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Choice Of Law In Contract Notes

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CHOICE OF LAW: CONTRACT
Rome I Regulation: Scope
**PQs will be RIR cases (assume contracts entered into now). But there isn't much case law on this, so lots of cases will be from Rome Convention (which have many similar provisions).

1. Material scope: Civil and commercial matters: Art.1(1): 'in situations involving a conflict of laws, to contractual obligations in civil and commercial matters'
a. Apply BIRR case law definition of 'civil and commercial matters'
b. 'Contractual obligations': RIR does not indicate what this means; a broad European approach must be taken, i.e. an autonomous meaning (Re Bonacina).
 Includes gifts and promises to give (GL Report1).
 Consider Art.5(1) BIRR: the meaning of 'contractual' is likely to be interpreted consistently with the case law on Art.5(1) (Art.7(1)) BIRR.
c. Exclusions (Arts.1(1)-(3)): RIR does not apply to:
i. Revenue, customs or administrative matters (Art.1(1))
ii. Questions involving the status or legal capacity of natural persons (subject to Art.13)
iii. Obligations arising out of family relationships (Art.1(2)(b))
iv. Obligations arising out of matrimonial property regimes (Art.1(2)(c))
v. Obligations arising under bills of exchanges, cheques, and promissory notes (Art.1(2)(d))
vi. **Arbitration agreements and agreements on choice of court (Art.1(2)(e))—probably the most important exclusion in practice vii. Questions governed by the law of companies and other bodies corporate or unincorporated (Art.1(2)
(f))
viii. In relation to contracts of agency, the question whether an agent is able to bind a principal to a third party (Art.1(2)(g))
ix. Constitution of trusts & relationship between settlors, trustees and beneficiaries (Art.1(2)(h))
x. **Obligations arising out of dealings prior to the conclusion of a contract (Art.1(2)(i))
xi. Questions of evidence and procedure without prejudice to Art.18 (Art.1(3); always governed by lex fori).
d. Exclusion of arbitration and jurisdiction agreements (Art.1(2)(e)): i.e. if parties agree to a contract,
and a separate arbitration (or jurisdiction) agreement. The law of the underlying agreement may be governed by RIR, but the law governing the arbitration agreement would be governed by national law.
 At common law, there is a strong presumption that the law governing the arbitration/jurisdiction agreement is the same as the law governing the underlying contract.
For arbitration, Lugano Convention covers it. For jurisdiction agreement in favour of MS, Art.25
BIRR covers.
 Procedural/substantive: Fentiman: While EJAs form a separate contract, these are of a separate kind because it is a procedural question that is more appropraite to be dealt with outside the RIR,
which looks more at issues of substantive law.
e. Exclusion of obligations relating to dealings prior to conclusion of contract (Art.1(2)(i)): these are covered by Rome II Regulation (the equivalent for non-contractual obligations).

2. Whether or not law of a MS: Art.2 provides that the law specified by RIR shall apply whether or not it is the law of a MS. Indeed the RIR applies regardless of the territorial connections of the parties and whether or not the contract or dispute has any connection with a Member State.
a. Applies to England/Scotland: As a matter of UK law, the RIR will also be applied between England and
Scotland.

1 The Rome Convention was accompanied by the Guiliano-Lagarde Report, written by members of the working group who were responsible for drafting the Convention. s.3(3)(a) Contracts (Applicable Law) Act 1990 implementing the Convention(—cf. RIR
which is directly applicable as a Community instrument—)expressly permits the English courts to consider the Report in ascertaining the meaning and effect of any provision in the Rome Convention. The provisions of this Report may still provide useful guidance to those provisions in the Regulation that are based on similar provisions in the Convention.

1 Express and implied choice of law under RIR

1. 3 steps to bear in mind:
a. Express choice of law (Art.3)
b. Implied choice of law (Art.3)
c. Closest connection (Art.4)

2. Express choice of law (Art.3)
a. Art.3: '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 circumstnaces of the case.'
Justifying principle is party autonomy. See Recital (11): 'The parties' freedom to choose the applicable law should be one of the cornerstones of the system of conflict-of-law rules in matters of contractual obligations.'
b. Clearest case is express choice of law provision: where parties have included provision e.g. 'this contract shall be governed by English law'; or 'any dispute arising out of this contract shall be denied according to English law'
c. Incorporation of choice of law clause: whether a clause has or has not been incorporated into the contract.
i. Might be governed by the putative law, i.e. the law which would govern if the contract or term were valid.
Problems: (1) pulling yourself up by your bootstraps; (2) complicated. So now courts seem to be applying a common-sense approach.
ii. But English law has adopted a more common sense approach with English law as the fallback position, e.g. in Lincoln National Life Insurance, if 'putative law' rules applied, Kansas law would have been the governing law instead. Cf. In Kingspan, Clarke J applied Danish law to decide whether the Danish choice of law clause had been incorporated.
 Where no putative law can be identified, English law is the default position as the lex fori:
The Lincoln.
iii. English law: Where English law is applied, normal contractual principles of offer and counteroffer will apply:

1. E.g. Lincoln National Life Insurance v Employers Reinsurance
 FACTS: Reinsurance contract. Broker got evidence that in his experience, contracts were always written on the basis of Kansas law. Contract was then sent to underwriter but they never sent it back. Question was, had there been any express choice of law?
 HELD: Trite law that silence cannot amount to acceptance.

2. Parties claim different express choice of law provisions? Iran Continental Shelf v IRI
(each party had provided contractual deocumentation including an express choice of law provision; D had provided for the law of Texas and C for law of Iran; in the circumstances, it could not be said that the parties had made an express choice in favour of either Iranian or Texan law; at no point did either party unequivocally accept the other party's terms. Therefore, Clarke LJ held that the question reverted to the law with the closest connection.)
iv. Express choice by reference: an express choice can also be made by reference to some external factor, e.g. the place of business of one of the parties or the flag of a ship, e.g. Companie
Tunisienne v Companie d'Armement.
 FACTS: Contract for carriage of a number of consignments of oil. Charterparties said choice of law is the flag of the vessel. But the vessel carried a number of different flags.
 HELD: There was strong evidence that their intention was to use French flagged vessels,
therefore French vessel. Therefore allowed incorporation via reference to evidence of underlying intention of the parties.
v. General words of incorporation will not incorporate a choice of law without something more
(Dornoch). References to another contract must be specific enough to incorporate a choice of law clase (Chase v Ram, where Timothy Walker J said that although there was a good arguable case that the choice of law clause had been incorporated, that was far from a foregone conclusion.)

3. Implied choice of law, clearly demonstrated (Art.3)
a. Art.3: '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 circumstnaces of the case.'
Cf. wording of Art.3 Rome Convention, which gave effect to implied choice where the choice is
'expressed or demonstrated with reasonable certainty by the terms of the contract or the circumstances 2 of the case'. This change emphasises the need to 'ascertain the true tacit will of the parties rather than a purely hypothetical will' (Green Paper) but cf the Toulson LJ in Lawlor v Sandvik Mining (2013)
particularly at [3] declined to find that the change was intended to have any substantive effect but was simply intended to bring the English and German text into line with the French text: it opined that whilst 'clearly demonstrated' sounds stricter than 'demonstrated with reasonable certainty', the difference is not substantive.
b. Test: The court is not imputing a choice to the parties; rather, it is acknowledging that the parties 'have made a real choice of law, although this is not expressly stated in the contract' (GL Report).
i. Objective test: it is not enough that if a choice had been made the parties woudl have chosen, for example, English law, nor is evidence of unspoken thoughts admissible. This has to be a choice the parties actually made (Lawlor v Sandvik Mining CA).
ii. Both contract + circumstances (despite use of the word 'or'): The courts must take both terms of contract & circumstances of the case into account. This is clear from the examples of implied choice given in GL Report, and the decision of Aikens J confirming this construction in
Marubeni Hong Kong v Mongolian Government.
iii. 'clearly demonstrated': might be substantively the same as 'demonstrated with reasonable certainty' in Art.3 Rome Convention (Toulson LJ, Lawlor v Sandvik); however, from the Green
Paper—emphasising the need to 'ascertain the true tacit will of the parties rather than a purely hypothetical will'—it seems the test is at least a shade stricter.
iv. Examples from GL Report of situations of implied choice of law (not a closed list, but start by looking for these):

1. Standard form contracts a. SF contract governed by a particular law: Where a contract is in a standard form which is known to be governed by a particular system of law, the parties may have intended the contract to be governed by that law, even though there is no express statement to this effect. E.g. Lloyd's policy of marine insurance.
 Accords with some common law cases where use of standard English form of insurance has been held to be grounds for inferring intention that English law should govern, e.g. Amin Rasheed v Kuwait Insurance (marine insurance policy issued by Kuwait insurance company to Liberian company carrying out business in the Gulf, had nothing to do with England but contract was based on Lloyds insurance policy; showed intention that it was intended it should be governed by English insurance law.)
 Accords with some Rome Convention caseswhere similar considerations have led to the implication of a choice of law under Art.3 in insurance &
reinsurance cases, e.g. Gan Insurance v Tai Ping; Tiernan v The Magen;
see also Gard Marine v Tunnicliffe.
b. References to specific terms of a national law: References in a contract to, e.g.
specific articles of the French Civil Code, leave the court in no doubt that the parties have deliberately chosen French law. But note that parties may simply have intended to incorporate that particular legal provision into the contract. E.g.
DR Insurance v Central National:
 FACTS: Contract referred to s.315 New York insurance law. Question was:
is that evidence of an intention of choice of NY law more generally to govern the contract (e.g. NY law on frustration, construction, etc.)? Or, was it just an intention to incorporate that particular provision as a term of the contract?
 HELD: It was in fact simply a provision incorporating that particular term.
(Perhaps we would assume the parties intended that the term would not change even if the law where the term was taken were to change.)
c. Delivery term not enough: The fact that a sale contract provided for delivery
'CIF UK' was not enough for an implied choice of English law since such an expression could be found in a contract governed by different laws, used universally in internatinoal maritime trade: Lupofresh v Sapporor.

2. Jurisdiction and arbitration clauses—most important a. Choice of jurisdiction ≠ choice of law: A choice of jurisdiction is not the same as a choice of law; e.g. in Companie Tunisienne the HL held that the contract was expressly chosen to be governed by French law, despite the presence of an 3 arbitration clause providing for London arbitration. See also XL Insurance v
Owens Corning.
b. But choice of forum is strong indicator: However, at common law, one of the strongest indications of an implied choice of law is a choice of forum clause.
Assuming the parties have not provided otherwise, the courts at common law readily assume that the parties must have had in mind that the chosen court would apply its own law: see The Kominos S; Companie Tunisienne; XL Insurance.
c. Probably also applies to RIR cases: Although the wording of Art.3 Rome
Convention differs from the common law test, the GL Report confirms that in some cases the choice of particular forum may show, in no uncertain manner, that the parties intend the contract to be governed by the law of that forum, albeit that this must always be subject to the other terms of the contract and circumstances of the case.
 Also arbitration: GL Report also refers to the possibility that the choice of a place where disputes are to be settled by arbitration may also indicate that the arbitrator should apply the law of that place.
 Confirmed similarly of Rome Convention to common law in this regard in Egon v Liberia Corp.
 Probably also for RIR: Recital (12) RIR: '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.'
d. Factors affecting strength of inference:
i. Inference stronger where England had been chosen as a 'neutral' forum.
ii. Inference may be less strong where the forum chosen is the jurisdiction of one of the parties, or where England is chosen as the place to hear the dispute for a different reason e.g. availability of witnesses.
iii. In arbitration cases, inference will be stronger where, not just the place of arbitration is chosen, but where there is also provision for an English arbitrator or someone familiar with English law or practice, or where the parties also provide for arbitration in accordance with the English
Arbitration Acts. The presumption will be weaker if the clause applies only to a narrow category of disputes, see Hirst QC in Travellers
Casualty v Sun Life Assurance.

3. Course of dealing between the parties: 2 situations referred to in GL Report:
a. 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 CoL clause has been omitted in circumstance swhich do not indicate a deliberate change of policy by the parties: Marubeni Hong Kong.
b. Express choice of law in related actions between the same parties may impel the court to the conclusion that a real choice of law has been made; e.g. Star
Reefers v JFC. See also Aquavita v Ashapura (guarantees):
 FACTS: An express choice of English law in the underlying contract. All the parties were in the negotiation.
 HELD: In these circumstances it could be said there was an implied choice of English law in the underlying guarantee contract. (1) There was an express choice in the underlying contract + (2) All the parties knew that because they were all in negotiations for the contract.

4. Other factors not considered in GL Report: may not be of much weight in a modern context (as suggested in Compagnie Tunisienne); scrutinise the reason behind the factors, determine if they demonstrate a real choice by the parties (Lawlor v
Sandvik), e.g. the use of English in a contract may not indicate much about choice of law,
but the use of a more obscure language might. The status of these factors is not discussed in GL Report.
a. English case law includes inferences from e.g.
4 i. currency (R v International Trustees, court inferred choice of NY law from the fact that payment was to be made in USD)
ii. place of payment iii. language used (Chatenay v Brazilian Submarine (old case), much less relevant now Compagnie Tunisienne)
iv. from the supposed intention of the parties to create or include a valid contract or term (presumption in favour of validity): Islamic Arab v
Saudi Egyptian: on the facts, the possibility of having Sharia law govern would render the insurance contract invalid; since the inference is that parties intended a valid contract, English law should govern.
b. Maybe can consider events after the contract, but limited: Allowed in
Lupofresh v Sapporor, but the fact that the parties envisaged proceedings might take place in England was not enough; nor was the fact that the parties shook hands (rather than bowed) enough for a finding that the contract was governed by
English rather than Japanese law.
c. Relationship with implied terms in English contract law: English courts (in cases decided under Rome
Convention) have differed as to the width of the Art.3 approach; in particular, whether it differs from the normal test for implication of contractual terms (cf. Lawlor v Sandvik).
i. ISS Machinery v Aeolian: Potter LJ inclined to the view that the test was wider than English law's approach to implied terms: 'the circumstances which may be taken into account when deciding whether or not the parties have made an implied choice of law under Art.3 of the Rome
Convention range more widely in certain respects than the considerations ordinarily applicable to the implications of a term into a written agreement, in particular, by reason of the reference in
Art.3 to the circumstances of the case.'
ii. Cf. AMICO v Cellstar: Mance LJ said that in his view there was considerable similary between the test for the implication of a term and the approach of Art.3(1): 'Art.3(1) does…bring to mind the test governing the implication of an implied term at common law, on the grounds that it must have been intended or was so obvious that it went without saying and was one to which the parties would have said "of course" if anyone had suggested it. The mere fact that it would be
"reasonable" would not suffice.'

4. Restrictions on parties' choice: impossible choices a. Must be choice of the law of a given municipal system, rather than, e.g. a code, the lex mercatoria, or religious law (see Shamil Bank v Beximco (cannot use Sharia religious law); Halpern v Halpern (cannot use Jewish religious law)).
 Recitals (13) & (14) RIR are not binding (see box below): Whilst a term had been proposed which would have allowed non-State bodies of law and international conventions, no such term was included in the final version.
Under an earlier draft of the RIR there was a proposal that the parties should be able to choose as the applicable law the principles & rules of the substantive law of contract recognised internationally or in the Community. This amendment introduced 'to further boost the impact of the parties' will' would have authorised the parties to choose the applicable law a non-State body of law including the
UNDROIT principles, the Principles of European Contract Law, but excludes the lex mercatoria.
 However, there was no such provision included in the final version of RIR, which therefore still requires choice of a municipal system of law.
 BUT Recital (13): 'This Regulation does not preclude parties from incorporating by reference into their contract a non-State body of law or international convention.'
 ALSO Recital (14): 'Should the Community adopt, in an appropriate legal instrument, rules of substantive contract law, including standard terms and conditions, such instrument may provide that the parties may choose to apply those rules.'
b. 'Floating' choice of law clauses: i.e. a proper law chosen at a time later than the commencement of the contract; e.g. by providing that one party has the option to determine the applicable law in future by selecting the applicable law from a list of alternatives.
i. Not allowed at common law: The applicable law must exist and be identifitable at the time when the contract is made. It was said to follow that it is not possible to specify a 'floating' applicable law: The Star Texas.
 FACTS: Charter contract contained arbitration clause saying that any dispute arising under the contract must be raised in arbitration proceedings in Beijing or London on their choice. It 5 was argued that this constituted a floating clause because once D did choose to arbitrate in
London, then that's a choice of English law; if Beijing, then Chinese law.
 HELD: It did not in fact constitute a floating clause: it was not a choice of law clause at all;
but if it had been a floating clause, it would have been unacceptable (because a contract cannot exist in a vacuum).
Canada: In Imperial Life Assurance v Colmenares, the Supreme Court of Canada also took the view that a contract cannot have a proper law that shifts from time to time.
ii. **BUT if specifies 'default' governing law, then valid: Mauritius v Hestia: The only problem would be if a clause required there to be no governing law unless you choose a certain applicable law. If the contract of sale stated 'I agree to sell you x and the seller can choose applicable law later', the contract does not exist in a vacuum: there is still the default rule operating from the beginning, and as and when the seller chooses an applicable law, the applicable law changes; so the question is simply whether the seller can make that change or not.
 Only invalid if states there there is no governing law unless D chooses.
 Art.3(2) RIR allows parties to vary their choice of law by agreement after all.
c. Dépeçage: refers to the fact that the parties may choose different laws to apply to different parts of a contract.
i. Art.3 RIR expressly provides that 'by their choice the parties can select the law applicable to the whole or a part only of the contract'.
ii. Must be logically consistent: The choice must be logically consistent i.e. it must relate to elements in the contract which can be governed by different laws without giving rise to contradictions.
 E.g. GL Report Commentary: compare an 'index-linking clause', which may be made subject to a different law, with the law governing repudiation of the contract for nonperformance which could not be subject to two different laws, one for the vendor and one for the purchaser.
iii. Contract cannot be governed in entirety by two different laws: Shamil v Beximco, where it was held that a contract could not be governed both by English law and Shari'ah law.
d. Variation of choice: Art.3(2) RIR: '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 in 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 Art.11 or adversely affect the rights of third parties.'

5. Closest connection (Art.4)—applicable law in the absence of choice: To the extent that the applicable law has not been chosen in accordance with Art.3, the court must look to Art.4 which aims to determine the law of the country with which the contract is most closely connected.
a. Rebuttable presumptions: Contains a series of presumptions intended to identify this law; they are not conclusive but can be displaced or disregarded if 'it appears from the circumstances of the case that the contract is manifestly more closely connected with another country'.
b. Under Rome Convention, general characteristic performance test: (1) Identify the performance which is characteristic of the contract; (2) Identify the party who is to effect that performance (i.e. the characteristic performer); (3) Find the relevant territorial connection for that party.
i. Identify characteristic performance & performer: more complex agreements involving multiple obligations (e.g. franchise or distribution contracts) can be more difficult to categorise,
e.g. Print Concept v GEW CA:
 FACTS: Under an exclusive distribution agreement, a German company undertook to distribute in Germany, Austria & switzerland air-cooled drying systems manufactured and supplied by the D English company.
 HELD: The 'real meat' of the contract and therefore the characteristic performance was the supply of the products.
 EVALUATION: It is more plausible that the characteristic performance of the exclusive distribution agreement is more the penetration into the relevant market; it is not selfevidently clear that the Print Concept conclusion was correct. Cf. Corman-Collins v La
Maison on Art.7 BIRR, where an exclusive distribution contract was classified as services rather than sale of goods.
ii. Apply relevant territorial connection: Characteristic performer's habitual residence/central administration: Under the Rome Convention, the court started with a general presumption in 6

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