number of autonomous contracts between different parties. In the Baroda case, the court considered four contracts. None of them contained an express choice of law. They were:
the contract between the buyer and the issuing bank (Vysya)
the contract between the issuing bank and the confirming bank (Baroda)
the contract between the confirming bank and the seller and
the contract between the issuing bank and the seller.
Baroda (the confirming bank) had paid the seller in London and sought reimbursement from Vysya. The latter refused to pay because the buyer had obtained an injunction against it in the Indian courts.
Baroda then sued Vysya in England. The latter had no office there, but Baroda argued that the English courts had jurisdiction because the contract between it and Vysya was governed by English law.43 Under Order 11, Rule 1(1)(d)(iii), of the Rules of the Supreme Court, this gave the English courts jurisdiction in cases not governed by the Brussels Convention. See now Rule 6.18(5)(c) of the Civil Procedure Rules. It was for this purpose (at least in the first instance) that the English court had to determine the applicable law.
It was common ground before me … that the proper law of the present contract, however it was made, must be determined in accordance with the Convention …
[Mance J then considered Article 4 of the Convention and concluded that, under Article 4(2), the characteristic-performance doctrine applied. He continued:]
It raises the question: what is ‘the performance which is characteristic of the contract’ made between Vysya and Bank of Baroda? Bank of Baroda says that the answer is the addition of its confirmation to the credit and the honouring of the liability accepted thereby. Vysya says that this fails to distinguish the contract between Vysya and Bank of Baroda from the contract between Bank of Baroda as confirming banker and Granada as beneficiary. In Vysya’s submission the performance which is characteristic of the contract between Vysya and Bank of Baroda is the former’s obligation to pay the latter upon presentation of conforming documents.
There are several different contractual relationships which can be identified in a situation such as the present. Leaving aside the underlying sale contract, there are contracts between (i) the buyer and the issuing bank, (ii) the issuing bank and the confirming bank, (iii) the confirming bank and the seller and (iv) the issuing bank and the seller. The last two relationships co-exist, giving a beneficiary two banks which he may hold responsible for payment. As the Uniform Customs1 Editor’s note: the Uniform Customs and Practice for Documentary Credits are published by the International Chamber of Commerce. For their precise legal status, see Roy Goode, Commercial Law (Penguin Books, London, 3rd edn, 2004), pp. 968 et seq. put it in Article 10(b):
When an issuing bank authorizes or requests another bank to confirm its irrevocable credit and the latter has added its confirmation, such confirmation constitutes a definite undertaking of such bank (the confirming bank), in addition to that of the issuing bank, provided that the stipulated documents are presented and that the terms and conditions of the credit are complied with …
Article 11(d) provides:
By nominating a bank other than itself, or by allowing for negotiation by any bank, or by authorizing or requesting a bank to add its confirmation, the issuing bank authorizes such bank to pay, accept or negotiate, as the case may be, against documents which appear on their face to be in accordance with the terms and conditions of the credit, and undertakes to reimburse such bank in accordance with the provisions of these Articles.
As between issuing bank and confirming bank the relationship is one of agency, although as against the beneficiary the confirming bank commits itself as principal … That the relationship is one of agency is also shown by the language used in the instant case …
[After discussing the facts and saying that both parties agreed that the confirmation was the object or focus of the contract, he continued:]
[The accounts of both parties] confirm the appropriateness of the general conclusion, at which I would anyway arrive, that under a contract between an issuing bank and a confirming bank the performance which is characteristic of the contract is the adding of its confirmation by the latter and its honouring of the obligations accepted thereby in relation to the beneficiary.2 Editor’s note: under the Regulation, the contract would almost certainly be characterized as one for the provision of services under Article 4(1)(b). The question would then arise who the provider of the service was. Mance J’s analysis of characteristic performance is equally applicable to answer this question. The liability on the part of the issuing bank to reimburse or indemnify the confirming bank is consequential on the character of the contract; it does not itself characterize the contract.
The fact that reimbursement was to be claimed and made in New York is doubly insignificant, being probably a mere matter of convenience because this was a dollar credit and in any event unrelated to any country whose law could conceivably govern …
[After referring to the Giuliano-Lagarde Report, Mance J continued:]
It follows in the present case, looking at the position of Bank of Baroda in relation to the confirmation given to Granada, that the performance characteristic of Bank of Baroda’s contract with Vysya, however made, was the addition and honouring of its confirmation of the credit in favour of Granada. That performance was to be effected through Bank of Baroda’s City of London office, viz ‘a place of business other than [its] principal place of business’ and so by the express terms of Article 4(2) the presumption is that English law governs the contract between Vysya and Bank of Baroda. For reasons which will further appear below, any wider examination of the circumstances under Article 4(5) simply confirms the application of English law.
So far I have focused on the contract between Vysya and Bank of Baroda which is the contract immediately in issue. It is relevant to consider the matter more widely, as the arguments before me did, and in this context to consider the proper laws of other contracts involved in the present situation. Whether one looks at Article 4(2) or at Article 4(5) of the Rome Convention, the contract of confirmation between Bank of Baroda’s City of London branch as confirming bank and Granada as beneficiary was clearly governed by English law … A suggestion that English law did not, as between beneficiary and confirming bank, govern a credit confirmed through the London branch of a foreign bank for payment in London would be wholly uncommercial.
Vysya submits however that, although Granada’s contract as beneficiary with Bank of Baroda as the confirming bank is subject to English law, Granada’s parallel contract with Vysya as the issuing bank falls as a result of the Rome Convention (and contrary to the previous common law position) to be regarded as subject to Indian law. It submits that the contract between the buyer and Vysya in India must also be subject to Indian law. In its submission different legal systems govern different contracts involved in the present situation and there is no particular incongruity in holding that the contract between the two Indian banks is subject to Indian law.
…
A point of importance is involved in the submission that the contract between Granada as beneficiary and Vysya as issuing bank is subject to Indian law. That would mean that, by force of [the Rome Convention], one and the same credit is here governed by two different laws, and that the applicable law varies according to the bank against which the beneficiary decides to enforce the credit. If the beneficiary enforces the credit against the Bank of Baroda, English law applies, and presumably (whatever the governing law of the contract between confirming and issuing banks) Bank of Baroda can then claim reimbursement from Vysya in respect of liabilities which it has incurred subject to English law. However if the beneficiary chooses to pursue the issuing bank direct, Indian law applies. Counsel for Vysya contemplated this with equanimity as a necessary result of the [Rome Convention], but I do not. In my judgment it would involve precisely [a] wholly undesirable multiplicity of potentially conflicting laws …
As between the beneficiary and Vysya, the position under Article 4(2) is that there is a presumption that Indian law applies. This presumption applies, although the performance which is characteristic of the contract is the issue of the letter of credit in London which was to be and was effected in London through National Westminster, initially at least as advising bank, with Bank of Baroda later adding its confirmation. Although such performance was to take place in London, Article 4(2) refers one back, prima facie, to India as the place of Vysya’s central administration.3 Editor’s note: this is a slip by the judge: since Vysya was acting in the course of business, he should have said that India was Vysya’s principal place of business.
In my judgment this is a situation where it would be quite wrong to stop at Article 4(2). The basic principle is that the governing law is that of the country with which the contract is most closely connected (Article 4(1)). Article 4(2) is, as stated in Professors Giuliano and Lagarde’s report, intended to give ‘specific form and objectivity’ to that concept. In the present case the application of Article 4(2) would lead to an irregular and subjective position where the governing law of a letter of credit would vary according to whether one was looking at the position of the confirming or the issuing bank. It is of great importance to both beneficiaries and banks concerned in the issue and operation of international letters of credit that there should be clarity and simplicity in such matters. Article 4(5) provides the answer. The Rome Convention was not intended to confuse legal relationships or to disrupt normal expectations in the way which is implicit in Vysya’s submissions. Under Article 4(5) the presumptions in Article 4(2), (3) and (4) are to be
… disregarded if it appears from the circumstances as a whole that the contract is more closely connected with another country.
I accept that the presumptions are to be applied unless there is valid reason, looking at the circumstances as a whole, not to do so …
The present situation provides in my judgment a classic demonstration of the need for and appropriateness of Article 4(5). I conclude that English law applies to the contract between Vysya and Granada.
…
I therefore conclude that the letter of credit was governed by English law as between the beneficiary and each of the banks. On this basis, it would be wholly anomalous if English law were not also to govern the contract between Vysya and Bank of Baroda and in my opinion it does. As between Bank of Baroda and Vysya the application of the presumption arising under Article 4(2) accords with good sense and sound policy and there is therefore no reason to depart from it.
1 Editor’s note: the Uniform Customs and Practice for Documentary Credits are published by the International Chamber of Commerce. For their precise legal status, see Roy Goode, Commercial Law (Penguin Books, London, 3rd edn, 2004), pp. 968 et seq.
2 Editor’s note: under the Regulation, the contract would almost certainly be characterized as one for the provision of services under Article 4(1)(b). The question would then arise who the provider of the service was. Mance J’s analysis of characteristic performance is equally applicable to answer this question.
3 Editor’s note: this is a slip by the judge: since Vysya was acting in the course of business, he should have said that India was Vysya’s principal place of business.
Our next case raises similar issues, but the judgment was given by the CJEU.
This case concerned Article 4(4) of the Rome Convention, which lays down special rules for contracts for the carriage of goods. A French company, Va Tech, had engaged another French company, Safram, as principal freight forwarding agent, to organize the carriage of a transformer from the port of Antwerp (Belgium) to Lyon, France. Safram then contracted with Haeger & Smidt, a German company, for the carriage of the transformer by inland waterway. In this contract, Safram acted in its own name but on behalf of Va Tech. Haeger & Schmidt subsequently concluded a contract with Mr Lorio, a carrier established in France, for the carriage of the transformer. Mr Lorio owned a barge registered in Belgium. Something went wrong with the loading process in Antwerp and the barge sank with its cargo. The case was concerned with liability for the loss.
Both the contract between Va Tech and Safram, and that between Safram and Haeger & Schmidt, were commission contracts. In its judgment, the CJEU said that a ‘commission contract’ is a contract the characteristic performance of which consists in organising the carriage of goods.44 Paragraph 27 of the judgment. In other words, the person concerned does not himself carry the goods: he undertakes to find someone else to do so. The CJEU said that such a contract is not itself a contract for the carriage of goods. However, the last sentence of Article 4(4) provides that contracts which are not strictly speaking contracts for the carriage of goods must be treated as such if their main purpose is the carriage of goods.45 There is no equivalent provision in Article 5 of Rome I. The CJEU therefore concluded that the two commission contracts could fall under Article 4(4) if their principal purpose was the actual carriage of the goods.46 Paragraphs 28–32 of the judgment. This was for the national court to determine.
The contract between Haeger & Schmidt and Lorio was clearly a contract for the carriage of goods. Under Article 4(4) it would be governed by the law of the carrier’s principal place of business (France) provided that one of the other links specified in Article 4(4) also pointed to France. One such link was the place of discharge (delivery). This was also France, so French law applied.
The contract between Va Tech and Safram was also clearly governed by French law. The governing law of the contract between Safram (insolvent by the time the case reached the CJEU) and Haeger & Schmidt was more difficult to determine. However, if it was not to be regarded as a contract for the carriage of goods,47 If it was to be regarded as a contract for the carriage of goods, Haeger & Schmidt’s principal place of business (Germany) would be decisive only if one of the other specified connecting factors pointed to Germany. However, none of them did. So Article 4(4) would provide no answer. In such a case, ruled the CJEU, one must simply go back to Article 4(1) and apply the test of the closest connection without any presumptions. The characteristic performance test in Article 4(2) cannot be applied. Haeger & Schmidt would appear to be the party performing the characteristic obligation. In this case, Article 4(2) would apply and the presumption would be that the contract was governed by the law of the characteristic performer’s habitual residence (as defined in Article 4(2)). This would be Germany. However, the court could avoid this by resorting to the escape clause in Article 4(5). This would be a means of holding that all three contracts were governed by French law. The extract set out below deals with this issue.
47 As is apparent both from the wording of Article 4(2) of the Rome Convention, which makes express provision for the application of Article 4(5), and from the Court’s case-law, that presumption [the characteristic performance presumption in Article 4(2)] may be disregarded when the requirements of Article 4(5) are met …
48 It follows from the foregoing that the court must ascertain, secondly, whether, in the light of the overall circumstances of the dispute before it, the solution it has reached applying Article 4(2) must be disregarded. To that end, it must compare the connections existing between the contract and, on the one hand, the country in which the party who effects the characteristic performance has his or its habitual residence at the time of conclusion of the contract and, on the other, another country with which the contract is closely connected.
49 In fact the referring court must conduct an overall assessment of all the objective factors characterising the contractual relationship and determine which of those factors are, in its view, most significant … As observed by the Commission, significant connecting factors to be taken into account include the presence of a close connection between the contract in question with another contract or contracts which are, as the case may be, part of the same chain of contracts, and the place of delivery of the goods.
50 This interpretation is also supported by recital 20 in the preamble to Regulation No 593/2008 [Rome I], which mentions that the existence of a very close connection between the contract in question and another contract or contracts may be a relevant connecting criterion.
51 In the light of the foregoing considerations, the answer to the third question is that Article 4(2) of the Rome Convention must be interpreted as meaning that where it is argued that a contract has a closer connection with a country other than that the law of which is designated by the presumption laid down therein, the national court must compare the connections existing between that contract and, on the one hand, the country whose law is designated by the presumption and, on the other, the other country concerned. In so doing, the national court must take account of the circumstances as a whole, including the existence of other contracts connected with the contract in question.
The escape clause in paragraph 3 requires the court to disregard the rules in paragraphs 1 and 2 if the contract is manifestly more closely connected with a country other than that indicated by those paragraphs. We next look at two English cases in which, under the less strict test in the Convention (the word ‘manifestly’ being omitted), the court held that recourse to the escape clause was justified.
The claimant, Definitely Maybe, was an English company. It had agreed with Lieberberg, a German company, that it would arrange for a pop group, Oasis, to perform in Germany. The pop group did so, but without one of its members. As a result, Lieberberg refused to pay the full amount stipulated in the contract. Definitely Maybe sued it in England. It argued that the English courts had jurisdiction under Article 5(1) of the Brussels Convention, since England was the place of performance of the obligation in question – the obligation to pay.48 Under Brussels 2012, the position would have been different: Article 7(1)(b) provides that, in the case of a contract for the provision of services, the courts having jurisdiction are those for the place where, under the contract, the services were provided or should have been provided. This would have been Germany. The German courts would thus have had jurisdiction under Article 7(1)(b), even if the action was for payment and the payment was to be made in a different country. This raised a problem. The place of payment was not specified in the contract. In such circumstances, English law would regard it as being in England, where the creditor had its headquarters, while German law would consider that it was in Germany, the debtor’s domicile. Thus the place of payment – and therefore the jurisdiction of the court – depended on the applicable law. The English court had jurisdiction only if English law was applicable.
The Master had held that the case should be heard in Germany. The claimant appealed to the High Court. There was little doubt that, under the presumption in paragraph 2, the applicable law was that of England. Definitely Maybe was the characteristic performer and, as it had no place of business in Germany, the governing law was that of the country in which its principal place of business was situated. This was England.
7. The real issue between the parties centres on the relationship between these two paragraphs of Article 4. Whilst paragraph (2) looks to the location of the principal performer, paragraph (5) looks more widely to a connection between the contract and a country. If there is a divergence between the location of the principal performer and the place of substantial or characteristic performance, what then? On the one hand, were the presumption to be displaced whenever such divergence existed, the presumption would be of little weight or value. Paragraph (2) must have been inserted to provide a ‘normal’ rule which is simple to apply. Giving wide effect to paragraph (5) will render the presumption of no value and represent a return to the English common law test of ascertaining the proper law, which places much less weight on the location of the performer and much more on the place of performance, and the presumed intention of the parties.
8. Rather than seeking to find an answer to this issue, I turn to those factors which are said to show a closer connection between the contract and Germany than with England. The contract provided for Oasis to perform live in Germany; that was the place of the characteristic or substantial performance of the contract. The defendants were obliged to make arrangements in Germany to enable the performances to take place (for example, marketing and promotion) and to provide facilities such as security and bits of equipment. Thus, the contract required performance of contractual obligations in Germany by both parties. For what it is worth, the defendant company is German and payment was to be made in Deutschmarks and subject to deduction for German tax. Apart from the location of the claimants and the group, and the place of payment, there is no other connection between England and the contract. The centre of gravity of the dispute is, I think, Germany. Therefore, if the test were simply that laid down in paragraph (5), namely, to say with which country was the contract most closely connected, I would have said Germany, rather than England.
9. But I return to the issue of the relationship between paragraphs (2) and (5) of Article 4 and the legal effect of the presumption. There are, I think, two schools of thought. The first is to say that the presumption in paragraph (2), which is expressly made subject to paragraph (5), is weak and will more readily be displaced where the place of performance differs from the place of business of the performer. The second, adopts a narrower view of the ‘exception’ to the presumption in paragraph (5) and gives firm dominance to the presumption.
10. In relation to the first approach, the editors of Dicey & Morris, The Conflict of Laws, 13th edn (2000), vol. 2, paragraphs 32–124, state that ‘the presumption may most easily be rebutted in those cases where the place of performance differs from the place of business of the party whose performance is characteristic of the contract’. That is this case. In Crédit Lyonnais v. New Hampshire Insurance Co. [1997] 2 Lloyd’s Rep 1, 5, the Court of Appeal noted that Article 4(5) ‘formally, makes the presumption very weak’.
11. In support of the more restricted view, the claimants rely upon a Dutch case, Société Nouvelle des Papéteries de l’Aa SA v. BV Machinefabriek BOA 1992 Nederlandse Jurisprudentie No 750, noted in ‘Some Dutch Judicial Reflections on the Rome Convention, Article 4(5)’ [1996] LMCLQ 18, where the court gave a most restrictive interpretation to paragraph (5). It appears that the Supreme Court in Holland concluded that
‘this exception to the main rule of section 2 has to be applied restrictively, to the effect that the main rule should be disregarded only if, in the special circumstances of the case, the place of business of the party who is to effect the characteristic performance has no real significance as a connecting factor’ (see [1996] LMCLQ 18, 20).
12. The problem is caused, I think, by the fact that the factor which identifies the governing law in paragraph (2) (namely the location of the principal performer) may well not play an important part in determining the closest connection between country and contract. Thus, the presumption to which it gives rise is likely to be capable of being rebutted in most cases, and as such the presumption may be worthless. Yet, if paragraph (2) has the dominance suggested by the Dutch court, the presumption becomes a rule of law to which paragraph (5) must be treated as an exception, and that is not the language of the convention.
13. In well presented and interesting submissions counsel concentrated on this problem. [Counsel] for the claimants adopted the Dutch position although he said that he did not need to go that far. He submitted that the court was required to give full effect to the presumption and to the thinking behind it. The scheme of Article 4 was to provide a simple and easily applied test. If, as was said in an obiter remark, the presumption was weak, then parties would not know where they stood and the Convention would not work as it was intended. He said that there were many cases where paragraph (5) might apply; for example, those cases where there was a link between one contract and another. Thus, he accepted as an archetype, the case where the court accepted that the rights of the beneficiary against the confirming bank were governed by the same law as his rights against the issuing bank. Or, he said, a case of a guarantee being construed as being subject to the same governing law as that which applied to the contract between debtor and creditor. For the defendant, it was submitted that the Dutch case was wrong in law, in that it added words which were not in Article 4 and that I should not follow it. He submitted that it was not necessary to adopt any extreme position in relation to Article 4. The presumption would do its work in the majority of cases, but where there was a divergence between the place of business of the principal performer and the place of performance it was right that the presumption should be displaced if the factors showed a closer connection with the place of performance. But if the factors were evenly balanced, then the place of business of the principal performer would be decisive. In that way, the presumption had some meaning, yet it was rebuttable where appropriate.
14. I must confess that I have not found this an easy case to decide. To some extent the court must recognise, I think, a natural tendency to wish to maintain the old, well developed common law position where factors were weighed and attempts were made to ascertain the true intention of the parties. Intention does not appear to exist as a factor any more, save in an Article 3 context. Although Article 18 of the Rome Convention encourages a uniform interpretation of the Convention, that is less easy to achieve than to say. The importance attached to the location of the principal performer stems from Swiss law. The provisions of Article 4 have been the subject of much criticism by academics; it is rightly pointed out that the Giuliano-Lagarde Report on the Convention (1980) (OJ C282, p. 1) (to which reference may be made) does not provide much useful guidance as to the interpretation of Article 4 although the authors accept that judges have been left with a measure of discretion or judgment. It may be that the Convention represents a compromise between different positions adopted by different countries during the negotiation of its terms.
15. It seems to me not to be helpful to characterise Article 4 by asking whether there is a one, two or three stage test. Nor am I attracted to the notion that the words of the Article should be twisted so as to accord with what is thought to be the intention of the draftsman. With an international Convention of this sort, I prefer to stay with the words and apply them as best as possible. On that basis, it seems to me that the presumption in Article 4(2) ‘shall be disregarded’ (not rebutted) if it appears from the circumstances as a whole that the contract is more closely connected with Germany rather than England. I accept that it is for the defendant to show that the presumption should be disregarded, by establishing factors which point to Germany. I accept that this will be more readily achievable where the place of performance is different from the place of the performer’s business. But, in carrying out what must be regarded as a comparative exercise, due weight must be given to the factor identified in Article 4(2).
16. Here, the defendants have established to my satisfaction that, overall, the contract between the parties has a closer connection with Germany than with England. Even recognising the Convention’s emphasis on England as the place of the performer’s business, having regard to the place of performance by both parties and the other factors referred to above, Germany has more attachment to or connection with the contract than England. Aside from any other consideration, the centre of gravity of the dispute is Germany, which will provide the more convenient forum for deciding to what extent Oasis without Noel Gallagher was worth anything, and, if so, how much.
17. Thus, in the result, I endorse the decision of Master Foster and dismiss the appeal.
This was another case on jurisdiction. Mr Bergmann was domiciled in Germany. He held the United Kingdom patent for a certain kind of waste-disposal machine. Kenburn, a British company, sold a different kind of waste-disposal machine. Bergmann thought that this latter machine infringed his patent. He wrote to one of Kenburn’s customers threatening a patent-infringement action. Kenburn responded by warning Bergmann that it would sue him under section 70 of the Patents Act 1977, a British statute that allows a person in Kenburn’s situation to obtain a declaration that the threat of a patent-infringement action is unjustifiable, an injunction against its continuance and damages for any loss suffered. Bergmann then wrote a letter to Kenburn which the latter regarded as an undertaking not to repeat the threats to any of its customers in England. As a result, the action under section 70 was not brought. Subsequently, Bergmann made further threats to a different customer. Kenburn responded by bringing an action in England for breach of the undertaking which it claimed existed.
Bergmann challenged the jurisdiction of the court. Kenburn said that the court had jurisdiction under Article 5(1) of the Brussels Convention, since the obligation in question – the obligation not to make threats – was to be performed in England. The lower court accepted this. It held that the contract not to make threats was governed by English law, though it seems that the position would have been the same under German law. Bergmann appealed.
The Court of Appeal considered whether the lower court was right in concluding that the applicable law was that of England. Since the characteristic obligation was the obligation not to make threats, the characteristic performer was Mr Bergmann. His principal place of business was in Germany. So, under the presumption, the applicable law was that of Germany. However, the characteristic obligation was to be performed in England. Moreover, the contract (assuming it existed) had been concluded to compromise a threatened action in the English courts under an English statute. The lower court considered that these facts were sufficient to rebut the presumption and establish that the closest connection was with England. The Court of Appeal agreed. So the applicable law was that of England. To hold that it was that of Germany would have meant that a contract to compromise an action to be brought in England under an English statute concerning the infringement in England of a United Kingdom patent would have been governed by German law. This would have been unjustifiable.
Examples based on the Definitely Maybe and Kenburn cases were used by the United Kingdom in the negotiations on the Rome I Regulation as part of its campaign to have the escape clause reinstated in the Regulation. It is not known whether the other Member States found these examples convincing, but these are both cases in which it is at least arguable that the escape clause should be applied under the Regulation as well.
In its first judgment on the Rome Convention, the CJEU was asked to rule on the interpretation of the escape clause. As the case was decided in October 2009, the Regulation was already in force when the CJEU considered the matter. However, the Convention applied to the case because the contract had been concluded in 1998. As was explained at the beginning of § 4.6.1, above, the structure of the Convention is different from that of the Regulation. Article 4(1) lays down the general principle that where there is no express or implied choice of law, the applicable law is that of the country with which the contract is most closely connected. Article 4(2) lays down a set of presumptions to determine which country that is, but Article 4(5) provides that those presumptions must (shall) be disregarded ‘if it appears from the circumstances as a whole that the contract is more closely connected with another country’.
Under the Regulation, there is no general principle of the closest connection but a set of specific rules, laid down in paragraphs 1 and 2 of Article 4. The escape clause, which is laid down in paragraph 3, states: ‘Where it is clear from all the circumstances of the case that the contract is manifestly more closely connected with a country other than that indicated in paragraphs 1 or 2, the law of that other country shall apply.’ The main difference between these two versions of the escape clause is that the word ‘manifestly’ is included in the Regulation.
Various matters were decided in this case. We will consider only the part of the judgment on the escape clause.
53 By its fifth question, the national court asks whether the exception in the second clause of Article 4(5) of the Convention [the escape clause] must be interpreted in such a way that the presumptions in Article 4(2) to (4) of the Convention do not apply only if it is evident from the circumstances in their totality that the connecting criteria indicated therein do not have any genuine connecting value, or whether the court must also refrain from applying them if it is clear from those circumstances that there is a stronger connection with some other country.
54 As was pointed out in the preliminary observations in paragraphs 24 to 26 of this judgment, Article 4 of the Convention, which sets out the connecting criteria applicable to contractual obligations in the absence of a choice by the parties of the law applicable to the contract, lays down, in Article 4(1), the general principle that the contract is to be governed by the law of the country with which it is most closely connected.
55 In order to ensure a high level of legal certainty in contractual relationships, Article 4(2) to (4) of the Convention provides for a set of criteria on the basis of which it is possible to presume which country the contract is most closely connected with. Those criteria operate like presumptions in the sense that the court before which a case has been brought must take them into consideration in determining the law applicable to the contract.
56 Under the first clause of Article 4(5) of the Convention, the connecting criterion of the place of residence of the party effecting the performance which is characteristic of the contract may be disregarded if that place of residence cannot be determined. Under the second clause of Article 4(5), all the ‘presumptions’ may be disregarded ‘if it appears from the circumstances as a whole that the contract is more closely connected with another country’.
57 In that regard, it is necessary to establish the function and objective of the second clause of Article 4(5) of the Convention.
58 It is apparent from the Giuliano and Lagarde report that the draftsmen of the Convention considered it essential ‘to provide for the possibility of applying a law other than those referred to in the presumptions in paragraphs 2, 3 and 4 whenever all the circumstances show the contract to be more closely connected with another country’. It is also apparent from that report that Article 4(5) of the Convention leaves the court ‘a margin of discretion as to whether a set of circumstances exists in each specific case justifying the non-application of the presumptions in paragraphs 2, 3 and 4’ and that such a provision constitutes ‘the inevitable counterpart of a general conflict rule intended to apply to almost all types of contract’.
59 It thus follows from the Giuliano and Lagarde report that the objective of Article 4(5) of the Convention is to counterbalance the set of presumptions stemming from the same article by reconciling the requirements of legal certainty, which are satisfied by Article 4(2) to (4), with the necessity of providing for a certain flexibility in determining the law which is actually most closely connected with the contract in question.
60 Since the primary objective of Article 4 of the Convention is to have applied to the contract the law of the country with which it is most closely connected, Article 4(5) must be interpreted as allowing the court before which a case has been brought to apply, in all cases, the criterion which serves to establish the existence of such connections, by disregarding the ‘presumptions’ if they do not identify the country with which the contract is most closely connected.
61 It therefore falls to be ascertained whether those presumptions may be disregarded only where they do not have any genuine connecting value or where the court finds that the contract is more closely connected with another country.
62 As is apparent from the wording and the objective of Article 4 of the Convention, the court must always determine the applicable law on the basis of those presumptions, which satisfy the general requirement of foreseeability of the law and thus of legal certainty in contractual relationships.
63 However, where it is clear from the circumstances as a whole that the contract is more closely connected with a country other than that identified on the basis of the presumptions set out in Article 4(2) to (4) of the Convention, it is for that court to refrain from applying Article 4(2) to (4).
64 In the light of those considerations, the answer to the fifth question must be that 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.
In this case the Dutch court asked the CJEU to decide between two possible interpretations of the escape clause. Under the narrow interpretation, the escape clause would apply only if it was evident from the circumstances as a whole that the connecting criteria indicated in paragraphs 2 to 4 of Article 4 had no genuine connecting value. Under the wider interpretation, on the other hand, the presumptions would also be inapplicable if it was clear from those circumstances that there was a stronger connection with another country. The second alternative is much closer to the words of the actual text; in fact, it is phrased more or less exactly in those words. This was the alternative chosen by the CJEU. Its rejection of the narrow interpretation would also apply under the Regulation, though the addition of the word ‘manifestly’ in the Regulation indicates that, in cases of doubt, the rules in paragraphs 1 and 2 must prevail.
The rules laid down in Article 4 of the Regulation do not apply to certain kinds of contracts. These are:
At this point, we will consider only the first two.49 Consumer and employment contracts are discussed in Chapter 25, § 4 (employment) and § 5 (consumers), below.
Article 5(1) is set out in Panel 23.6. It is partly based on the characteristic-performance doctrine. The carrier is the characteristic performer, so the applicable law should be that of the country of its habitual residence. However, Article 5(1) adopts this solution only if some other factor provides an additional link with that country. The possible links are: the place of receipt (of the goods); the place of delivery (of the goods); or the habitual residence of the consignor.
(22) As regards the interpretation of contracts for the carriage of goods, no change in substance is intended with respect to Article 4(4), third sentence, of the Rome Convention. Consequently, single-voyage charter parties and other contracts the main purpose of which is the carriage of goods should be treated as contracts for the carriage of goods. For the purposes of this Regulation, the term ‘consignor’ should refer to any person who enters into a contract of carriage with the carrier and the term ‘the carrier’ should refer to the party to the contract who undertakes to carry the goods, whether or not he performs the carriage himself.
1. To the extent that the law applicable to a contract for the carriage of goods has not been chosen in accordance with Article 3, the law applicable shall be the law of the country of habitual residence of the carrier, provided that the place of receipt or the place of delivery or the habitual residence of the consignor is also situated in that country. If those requirements are not met, the law of the country where the place of delivery as agreed by the parties is situated shall apply.
2. To the extent that the law applicable to a contract for the carriage of passengers has not been chosen by the parties in accordance with the second subparagraph, the law applicable shall be the law of the country where the passenger has his habitual residence, provided that either the place of departure or the place of destination is situated in that country. If these requirements are not met, the law of the country where the carrier has his habitual residence shall apply. The parties may choose as the law applicable to a contract for the carriage of passengers in accordance with Article 3 only the law of the country where:
(a) the passenger has his habitual residence; or
(b) the carrier has his habitual residence; or
(c) the carrier has his place of central administration; or
(d) the place of departure is situated; or
(e) the place of destination is situated.
3. Where it is clear from all the circumstances of the case that the contract, in the absence of a choice of law, is manifestly more closely connected with a country other than that indicated in paragraphs 1 or 2, the law of that other country shall apply.
If none of these links is present, the law of the country of the agreed place of delivery is applicable. This latter requirement leads to the law of the place of performance of the characteristic obligation.50 Additional provisions on the interpretation of Article 5(1) are to be found in Recital 22 to the Regulation (set out in Panel 23.6). Under these, single-voyage charterparties and other contracts the main purpose of which is the carriage of goods should be treated as contracts for the carriage of goods. In the Intercontainer Interfrigo case (§ 4.6.4, above), the CJEU said that charterparties other than single-voyage charterparties could constitute contracts for the carriage of goods only if the main purpose of the contract was something more than making available a means of transport (paragraphs 31–7 of the judgment). Even though this was decided under the Convention, it would also apply under the Regulation: Recital 22 to the Regulation.
Contracts for the carriage of passengers – for example, by air, road or sea – are governed by Article 5(2), set out in Panel 23.7. This is not based on the characteristic-performance doctrine (under which the law of the habitual residence of the carrier would govern), since contracts for the carriage of passengers are usually consumer contracts. (As we will see in the next chapter, the policy of the Regulation, like that of the Convention, is to give special protection to consumers on the ground that they are in an economically weak position.) For this reason, the primary rule is that the law of the passenger’s habitual residence applies. However, there must again be an additional link: either the place of departure or the place of destination must also be situated in that country. This will be so in most cases, though sea cruises may be an exception unless the flight to the port of embarkation is part of the cruise package. Where the additional link does not exist, the applicable law is that of the carrier’s habitual residence. At this point, the characteristic-performance doctrine comes into play again.
Two interesting features of this provision are, first, that there is an escape clause along the lines of that considered in § 4.6.4, above; and, secondly, that the power of the parties to choose the applicable law is limited to the law of five specified countries. This is probably done to prevent the carrier from choosing the law of a totally unconnected country simply because it would be unfavourable to the passenger.
We must now deal with a basic problem in choice-of-law theory regarding contracts: if the applicable law depends on the parties’ choice, how do you decide whether that choice is itself valid? Assume, for example, that the parties conclude a contract in circumstances in which one party would not, by any relevant legal system, be regarded as having consented. Perhaps his ‘consent’ was subject to duress or vitiated by misrepresentation. Could it not be said that the choice-of-law clause was itself invalid so that it could not determine the applicable law for the contract as a whole?
This view is rejected by the Regulation, which provides in Article 10(1) (Panel 23.8) that the existence and validity of a contract are governed by the law that would be applicable to it if it were valid. However, this could give rise to injustice since the other party might deliberately insert into the contract a choice-of-law clause in favour of the law of a country under which it was valid, even though that country had no connection to the parties or the ‘contract’, and even though, under the law of all countries connected to the parties or the ‘contract’, there was no consent. To avoid this, Article 10(2) (also Panel 23.8) allows the party in question to rely on the law of the country of his habitual residence to establish that he did not consent, if this would be reasonable in the circumstances.
The following example shows how this would work. Assume that there is one country in the world, country X, where a person is regarded as having consented to a contract if he has received an offer and does not reject it within a specified period of time. A fraudster habitually resident in England e-mails a victim habitually resident in Germany and makes him an offer. The offer contains a choice-of-law clause specifying the law of country X. It ends with the words, ‘If I have not heard from you within seven days, you will be deemed to have assented.’ The victim does not reply. Seven days later, the fraudster claims that a contract has been concluded. This would have been the case if Article 10(1) alone existed; however, thanks to Article 10(2), the victim can invoke German law to establish that there is no contract.
1. The existence and validity of a contract, or of any term of a contract, shall be determined by the law which would govern it under this Regulation if the contract or term were valid.
2. Nevertheless, a party, in order to establish that he did not consent, may rely upon the law of the country in which he has his habitual residence if it appears from the circumstances that it would not be reasonable to determine the effect of his conduct in accordance with the law specified in paragraph 1.
A similar theoretical problem exists with regard to capacity. If a party has no capacity to conclude a contract under the law that would otherwise apply, can he give himself capacity by agreeing to a choice-of-law clause in favour of the law of a country under which he would have capacity? Here, the Regulation takes a somewhat different position. It does not claim that the capacity of a party is governed by the law that would apply to the contract if it were valid. This is because Article 1(2)(a) states that the Regulation does not apply to the status and legal capacity of natural persons (human beings). The matter is, therefore, left to national law. However, Article 1(2)(a) says that it is without prejudice to Article 13. The latter (set out in Panel 23.9) contains provisions intended to restrict the right of a party to invoke his incapacity under a foreign law if this would be unfair to the other party.
In a contract concluded between persons who are in the same country, a natural person who would have capacity under the law of that country may invoke his incapacity resulting from the law of another country, only 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.
It is not entirely clear what the choice-of-law rule for capacity is under English common law,51 Possible candidates are the law of the country with which the contract is most closely connected (‘objective proper law’) or the law of the domicile of the person concerned. and it is hard to imagine a situation in which Article 13 would be applied by an English court. In some civil-law countries, capacity is governed by the law of the person’s nationality. Assume that, under the law of Ruritania (an imaginary country), no one has capacity to contract until he is 25. A Ruritanian citizen aged 24 goes to an EU Member State under the law of which contractual capacity begins at 18 and under the conflict of laws of which capacity is governed by the law of the nationality. The Ruritanian concludes a contract with a local person, who has no way of knowing that he is dealing with a Ruritanian. In these circumstances, Article 13 would prevent the Ruritanian from invoking his incapacity under Ruritanian law to avoid his obligations under the contract.
Certain other provisions should be mentioned briefly. Article 11 (Panel 23.10) has rules on the formal validity of contracts and Article 12 (also in Panel 23.10) has rules on the scope of the applicable law. Article 20 provides that renvoi is inapplicable unless provided otherwise in the Regulation.52 The words ‘unless provided otherwise in the Regulation’ are apparently a reference to Article 7(3) (second indent), a provision relating to insurance, which might be regarded as implying some form of renvoi. This reads: ‘Where … the Member States referred to grant greater freedom of choice of the law applicable to the insurance contract, the parties may take advantage of that freedom.’ Renvoi is discussed in Chapter 21, § 2.4.2, above.
1. A contract concluded between persons who, or whose agents, are in the same country at the time of its conclusion is formally valid if it satisfies the formal requirements of the law which governs it in substance under this Regulation or of the law of the country where it is concluded.
2. A contract concluded between persons who, or whose agents, are in different countries at the time of its conclusion is formally valid if it satisfies the formal requirements of the law which governs it in substance under this Regulation, or of the law of either of the countries where either of the parties or their agent is present at the time of conclusion, or of the law of the country where either of the parties had his habitual residence at that time.
3. A unilateral act intended to have legal effect relating to an existing or contemplated contract is formally valid if it satisfies the formal requirements of the law which governs or would govern the contract in substance under this 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.
4. Paragraphs 1, 2 and 3 of this Article shall not apply to contracts that fall within the scope of Article 6. The form of such contracts shall be governed by the law of the country where the consumer has his habitual residence.
5. Notwithstanding paragraphs 1 to 4, a contract the subject matter of which is a right in rem in immovable property or a tenancy of immovable property shall be subject to the requirements of form of the law of the country where the property is situated if by that law:
(a) those requirements are imposed irrespective of the country where the contract is concluded and irrespective of the law governing the contract; and
(b) those requirements cannot be derogated from by agreement.
1. The law applicable to a contract by virtue of this Regulation shall govern in particular:
(a) interpretation;
(b) performance;
(c) within the limits of the powers conferred on the court by its procedural law, the consequences of a total or partial breach of obligations, including the assessment of damages in so far as it is governed by rules of law;
(d) the various ways of extinguishing obligations, and prescription and limitation of actions;
(e) the consequences of nullity of the contract.
2. In relation to the manner of performance and the steps to be taken in the event of defective performance, regard shall be had to the law of the country in which performance takes place.
1 The English rule is that, where the parties communicate by instantaneous (or near-instantaneous) means of communication (for example, telephone, fax or e-mail), the contract is made where the offeror receives the acceptance (England, in the example). Where, on the other hand, it is by non-instantaneous means of communication (for example, by post), it is where the letter of acceptance is mailed. In the example, this would be Germany. See Entores v. Miles Far Eastern Corporation [1955] 2 QB 327 (CA).
2 For some earlier cases which might be regarded as taking the first hesitant steps in this direction, see Gienar v. Meyer (1796) 2 Hy Bl 603 (126 ER 728), a case mainly on choice of court, and Robinson v. Bland (1760) Black W 257 at p. 259 (96 ER 141 at pp. 141–2).
3 [1939] AC 277 (PC).
4 Nova Scotia is a province of Canada. At that time, the Privy Council (which sits in London) heard appeals from Canada. Most of the members of the Privy Council in its judicial capacity were Law Lords (judges from the House of Lords in its judicial capacity), though sometimes senior Commonwealth judges also sat. Appeals to the Privy Council from Canada have now been abolished. Today, the Supreme Court of Canada is the highest court in Canada.
5 [1954] P 150 (CA).
6 At p. 180.
7 At pp. 185–6.
8 [1972] 2 QB 34 (CA). For an earlier case, see Bonython v. Commonwealth of Australia [1951] AC 201 at p. 219 (PC).
9 At p. 44.
10 At p. 46.
11 At p. 50.
12 [1984] AC 50 (HL).
13 [1970] AC 583 (HL).
14 Lord Reid and Lord Wilberforce.
15 Viscount Dilhorne and Lord Hodson. The contract was based on a form, drafted in terms of English law, recommended by the Royal Institute of British Architects. It was adopted because the architect was English.
16 Viscount Dilhorne.
17 Regulation 593/2008. The common law may still apply in some of the special cases in which the Rome I Regulation does not apply: see Article 1.
18 Some American lawyers think that the parties should not have a completely free choice of the applicable law: see Uniform Commercial Code, section 1–105(1) (the parties may choose the law of a state only if the transaction ‘bears a reasonable relation’ to that state), but see the New York General Obligations Law, Title 14, § 5–1401, in which this restriction is rejected in most cases; see also the American Law Institute, Restatement of the Law Second: Conflict of Laws, § 187(1); cf. ibid Regulation 593/2008. The common law may still apply in some of the special cases in which the Rome I Regulation does not apply: see Article 1.., § 187(2). As regards the applicable law in the absence of a choice, the Restatement lists the contacts to be taken into account: see § 188.
19 The Convention on the Law Applicable to Contractual Obligations 1980.
20 Article 24 of the Regulation.
21 Giuliano and Lagarde, ‘Report on the Convention on the Law Applicable to Contractual Obligations’, OJ 1980 L 282.
22 Regulation 593/2008, OJ 2008 L 177, p. 6.
23 It was published in the Official Journal of the European Union dated 4 July 2008.
24 Article 28. This Article originally said that it applied to contracts concluded ‘after’ 17 December 2009, but a corrigendum changed this to ‘as from’ 17 December 2009: OJ 2009 L 309, p. 87.
25 Law Applicable to Contractual Obligations (England and Wales and Northern Ireland) Regulations SI 2009 No. 3064. The only exception is Article 7 of Rome I, which concerns insurance contracts. This does not apply as between the different parts of the United Kingdom.
26 For exceptions, see Article 5(2) (carriage of passengers), discussed in § 4.6.7, below, and Article 7(3) (insurance).
27 Recital 13 in the Preamble.
28 The law applied under a choice-of-law clause is that law as it exists from time to time. Relevant changes after the contract is made are applied unless the applicable law itself provides otherwise. Where, on the other hand, a set of rules is incorporated by reference, subsequent changes are not taken into account – except perhaps where the contract expressly so provides.
29 Under the English text of the Convention, it had to be ‘demonstrated with reasonable certainty by the terms of the contract or the circumstances of the case’. In the French text, the word ‘reasonable’ was omitted: ‘Ce choix droit être exprès ou demonstré de façon certaine des dispositions du contrat ou des circonstances de la cause.’ It seems that this discrepancy was deliberate: the negotiators agreed on the two texts as part of the compromise that brought a successful conclusion to the negotiations.
30 Paragraph 3, p. 17.
31 This is a ground of jurisdiction under the traditional English rules: see Chapter 6, § 4.2.3, above.
32 On the doctrine of forum non conveniens, see Chapter 9, § 2.1, above.
33 Page 17, paragraph 3.
34 This presumption did not apply to contracts the subject-matter of which was a right in immovable property or a right to use immovable property (Article 4(3)); contracts for the carriage of goods (Article 4(4)); certain consumer contracts (Article 5); or individual contracts of employment (Article 6).
35 Sub-paragraphs (a), (b), (e) and (f). The concept of ‘sale of goods’ in sub-paragraph (a) and ‘provision of services’ in sub-paragraph (b) are to have the same meaning as in Article 5(1)(b) of the Brussels I Regulation: see Recital 17 in the Preamble to the Rome I Regulation.
36 According to Recital 19 in the Preamble to the Regulation, in the case of a contract consisting of a bundle of rights and obligations capable of being categorized as falling within more than one of the specified types of contract, the characteristic performance of the contract should be determined having regard to its centre of gravity.
37 The phrase ‘escape clause’ is used in Recital 20 in the Preamble to the Regulation.
38 Such escape clauses are to be found in other provisions of the Regulation: see Articles 5(3), 7(2) (last sentence) and 8(4). In the last of these, the word ‘manifestly’ does not appear.
39 The word ‘manifestly’ does not apply here.
40 For the difference between these two concepts, see Chapter 3, § 6.4, above.
41 See ibid For the difference between these two concepts, see Chapter 3, § 6.4, above..
42 See also Recital 21.
43 Under Order 11, Rule 1(1)(d)(iii), of the Rules of the Supreme Court, this gave the English courts jurisdiction in cases not governed by the Brussels Convention. See now Rule 6.18(5)(c) of the Civil Procedure Rules.
44 Paragraph 27 of the judgment.
45 There is no equivalent provision in Article 5 of Rome I.
46 Paragraphs 28–32 of the judgment.
47 If it was to be regarded as a contract for the carriage of goods, Haeger & Schmidt’s principal place of business (Germany) would be decisive only if one of the other specified connecting factors pointed to Germany. However, none of them did. So Article 4(4) would provide no answer. In such a case, ruled the CJEU, one must simply go back to Article 4(1) and apply the test of the closest connection without any presumptions. The characteristic performance test in Article 4(2) cannot be applied.
48 Under Brussels 2012, the position would have been different: Article 7(1)(b) provides that, in the case of a contract for the provision of services, the courts having jurisdiction are those for the place where, under the contract, the services were provided or should have been provided. This would have been Germany. The German courts would thus have had jurisdiction under Article 7(1)(b), even if the action was for payment and the payment was to be made in a different country.
49 Consumer and employment contracts are discussed in Chapter 25, § 4 (employment) and § 5 (consumers), below.
50 Additional provisions on the interpretation of Article 5(1) are to be found in Recital 22 to the Regulation (set out in Panel 23.6). Under these, single-voyage charterparties and other contracts the main purpose of which is the carriage of goods should be treated as contracts for the carriage of goods. In the Intercontainer Interfrigo case (§ 4.6.4, above), the CJEU said that charterparties other than single-voyage charterparties could constitute contracts for the carriage of goods only if the main purpose of the contract was something more than making available a means of transport (paragraphs 31–7 of the judgment). Even though this was decided under the Convention, it would also apply under the Regulation: Recital 22 to the Regulation.
51 Possible candidates are the law of the country with which the contract is most closely connected (‘objective proper law’) or the law of the domicile of the person concerned.
52 The words ‘unless provided otherwise in the Regulation’ are apparently a reference to Article 7(3) (second indent), a provision relating to insurance, which might be regarded as implying some form of renvoi. This reads: ‘Where … the Member States referred to grant greater freedom of choice of the law applicable to the insurance contract, the parties may take advantage of that freedom.’