Choice of Law in Contract

The choice of law in contract has emerged from three main factors the first factor is the place where contract is made, the performance of the contract and the nationality or the place where contract is made. The issue of choice of law in contract becomes more pertinent when there are number of connecting factors involved in the contract. This issue is very common in all countries and almost all countries have tried various methods to solve it out. The English law has applied “the proper law of contract” which is almost sufficient to ascertain the factor which covers the contract. The doctrine of proper law is of common law origin the main feature of this theory is that the parties to contract can chose it with very little restrictions and if there is no expression of choice and the choice cannot be inferred by court than the problem can be solved by looking for the system of law with which the transaction is closely related. In these cases proper law is relevant but the court can go beyond the proper law while taking in to considerations various other issues such as illegality in this scenario the court will not only concerned with illegality of proper law but also with the act of illegality at the place of action.

The above mentioned three factors laid the foundation on which the common law laid the structure. In common law the choice of contract has emerged from Rome convention and Rome One regulation. This assignment will explain certain features of Rome convention and Rome One Regulation and in the end of assignment critical evaluation will be given to explain why this convention and regulation has failed to lived up to expectation.

THE COMMON LAW AND CHOICE OF LAW IN CONTRACT

a contract may have a different meaning in English conflict of laws compare to its meaning in domestic law. When a contract is materialized due to common law than this contract is know as proper law of contract, Lord Diplock has defined proper law as that law through which the rights of parties can be judged and both the parties have chosen that law [1]. As explained above there are number of factors through which are consider hallmark of the proper law of the contract but the two most important factors are, the law of place where contract was concluded and the law of the area where action of contract was done.

Both these factors are not absolute as both have certain limitations. One such limitation of the contracts on which law of a place applies may have no saying or affect in a scenario when a Arab business man who is from Saudi Arabia and a Turkish business man agree a deal in London to the sale of Goods located in Italy. In this case the English law has no real or close link but it will be proper law of contract.

The law of the place for performance of the contract was due may be not be appropriate for two reasons, the first one is that parties respective obligations may take place in different countries e.g. the seller agrees to deliver goods in Germany in exchange for the buyers promise to pay the price in New York . it would be illogical for the parties to have their respective obligations governed by different laws secondly at the time of the formation of the contract the place of the formation of contract may not be have been determined than in this case it will be determined unilaterally, e.g. a port for the delivery may not be known until or unless that vessel is at sea.

Keeping in view the above points it can be ascertained that there is no connecting factor that can be used in English Law as Lord Wright has said English law has refused while determining connecting factors to treat Lex loci contracts and lex loci solutionis as rigid or arbitrary standard and has treated the matter on the intention of the parties to be ascertained in each case on the consideration of the terms of the contract, the situation of the parties and generally all surrounding facts [2]

THE PRINCIPLE OF PARTY AUTONOMY

A very important feature in English law for determining proper law of contract was the principle of party autonomy as Lord Atkin has said it is the law which the parties want it to be applicable [3] and this approach shows the old consensus ad idem approach to concluding a contract i.e. subject twist approach.

In the absence of the choice of proper law of contract the determination is made through court to judge what that intention is or to determine for the parties the proper law which is reasonable for both the parties and the parties would have taken if they had though about it while making a contract [4] . While Mr. Donaldson thinks that there are no limitations on the number of the factors unless they have some effect on the transaction [5] and the factors which help the courts to determine proper law of the contract are those which have the transaction has very close connection [6]

THE CHOICE OF LAW IN CONTRACT UNDER ROME CONVENTION

In 167 there was a proposal from Benelux countries to the commission of European communities for the unification of Private International Law particularly in the field of law of contract and this proposal culminated in the unification of all the rules of private international laws and this uniformity of the rules applicable to the contractual obligations was achieved via giving the force of law to the 1980 Rome Convention on the law applicable to contractual obligations which was incorporated into English Law with the contracts Acts 1990.

THE PURPOSE OF CONVENTION

According the preamble of the convention the main purpose is to establish uniform choice of law rules for contractual obligation throughout the community [7] . The convention is also concerned with creating with right conditions for an internal market with the free movements of goods, persons, services and capital among the member states. More specifically as the law will be same wherever the trial takes place it inhibits the forum shopping that the Brussels convention allows and it is also believed that the convention will increase legal certainty and make it easier to anticipate more easily the laws to be applied

SCOPE OF THE CONVENTION

The scope of this convention is very broad it applies to any contractual obligation in any situation involving a choice between different laws of different countries this means that it not only applies to contract having close relation with the contracting states of EC but also to states which have no connection with any European community contracting state but it is necessary it must be litigated in a court of contracting state. The second significant point of this convention it that any law that is specified by the convention is to be applied whether it is a law of contracting state or not [8]

There are two main points which need explanation relating to article 1 of the convention and this explanation must be addressed. The first point is that what legal system determines whether there is a contractual relationship? And how it is interpreted by the country

WHAT LEGAL SYSTEM DETERMINES WHETHER THERE IS CONTRACTUAL RELATIONSHIP

This problem arises or becomes pertinent when one state may regard the matter as contractual obligation where as the other state may doesn’t regard the matter as contractual obligation. For example the article 8 of convention provides that the validity of the contract shall be determined by the law which would govern it under this convention if the contract is valid and the convention can also analyze whether the matter is a contractual relationship or not. According to Forsyth it will be illogical to apply this principle while determining the contractual obligation

HOW IT IS INTERPRETED BY COUNTRY?

According to article 19 Scotland and England are two different territorial units but it also states that those states which are different territorial units are not bound to apply this convention to conflicts solely between the laws of such units. [9] Thus UK had the choice to apply this convention in cases of conflicts between the different part of its units and that choice is given in section 2 of contracts Applicable law Act 1990

MATTERS TO WHICH CONVENTION DOES NOT APPLY

The convention does not apply to number of matters which are specified in Article 1(2) and in article 3. These articles include the capacity and status of natural and legal persons. Contractual obligations relating to wills and succession, rights in property arising out of matrimonial relationship, rights and duties arising out of family relationship, obligations arising under most aspects of negotiable instruments, arbitration agreements and arguments on the choice of courts, questions governed on the choice of courts, questions governed by company law, trust, agency, evidence and procedure and insurance risks situated within in the EC.

DETERMINATION OF THE CHOICE OF LAW VIA PRINCIPLE OF PARTY AUTONOMY (ART 3) ROME CONVENTION

According to article three of the Rome convention the parties to the contract shall be governed by the law chosen by the parties and this choice should be clearly explained in the terms of contract or in the circumstances of the case. Through this article the parties can chose the law applicable to the whole contract or to any other part of the contract [10] . The Rome convention respects the principle of party autonomy in the same manner in which the parties to a contract can choose the proper law at common law [11] . But a problem can arise in a situation where choice of law has been shown with reasonable certainty in this case help can be taken from article 18 of the convention as it narrates consideration should be given to the international character and to the desirability of achieving uniformity in their interpretation and application.

To determine whether the choice of law is valid or not the consent of the parties as to the choice of the applicable law shall be determined in accordance with the provisions of article 8, 9 and 11. The article 8 of the convention refers to the existence and material validity, article 9 refers to the formal validity and article 11 explains incapacity

Article 3(2) is a total contrast to the common law status which provides the parties at any time can change the law which governs there contract previously and this applies irrespective of the fact whether that law was expressly chosen or demonstrated with reasonable certainty or it is determined with other provisions of this convention. However any change by the parties of the law to be applied made after the conclusion of the contract shall not prejudice its formal validity

ROME ONE REGULATION

According to the Rome regulation the choice of the law is to be determined by party autonomy and the choice of law should be clearly explained without any ambiguity

THE APPLICABLE LAW OF CONTRACT IN THE ABSENCE OF THE CHOSEN LAW.

In the absence of the expressed or an implied choice of the law the article 4(1) of the regulation provides that the contract shall be governed by that law of contract with whom the contract is closely related [12] and at common law this close relationship refers to the country with which the contract is closely connected and not the legal system with which the common law provision is associated [13] . There is also a presumption in Rome convention provisions to determine the closest connection. The relevant provision which deals with this presumption is article 4(2) which explains that the contract is closely connected with the country where the party at the time of conclusion of contract resides or he is habitual resident of that specific country and this presumption has turned the clock back as far as English law is concerned [14] . The article 4 of the convention further explains that if the contract is made in the course of party’s trade or profession than in this case the country of closest connection shall be the country in which the principal place of business is situated or where under the terms of the contract the performance is to be effected through a place of transaction other than the main place of business

THE DOCTRINE OF CHARACTERISTIC PERFORMANCE

This doctrine is borrowed from Swiss law as all of know Switzerland is not a part of EU so this is consider as an innovative step. In the case of a contract for a supply of goods or services not the payment of money for them which is the contraistic performance. The presumption of a contract having its characteristic performance most closely connected with the a particular country will not apply however if characteristic performance cannot be determined if it appears from the circumstances as a whole that the contract is more closely connected with another country

LIMITATIONS ON PARTY AUTONOMY

The Rome convention has certain provisions which limits the party autonomy and more specifically these provisions are article 5 and 6 which relate to consumer contracts and individual contracts of the employment and these provisions have the effect of either limiting the ambit of general choice of law provisions or excluding the provisions and this limitation was not the part of the preexisting English Conflict of laws rules.

ARTICLE 5 CONSUMER CONTRACTS

According to article 5 of the Rome convention consumer contract is that type of contract whose main aim is to provide goods or services to a person for a purpose which can be regarded as being outside his trade or profession or a contract for the provision of credit for that object.

And where a consumer contract exists the article 5 provides that a choice of law by the parties shall not have the result of depriving the consumer of the protection afforded to him by the mandatory rules of law of the country in which he has his habitual residence and one must not forget that this type of protection is only given to the consumer only.

INDIVIDUAL CONTRACTS OF EMPLOYMENT

According to Rome regulation a employee shall not be deprived of the protection of mandatory rules of the otherwise applicable legal system and according to article 6(2) of convention that this otherwise applicable legal system is the law of the country in which the employee habitually carries out his work in the performance of the contract and if the party does not habitually work in nay country than the contract will be determined in which place of business through which he was engaged is situated where as in common law protection has been given to the employee who works in Great Britain irrespective of choice of law [15] .