Home choice of law principle An analysis of the choice of law existing in a domestic context

choice of law principle

An analysis of the choice of law existing in a domestic context

October 27, 2021

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This article is written by Ms. Nikara Liesha Fernandez from the School of Law, Christ University, Bangalore. This article analyzes the choice of law principle and its applicability in various jurisdictions as well as where India currently stands with respect to the same.

Table of Contents

Introduction

The Indian system of governance is known to have a unique quasi-federal nature. Thus, there is a division of powers between the centre and the states. However, we see the limitations of India’s federalism especially with regard to the judiciary on comparing it with the judiciary of the United States of America. The USA follows a strict federal structure for all its organs of governance; the main organ this article will highlight is the judiciary. The federal structure gives rise to each state having its own Supreme Court and thus is governed by its own laws. There are no central laws per se for the entire USA. The Indian judiciary, on the other hand, is quite different. Although the Supreme Court functions as the highest authority of the country and the High Courts of each state exercise a certain degree of autonomy, in case of any dispute of judgments, the latter is bound by the decisions of the former. The Supreme Court of India thus exercises virtual control over all the other courts in India and thus, its will prevails.

This makes the settlement of domestic disputes, wherein the plaintiff and the defendant both reside within India, quite simple as they are governed by the same set of laws. However, the question of ‘choice of law’ comes into play when a party residing in India and thus being governed by Indian law, enters into any agreement of venture with a foreign entity who is governed by an independent set of laws, different from that of India. In these cases, there arises a question as to which system of law the court is to follow in deciding disputes which might arise between the two parties of the agreement in the future. This is where the concept of ‘choice of law’ comes into play.

Choice of law or conflict of law

The terms ‘conflict of law’ and ‘choice of law’ are often used interchangeably in cases where a dispute spans over two different jurisdictions. In India, the ‘choice of law’ principle is commonly referred to as the ‘Indian Private International Law’.

In Indian private international law, parties are given the autonomy to choose the law they want to apply, restrictions to choice, choice of law of parties may be expressed or implied, pre-determined in nature and thus takes care of future disputes, avoids uncertainty and ambiguity.

Indian private international law is the law that is usually relied upon in deciding cases involving foreign parties with conflicting laws from the Indian legal system. Under this law, both the parties are given the autonomy and freedom to choose beforehand, while the contract is being formed itself, which law they want to apply to settle any future dispute which may arise. The choice made by the parties can be an expressed choice or an implied choice which will be discussed below. However, there are certain restrictions which the parties must adhere to while agreeing upon the law to be used to settle their disputes. These restrictions include the mandatory rules of the domestic law governing the country where the dispute arises, the law of the country with which the contract is most closely connected to the centre of gravity (the country in which the elements of the contract are most closely grouped whose interests and policies are most likely to be affected by the contract) and the convenience and business efficiency.

Expressed choice

An expressed choice quite literally means that the parties clearly state in writing the law they intend on following in case of any future dispute in the agreement or contract itself.

Implied choice

From the explanation of Lord Simonds in his judgment in the case of Bonython v. Commonwealth of Australia (1951), an implied choice can be defined as ‘the system of law by reference to which the contract was made or that with which the transaction has its closest and most real connection’.

In certain instances, the implied choice of the parties can also be ascertained by the courts if the contract contains an arbitration clause. This is also known as the Choice of Forum.

When parties themselves have not decided on the choice of law

When the courts of law conclude that there is an absence of an expressed or implied choice from the parties themselves in a contract, the onus of responsibility in deciding which law to apply rests in their hands. In these circumstances, the courts adopt two approaches, the objective and the subjective approach.

The objective approach is where the courts reach a concrete conclusion, after a thorough analysis of the contract that there has been no choice expressed or implied.
The subjective approach is when the courts take into account the hypothetical will of the parties and through this lens try and arrive at a law which they have reason to believe the parties would have chosen as their choice of law.

Law of the country with which the contract is most closely connected

In the case of disputes arising in the field of contracts, the courts of law were of the opinion that the solution to the question of the choice of law would be to apply the law of the country with which the contract is most closely connected. This is decided by the courts based on the following parameters-

The place or places of making the contract
The place or places of performance of the contract
The connection of the parties with the countries
The situs of any immovable property which is the subject matter of the contract
The country where the ship is registered, on which the goods are to be carried
The currency in which money due under the contract, has been paid

Despite these points of consideration, further questions can arise due to a conflict between the interests of the parties and the interests of the country whose law is being applied (the governing law). The final law that is to be applied to settle the dispute must be in the best interests of the parties to the contract as well as the best interests of the country whose law is to be applied.

Forum shopping or choice of forum

Forum shopping or the plaintiff’s choice of forum is a process commonly practised in the USA and is becoming an area of concern discouraged by the courts of law. In the federal system, each state is governed by different procedural laws and sometimes even different substantive laws. Thus, certain issues come under concurrent jurisdiction which means that the issue can be resolved by more than one court, all equally competent in exercising their jurisdiction over the issue. Thus, the plaintiff uses this choice available to him/her to his/her advantage and brings the issue to that court which is likely to produce a verdict that will be most beneficial to the plaintiff and most deleterious to the defendant. The factors governing the choice of forum vary and can even include the kind of jury, whether local or federal, whichever is more likely to have a favourable impact on the plaintiff.

Erie doctrine

The Erie doctrine is another factor that encouraged the process of forum shopping. Derived from its namesake in the case of Erie Railroad Co. v. Tompkins (1938), this became a binding principle by which federal courts which exercised diversity jurisdiction (wherein the plaintiff and defendant belonged to different states) had the power to apply both federal procedural law as well as the state substantive law. This gave the courts unfettered power to exercise whichever law they chose whenever they saw it convenient which gave rise to arbitrary and unfavourable judgments.

Private International Law vs. Conflict of law

A common definition of the above terms given by Professor Emeritus I.O Agbede has been described as ‘physics of the law’ because it is concerned with the application of the law in space and time. It is that part of the private law of a country that deals with cases having a ‘foreign element’. These two terms are often used interchangeably in the sense that the term ‘conflict of law’ is used by common law countries such as the USA, Canada, England, and Australia, whereas the term ‘private international law’ is used by civil law countries such as France, Italy, and Greece.

Three branches

The three branches which form the basis of conflict of law are-

Jurisdiction

This deals with the question of whether the court or forum to which the dispute is brought exercises the competent authority or has the power to decide the case at hand. The five bases of jurisdiction that are generally recognized in the case of international law are as follows-

Territoriality- This is the strongest principle governing jurisdiction which states that every country has the right to regulate and exercise power over all issues occurring within its territorial borders.
Passive personality- A country is empowered to have jurisdiction in occurrences that have led to the harm of its people or nationals.
Nationality/ active personality- When the country’s national self is the perpetrator of any occurrence causing harm, that country is obligated to exercise its jurisdiction to punish the wrongdoer.
Protective- A country has the right to exercise jurisdiction to protect its country from all threats to its security.
Universal- The most common jurisdiction, which has been mentioned in this article is universal jurisdiction by which a country has jurisdiction over certain acts based on their intrinsic rejection by international communities.

Choice of law

As discussed in detail above, after the court has proved that it exercises appropriate jurisdiction to handle the case at hand, the next question that arises is which law is most suited to be applied to settle the dispute. The two main components that govern the choice of law in a situation are as follows-

Lex fori- This refers to all the procedural matters governing the choice of law, including the rules to be used to settle a particular issue.
Lex patriae- This refers to the nationality or habitual residence of the plaintiff according to which the court will decide which law of which state is to be applied to settle the dispute at hand.

For example, suppose a dispute has arisen between two individuals A and B, both belonging to different countries. If A is the plaintiff and brings the case to a court in his own country, B can challenge this action because B lives outside the jurisdiction of the court in A’s country. Once the court of A’s country proves that it is competent to exercise jurisdiction over the matter, it needs to decide whether it should follow the law governing A’s country or B’s country to solve the dispute. These two options which the court needs to choose between is known as the choice of law. According to lex fori, the court can apply either A’s country law or B’s country law. According to lex patriae however, the court would have to apply the law of A’s country as A is the plaintiff in this case.

Enforcement of foreign judgment

In certain instances where there exists no domestic law which can be applied to settle the dispute, the court can, if it is within its jurisdiction to do so, recognize and enforce any judgment from an external or foreign forum to the case at hand.

There are multiple types of foreign judgments which can be applied. Some examples are judgments that concern bilateral or multilateral treaties or understandings or even unilaterally agreed to treaties that do not contain an express international agreement.

Governing clause and jurisdiction clause

Governing clause

This clause is used to determine the legal rights and obligations of the parties, or in other words, it deals with the substantive law which is to be applied to aid in the interpretation of a contract or an agreement. It merely determines the law but contains no information on the procedure which is to be used to apply such substantive law.

Jurisdiction clause

This has the effect of procedural law as it determines all the procedures which are to be followed to settle a dispute, both to commence the proceedings as well as during the trial. It is also used to determine which process of dispute resolution is to be adopted. For example, expert determination, settlement by courts, or arbitration.

Domestic context – Indian Private International Law or Choice of Law

Indian courts also respect the choice of law principle as stated above and allow the applicability of the governing law in place of local Indian law. However, similar to what was mentioned above, there are a few caveats in the extent of applicability of a governing law that differs from Indian law. The foreign law cannot derogate from the mandatory and overriding provisions of Indian law nor can it conflict with Indian public policy as this would invalidate the conflict entirely. The courts in India also use the expressed and implied choices in a contract to decide which law applies to the case at hand.

Examples of case laws in Indian jurisprudence

Dholi Spintex Pvt. Ltd. v. Louis Dreyfus Company India Pvt. Ltd. (2020)

The issue, in this case, was whether an arbitration agreement between two parties is an agreement that is independent of the substantive contract. The Court in this case laid re-emphasis on the principle of non-interference of the Indian courts of law in matters of international arbitration as Indian parties have every right to choose a foreign law as the law governing the arbitration between them.

To answer the question at hand, the Court ruled that ‘an arbitration agreement/ clause does not govern the rights and obligations arising out of the substantive contract and only governs the manner of settling disputes between the parties.’

Rhodia Ltd. v. Neon Laboratories Ltd (2002)

The issue that arose, in this case, was whether contracts using a foreign choice of the law were valid under Indian law and whether the opinion of the foreign law could be relied upon in determining whether an Indian Court had jurisdiction in a particular matter related to the same.

The Court held that the application of choice of law is dependent on the question of law which the parties choose to apply and not when a question regarding their nationality arises. Thus, it was held that two Indian parties can indeed choose a foreign law to govern their contract. As long as the law in question is bona fide in nature, it can be applied to the case at hand.

Ssangyong Engineering & Construction Co. Ltd. v. National Highways Authority of India (NHAI) (2019)

In this case, the Supreme Court of India stated that in cases where an agreement is found to be in contravention of the ‘fundamental principle of justice… prevalent concepts of good morals (or) deep-rooted traditions of the commonwealth’, the same could be deemed to violate the public policy of India. As a result of this reasoning, foreign law cannot be enforced in India if it contravenes the public policy of the latter. Thus, the concept of choice of law ceases to be recognized in cases where the object of the agreement is unlawful under Indian law and legal proceedings.

The Indian scenario

India is a land of diversity where personal laws are formed based majorly on religions that differ distinctly from one another and thus it proves even more problematic to apply a uniform law to govern all aspects of international disputes as compared to countries abroad that have adopted a unified civil code applicable to all its people.

In an attempt to bring some uniformity to resolve mainly commercial activities involving international trade contracts, India became a member of the Hague Conference on Private International Law. This ensured that the contractual obligations of the parties were fixed beforehand to prevent any legal disputes in the future. This, however, still had its own set of problems as it is not plausible to eliminate all possibilities of disputes arising between parties.

Mandatory rules of domestic law

The personal law of India forms a part of its domestic law which is one of the strongest limitations to the power of the parties to exercise their choice of law. An example of these mandatory rules is especially prevalent in the field of contracts, namely the rules which render the contract void on the ground of public policy and the presence of certain provisions that invalidate the same such as exemption clauses that protect the weaker party from major limiting factors. The grey areas which might arise are always to be solved by ensuring that the intention in choosing a particular law is bona fide.

Conclusion

Although at present, India is not a signatory to any International Treaty or Convention that regulates the disputes arising from the international jurisdiction of courts or the recognition and enforcement of foreign judgments in transnational civil or commercial matters, scholars have been examining the role of various international policies can play in the development of the Indian legal system. Two of the possible conventions India can adopt into their domestic legislation and become parties of are the Hague Conference on Private International Law’s Judgment Project, namely, the Convention of 30 June 2005 on Choice of Court Agreement (the HCCA) and the recent Proposed Draft Text on the Recognition and Enforcement of Foreign Judgments (the Draft Convention). By integrating these provisions appropriately with the domestic legislation, the judiciary can further bring clarity and uniformity to the choice of law process in domestic legislation.

References

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