This article has been written by Akhil Ganatra pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution at LawSikho, and edited by Shashwat Kaushik.
It has been published by Rachit Garg.
Table of Contents
Introduction
The principle of choice of law in contracts has evolved due to the increasing number of international transactions between parties from different countries, where it is difficult to determine which law should be applied to resolve a dispute. Such difficulties may arise due to many factors, such as different jurisdictions, place of execution of contract, place where parties are residing, etc. This freedom of choice under the proper law is not absolute and is subject to certain limitations. In this article, we will explore different types of options that the parties have in determining the proper law governing the contract as we dive deeper into the article.
Autonomy of choice in contracts
Usually, there are two criteria for determining the law that should be applied in cases of conflict between the parties, and those are place of contracting and place of performance. Parties have the freedom of choice, either expressly or impliedly, in determining the law that will apply to them. However, this does not solve the problem entirely between the parties, as it may happen that the law of one country is not adequate to deal with the issues of the parties or that the law itself is ambiguous. In such cases, it is up to the courts and other judicial authorities to decide the application of moral law to the issues between the parties. So basically, there are two types of choices that parties have in determining the law:
- Express choice
- Implied choice
Express choice
When the parties to a contract decide to include a specific provision that specifies the law under which they are to be governed in case of any dispute, such a law is considered an express choice. In these cases, there is no ambiguity as to the applicability of the law or the jurisdiction of the courts or forums. The only requirement highlighted in Vita Food Product Inc. vs. Unus Shipping Co. Ltd. (1938), was that the choice of law should be bona fide, legal, and not contrary to public policy. It is advisable for the parties entering into international contracts to include a specific provision in the contract to avoid any ambiguity in determining the proper law in case of a dispute.
Implied choice
The word ‘implied’ means something suggested but not directly expressed or something that can reasonably be inferred from the conduct of the parties. When the contract contains no express provision as to the choice of proper law, according to the case of Bonython v. Commonwealth of Australia, Lord Simonds held that 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. The most common example of implied choice by the parties to a contract is the inclusion of a forum clause, i.e., in case of a dispute, this clause determines whether the court of a particular country will have jurisdiction or not. Another example commonly seen in commercial international contracts is the inclusion clause, which provides that any dispute between the parties will be referred to arbitration. In both of the above mentioned examples, the parties have intended that the law of a particular country will govern the dispute, and the courts or arbitrators will apply such law in determining the issues between the parties.
Another example of implied choice is the use of form, terminology, or concepts relating to a particular law. In these situations, it can be assumed that the parties wanted the relevant law to apply. In Amin Rasheed Shipping Corp. vs. Kuwait Insurance Co. (1983), the insurance policy in question was based on Lloyed’s form set out in the schedule of the English Marine Insurance Act of 1906, so the House of Lords held that English law rather than Kuwait law was the proper law. Another factor was that, at the time of the contract, Kuwait did not have any laws on marine insurance. Such circumstances help determine the parties’ intentions as to the choice of proper law in the event of a dispute.
Limitations on freedom of choice of law
The freedom of choice of proper law by the parties gives a feeling of certainty as to the applicability of law in case of any dispute. However, there are certain limitations to this freedom of choice, which are mentioned as follows:
Mandatory rules of domestic law
Irrespective of whether parties enter into a domestic or international contract, they are required to observe certain mandatory rules of domestic law. These rules are applicable irrespective of any agreement between the parties and can be considered one of the limitations on freedom of choice of the proper law by parties. These rules can be in any form, such as grounds of public policy, exemption clauses to protect a weaker class, the public interest, or the interests of a particular class. The basic requirement, which has also been indicated in the Vita Foods case, is that the choice of law must be bona fide and legal.
The law of the country with which the contract is most closely connected
It is applied when there is no express or implied choice by the parties and when the courts have held that the proper law is the law of the country with which the contract is most closely connected on the ground that it is the law that reasonable parties would have chosen in case of any dispute. The courts have also considered certain elements in this regard, such as the place of execution of the contract, the place of performance of a contract, the connection of parties with the countries, the immovable property which is the subject matter of the contract, the currency of consideration due under contract, etc.
Centre of gravity
When an international contract is entered into between parties residing in two or more countries, the elements in the contract that connect with two or more countries are considered the basis of proper law. These elements are found in the country in which they are most closely grouped and constitute the centre of the contract because it is the country in which elements are most closely grouped and whose interests and policies are most likely to be affected by the contract. This theory comes into play when there is no clear sign of connection with the country and the weight of different elements is to be assessed.
Convenience and business efficiency
We have talked about how the elements of a contract, such as the place of performance, the place of execution of the contract, etc., play an important role in determining the proper law to govern the disputes between the parties. However, in this theory, the relationship of parties with countries is given more importance than other factors because it is more convenient for the parties that the governing law be their law. This also reflects the implied choice of the parties, where the interests of the parties are considered rather than the countries and other factors in terms of business efficiency and convenience.
All the concepts discussed above are not expressly mentioned anywhere in the judgements of the courts or a system of law. Whenever any difficulty arises as to the determination of proper law, the difficulty is faced by the judges in deciding whether to apply the centre of gravity approach or the convenience approach.
Conclusion
Based on the above, it is now clear that the parties to a contract have the freedom to choose a proper law that governs their disputes either through express or implied autonomy, but this principle of autonomy is also subject to certain limitations, as discussed above. The courts have also played an important role by resolving the ambiguities in the application of these fundamental principles in international contracts through their judgements and by ensuring that the parties do not circumvent the mandatory operation of law, which is applicable irrespective of the choice of the parties or its non-inclusion in the contract.
References
- https://blog.ipleaders.in/choice-laws-international-contracts-indian-jurisprudence/
- https://shodhganga.inflibnet.ac.in/bitstream/10603/76575/15/15_chapter%206.pdf
- https://www.investopedia.com/terms/i/implied_contract.asp
- https://www.uni-muenster.de/imperia/md/content/kfg-normenbegruendung/intern/publikationen/gutmann/55_gutmann_-_contract_and_autonomy.pdf
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