This article is written by Sahil Aggarwal, currently pursuing B.A.LLB. (Hons) from NALSAR University of Law, Hyderabad. This article explores the challenges of choices of law, international contracts and briefly provides the Indian position as to the parties’ choice of law.
Table of Contents
Introduction
A contract is a backbone of trade at a domestic or an international level. In India, the Indian Contract Act, 1872 (ICA) forms the governing and foundational law in terms of regulation of all forms of contract, however, one must also appreciate that the business contract between individuals, institutions, companies, etc. have also grown beyond the boundaries of the ICA. When contracts transcend national boundaries, the legal regime of a single country becomes inadequate to regulate and control the implications of the international contracts.
Thus, when parties to a contract are from different countries, at least two systems of law impinge upon the transaction and the rules and guidelines of private international law come into play. Hence, there are multiple international conventions such as the United Nations Convention on Contracts for the International Sale of Goods (CISG), or the clauses of International Arbitration that play their role in the formation as well as governance of contracts in India. In this article, we explore the challenges of choice of laws in the context of international commercial contract and then briefly look at the practices prevailing in India regarding the principles governing the choices of law.
Conflict of laws and contracts
When parties to a contract reside in different countries, different problems pose themselves such as what law one or both the parties should follow or in which country the claim is justiciable and in what way. Conflict of laws or private international laws is a set of laws or guidelines that determine which legal system or jurisdiction may apply in a dispute related to contracts between parties. These rules typically apply when a dispute has a ‘foreign’ element. Thus, these laws and rules seek to reconcile the disparities among laws of different countries. The conflict of laws may be seen at multiple levels, like, whether the court or the forum has the power to decide the case presented before it, secondly, if the court or forum has the forum has the jurisdiction, then which country’s law must be applied by the court or the forum to decide the case, and thirdly, whether the courts have the ability to recognize and enforce a judgment from a foreign forum or the court within its jurisdiction.
In a dispute related to contracts, as noted earlier, there may appear foreign elements, for instance, in a case where an Indian businessman entered into a contract with its French counterpart, and they decided that the goods will be delivered and paid for in the United Kingdom. Consequently, however, one of the contracting parties breaches the contract, and in an action brought in an Indian court, a question arises which country’s law should be considered by the Court in deciding the case because laws of India, France and the UK might be different in certain aspects. In that case, a general principle is that every international contract (that is, a contract containing one or more foreign elements) has a governing law, which is most often termed as the ‘proper law of the contract’.
The proper law of the contract, thus, helps in deciding the issues in a case. The parties have the power to choose the proper law of the country with which the contract has the most real connection. However, this may not entirely resolve the issue, because the idea of proper law itself is ambiguous. It is possible that the law of a single country may not be adequate to deal with the whole of the contract, since it may not deal with certain aspects of the contract. Thus, some of the aspects may be subjected to one country’s law and some aspects of the same contract may be subjected to other country’s law. Hence, the application of proper law may itself become complicated for the courts and the forum.
Choice of the proper law
There has been a conflict persisting in the scholarships whether the place of contracting or the place of performance should be the criteria to determine which law should be applied to the problem. But under Indian and English private international law the autonomy of the parties in this matter has been recognized multiple times, which means the parties are deemed to choose any law which could govern their contract. For international contracts, in the absence of any domestic codification on that aspect, the Indian judiciary relies, for its persuasive value, on the traditional common law position as enunciated in Vita Food Product Inc v Unus Shipping Co.Ltd, wherein it was held by the Privy Council that the parties were free to choose any governing law, irrespective of its connection with the contract, provided that the choice was bonafide, legal and not contrary to public policy. Thus, The proper law of the contract under the Indian private international law is determined on the grounds of justice, equity, and good conscience.
It has also been observed that such a choice of the proper law of the contract may either be express or implied. The choice may be considered express when the contract contains an explicit provision of the specific governing law, in a situation of conflict. Thus, ideally, parties of different nations are required to provide the provision for proper law. However, it may not be possible in every case.
On the other hand, when the contract does not contain any such explicit provision for the proper law of contract, in that case, the principle as laid down by Lord Simonds in the case of Bonython v. Commonwealth of Australia is referred which says that the proper law of the contract is 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 idea that the contract was made with a reference to a certain system of law represents the implied choice of the parties as the proper law governing the contract. The most prominent example of an implied choice can be the choice of a governing forum by the parties, that is, the contract contained a clause providing the court of the jurisdiction of a particular country. In international commercial contracts, the arbitration clauses which stipulate the place for arbitration may provide the choice of the proper law.
The validating laws
Similar to the idea of the implied choice of the proper law of the contract, where a contract or a particular provision in the contract is valid under the law of one country but invalid under the another country’s law, the court may infer the tacit choice of validating law on the basis that the parties had intended their contract to valid from the beginning and not void. For instance, in In re Missouri S.S. Co., there was an exemption clause in a contract that was void under the law of Massachusetts, however, the same was valid in English law. Thus, it was held that the English law was the proper law, as the parties must have intended that their contract as well as the exemption clause in question must be valid. Thus, until there appears anything contrary in the contract, the court will consider the proper law in the law which validates, rather than invalidates the contract.
Restrictions on the power to choose the proper law
There are many reasons for the power of choosing the proper law in the very beginning of the contract, firstly, it gives the parties a feeling of certainty as to the governing law, secondly, in domestic systems of law, the parties are largely free to choose the terms of their contract for themselves, from which the power to choose the governing law automatically follows as an apparent and rational expansion. However, there are some limitations as well to the power of parties to choose the proper law such as :
- Mandatory rules of domestic law- Some rules of the domestic law are not optional, but mandatory, which means they are applicable irrespective of any agreement of the parties to the contrary. For instance, the rules which render the contracts void on the ground of public policy, etc. This is to say that if parties are allowed an unrestricted choice of the governing law, there will be chances on evasion from mandatory rules of the country with which the contract is most closely connected, whose purpose may be to protect the public interest or to protect the interests of a particular class, such as employees or consumers. Moreover, in the Vita Foods case, it was held by the court that the only general limitation on the choice of the parties regarding the governing law is that it must be made with bonafide intention and it must be legal.
- The law of the country with which the contract is most closely connected- in some cases, where the choice of proper law cannot be derived either expressly or impliedly from the contract, then the law of the country with which the contract is most closely connected is deemed the proper law. The court, in this regard, considers various factors such as the place of making the contract, the place of performance of the contract, the connection of the parties with the countries, the site of any immovable property which is the subject matter of the contract, etc. However, it is sometimes hard to determine the close connection itself.
- Convenience and business efficiency- When the interest of the parties is emphasized in the contract, then the court evaluates the contract in terms of business efficiency and convenience. For this, the court looks at multiple factors with varying relevances while deciding these connections, for instance, the factors like the place of making the contract or the place of performance may not be as important as the place where the parties carried their business or where they reside in. Moreover, in relation to the interest of the parties, the law of that country with whom the party belongs will usually be the accurate law. However, it is still not easy to answer the question that the law of which party must be preferred, in an international contract.
Conflict of laws and Indian jurisprudence
Indian private international law is majorly governed by judiciary decisions in concrete cases. The courts have generally adopted the English rules of private international law. The Supreme Court in Delhi Cloth and General Mills v. Harnam Singh had to decide whether Indian private international law gave the parties the freedom to choose whatever governing law from any part of the world. The case pertained to the recovery of balance from the plaintiff who resided in Pakistan and was in business with the defendant in India.
Justice Bose observed that the subjective theory may produce strange results because of the unconnected law and it is possible that there must be difficulty in enforcing the law if it is illegal or against the public policy. Similar observation was provided in the case of British India Steam Navigation Co Ltd v Shanmughavilas Cashew Industries, the court emphasized the law laid down in ista Foods case and held that the choice of proper law must be bonafide and legal, and not against public policy. And also observed that it may not be permissible to choose a wholly unconnected law. Similarly, the Calcutta High Court in Rabindra N Maitra v Life Insurance Corporation of India upheld the same principle and observed that there would be no justification for a choice of an unconnected law in the contractual agreement between international parties, unless the law is also the proper law.
However, it has been argued that the position has changed subsequently, and in the case of National Thermal Power Corporation v Singer Company, the Supreme Court abandoned the restrictive approach that confined the parties to make a choice of the governing law that was unconnected to the contract. The parties were permitted to make a choice of law even if there was no geographical nexus between the obligation in the contract and the chosen law. Thus, it implied that the parties became more autonomous in their choice of law. The court also extended the autonomy by observing that the parties were free to choose different laws to govern different parts of the contract. It also observed that the only limitation to the parties’ freedom to choose a governing law for their international commercial contract would be that such choice was not bonafide or was opposed to public policy. Similarly, in Modi Entertainment Network and Another v WSG Cricket Pte Ltd, the Supreme Court again clarified that Indian private international commercial law permits the choice of any legal system even if the legal system does not have any connection with the contractual obligation in question.
However, in these judgments, there still persists an ambiguity about the meaning of ‘bonafide and opposed to public policy’ since there can be wide parameters for adjudicating these requirements. Thus, it has been argued that although the Indian private international commercial law corresponds with the global best practices on the subject, still the ambiguities regarding these terms makes it unpredictable and uncertain for the courts to apply these principles efficiently.
Conclusion
In sum, it can be said the choice of laws in context of international commercial contracts has been a complex space for stakeholders. The challenge posed of choice of laws do get amplified when there’s an ambiguity regarding the principles that are the fundamentals for International commercial contracts in Indian experience, thus it becomes relevant for the courts to resonate with international trends which provide certain fundamentals for the adjudication of suits related to international contract. This suggestion becomes more relevant in the context of increasing global trade, since it inevitably results in an increase in disputes between parties. Hence, the courts need to lay down more predictable and certain standards for the parties to choose a proper law while their autonomy of the latter remains unharmed.
References
[1] https://www.tandfonline.com/doi/abs/10.1080/03050718.2019.1621761
[2] https://www.jstor.org/stable/43950071?read-now=1&seq=10#page_scan_tab_contents
[2] https://shodhganga.inflibnet.ac.in/bitstream/10603/76575/15/15_chapter%206.pdf
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