This article is written by Jannat, from Chandigarh University, Mohali. The article explains the law of contract in the light of Private International Law.
Private International Law is the branch of law in each legal system that governs cases involving a foreign element. The nature of this foreign element will differ, but its presence is required before the rules of Private International Law can be applied. When all elements of a case are linked to Scotland, the rules of Private International Law are null and void, and the case is resolved according to the domestic Scots law. However, once this foreign element is present, whether as a result of the parties themselves or the subject matter of the dispute, the rules of Private International Law will apply. Private International Law has three main goals: (1) determining jurisdiction, (2) identifying applicable law, and (3) making foreign judgments more easily recognized and enforced. In recent years, there has been a significant trend toward harmonization of Private International Law, owing primarily to the work of the Hague Conference on Private International Law and the European Union.
From the dawn of time until 1991, the common law established the rules of Private International Law in respect of contractual obligations. It was bifurcated into two parts:-
- The common law doctrine of characterization determined what was within the choice of law rule or rules for contracts, and
- The common-law rules for choice of law determined the law that applied to them
All of that came to an end when European legislation supplanted common law and established consistent European criteria for choosing the law applicable to contractual obligations originating in civil and commercial affairs. The legislation outlined the region in which it was to be implemented, as well as the procedures for the choice of law when such an issue occurred within it. In the Rome Convention, the law applicable to contractual obligations before 1980 was implemented into law by the Contracts (Applicable Law) Act 1990, which contains the choice of law rules for contractual obligations in civil and commercial disputes originating from contracts executed after 1 April 1991. For the then-member states of the European Union, the Rome Convention standardized the choice of law provisions for contractual obligations in civil and commercial affairs.
The Rome Convention was always intended to be a transitory step in a larger endeavor to harmonize member states’ choice-of-law standards. In 2007, the Rome II Regulation, which controls the choice of law for non-contractual obligations, was adopted. Parallel talks to convert the Rome Convention into Rome I Regulation proceeded at a slower pace. Perhaps this was owing, in part, to a desire to widen the scope of the existing Convention to include certain complex areas that had previously been omitted. The Rome I Regulation, however, was enacted in 2008, and it went into force on December 17, 2009, and it applies to contracts made after that date. As a result, the Rome I and Rome II Regulations control the choice of law for duties in civil and commercial issues, subject to the date on which the question must be handled.
The scope of the Rome I Regulation has been established affirmatively in its Article 1(1), which states that it shall apply to contractual obligations in civil and commercial affairs in situations involving a conflict of laws. Although the similar Article of the 1980 Rome Convention has a somewhat different language, there appears to be no significant difference between the two articles. The Regulation’s scope is likewise limited by Article 1(1), which states that it does not apply to tax, customs, or administrative issues. The stated exclusion of certain things as described in Articles 1(2) & Article 1(3) further limits the scope of the regulation. Article 2 stipulates that the regulation’s law will be enforced regardless of whether it is a member state’s law. The regulation, like the Convention before it, does not discriminate in its selection of relevant legislation, and the law of a non-EU member state is regarded in the same way as the law of an EU Member State.
Law applicable by choice
“The parties’ right to select the appropriate law shall be one of the pillars of the system of conflict-of-law rules in areas of contractual obligations,” explains Recital (11) of the Rome I Regulation. The importance of party sovereignty is shown in Article 3(1), which states: “A contract should be regulated by the law decided by the parties. “The decision must be made openly or plainly proven by the contract provisions or the facts of the case.” It’s worth noting that whether a governing law is chosen expressly or implicitly, parties are completely free to do so, and there’s no requirement that the law has any existing connection to the parties or the contract, i.e., parties are free to choose a completely neutral law that has nothing to do with their circumstances.
Parties can specifically pick the law that will govern their contract by including a phrase in the contract that states that the deal will be regulated by the law of a specific nation. The ruling legislation can only be the legislation of a certain nation. Each geographical unit of a composite state shall be treated as a nation to determine the relevant legislation (Article 22(1)). A religious law, such as Sharia law, may not be used to control a contract (Beximco Pharmaceuticals Ltd v Shamil Bank of Bahrain EC003).
In many circumstances, a contract may not have an express choice of law clause, but it is apparent that the parties anticipated or intended that the law of a certain nation would govern their agreement. If the implicit option can be “clearly proved by the provisions of the contract or the circumstances of the case,” it will be honored. The option must be “demonstrated with reasonable confidence,” according to the Convention’s corresponding requirement. A choice of a specific law, even if not stated, must be just that–a decision–and a court cannot infer a choice of law that it feels the parties would have made if they had put their thoughts to the issue.
Professors Mario Giuliano and Paul Lagarde’s report on the Convention on the law applicable to contractual obligations, popularly known as the Giuliano–Lagarde Report, provides guidance on the criteria to consider when assessing whether the parties have made an implicit choice of law. This advice is not exhaustive, but it covers topics such as reliance on a standard form governed by a specific system of law, a previous course of dealing between the parties under contracts governed by an express choice of law, an express choice of law made in related transactions between the parties, and the choice of a location where disputes will be settled by arbitration. For example, in the case of Egon Oldendorff v Libera Corp (1996), it was held, based on the terms of the Giuliano–Lagarde report, that where an international contract between a German and a Japanese company expressly provided for arbitration in London and was governed by a well-known English standard form of the charter party, the parties had immunized themselves from the application of English law in the absence of an express choice of law.
Division or change in the governing law
“By their decision, the parties can pick the law applicable to the whole or to a portion of the contract,” reads the last clause of Article 3(1). This permits dépeçage or the division of the relevant legislation. This option is constrained by the fact that it must be logically coherent since each distinct choice of law must correspond to a provision of a contract that may be controlled by a different law without creating inconsistencies. If there is a discrepancy, the parties have no effective option and must turn to the requirements of Article 4 to determine the appropriate legislation. Parties may modify the governing law of the contract at any moment, either by changing a previously agreed-upon decision or by making a decision that they had not previously made (Article 3(2)). Any change in the relevant legislation that occurs after the contract is signed should not jeopardize its formal legality or infringe on the rights of third parties.
Freedom of choice and mandatory rules
The freedom granted to parties under Article 3(1) to pick the law relevant to their contract is not absolute; rather, Article 3(3) serves to prohibit parties from evading the necessary norms of the legal system with which the contract and the parties are otherwise inextricably linked. “Where all other elements relevant to the situation at the time of the choice are located in a country other than the country whose law has been chosen, the parties’ choice shall not prejudice the application of provisions of that other country’s law which cannot be derogated from by agreement,” according to Article 3(3).
For example, if all of the elements relevant to the situation are in Scotland, the parties will be unable to escape the mandatory rules of Scots law by choosing to have the contract governed by French law. While this option will be recognized, and French law will be the controlling law, it will be administered according to the obligatory rules of Scots law. Article 3(3) applies only where all necessary aspects to the situation are located in a single nation other than the designated nation. If an element may be found elsewhere, Article 3(3) does not apply. In the case of Emeraldian Ltd Partnership v Wellmix Shipping Ltd (2010), it was held that Article 3(3) of the Convention applies only when all elements relevant to the situation are located in a single country.
Similar to Article 3(3), Article 3(4) prevents parties from avoiding the application of mandatory Union law by choosing the law of a third state, stating that “where all other relevant elements to the situation at the time of the choice are located in one or more member states, parties choice of applicable law other than that of a member state shall not prejudice the application of provisions of Community law, where appropriate as implemented in the member state of a forum, which can’t be derogated by agreement” It is crucial to note that Article 3(4) has a broader reach since it applies even when the elements are situated in separate countries, as long as those nations are all member states and the law of a third state is chosen.
Law applicable in the absence of choice
In the absence of a choice by the parties, Article 4 of both the Convention and the Regulation establishes the law applicable to contracts. “If the relevant legislation to the contract has not been chosen in line with Article 3, the contract must be regulated by the law of the nation with which it is most closely connected,” it says. The applicability of dépeçage is addressed in the second clause. According to Article 4(2), the contract is most closely associated with the country in which the party who is to carry out the contract’s characteristic performance has his habitual residence, or, in the case of a body corporate or unincorporated, its central administration, at the time of the contract’s conclusion. Where the contract’s subject matter is a right in immovable property or a right to use immovable property, Article 4(3) gives a particular assertion; when the contract is for the transportation of goods, Article 4(4) gives a particular assertion. In Caledonia Subsea Ltd v Micoperi Srl (2003) it was held that the Article 4(2) presumption of the Convention should only be displaced under Article 4(5) when there is a clear preponderance of factors showing a closer connection with another country.
The Rome I Regulation includes rules for determining the appropriate law in
Carriage contracts (Article 5),
Article 4(4) of the Rome Convention of 1980 establishes a specific presumption that applies to contracts for the carriage of goods. A similar provision can be found in Article 5 of the Regulation, which also governs passenger carriage contracts. In the case of contracts for the carriage of goods, Article 5(1) of the Regulation states that, in the absence of a choice, the law applicable to such contracts shall be the law of the carrier’s habitual residence, provided that the consignor’s place of receipt, place of delivery, or habitual residence is also located in that country. In the absence of this, the applicable law will be the law of the agreed-upon delivery location.
Article 5(3) states that if the parties have not made a choice and it is clear from the circumstances of the case that the contract is more closely linked to a country other than those mentioned in Article 5(1) or Article(2), the law of that other country will apply.
Consumer contracts (Article 6),
When a consumer contract is entered into under any of the situations mentioned in Article 5(1), it is covered by Article 5 of the Convention (2). The customer will be covered in one of two respects in such circumstances. First, if the parties have decided on applicable law, that option will remain the contract’s underlying law, but the buyer will still be covered by the necessary rules of the law of the country in which he has his habitual residence (Article 5(2)). Second, if the parties cannot agree on an appropriate statute, the presumptions and rules of Art 4 will be replaced by the law of the country where the consumer has his or her place of business.
The Rome I Regulation updated these special security laws, which are now included in Article 6. Article 6(1) specifies the types of consumer contracts to which its provisions relate, namely contracts signed by a natural person (the consumer) for a reason that can be considered beyond his trade or profession with another person acting in the exercise of his trade or profession (the professional).
Insurance contracts (Article 7),
Insurance policies were not subject to special coverage under the Rome Convention, which only applied to contracts of insurance where the risk was located outside of the EU’s Member States (Article 1(3)). The Convention did, however, extend to all reinsurance contracts (Article 1(4)). Art 7 of the Rome I Regulation, on the other hand, gives insurance contracts special consideration.
Article 7 applies to insurance contracts that cover a “large danger” (as specified in Article 7(2)), whether or not the risk is located in a Member State, as well as all other insurance contracts that cover risks within a Member State’s territory. The terms of these bespoke clauses do not apply to reinsurance contracts. The law chosen by the parties in compliance with Article 3 governs an insurance policy covering a significant risk. The insurance policy would be regulated by the law of the country where the insurer has his habitual residence if the parties have not agreed on a law.
Individual employment contracts (Article 8).
Individual employment contracts are governed by particular rules set out in Article 6 of the Convention and Article 8 of the Regulation. Even though the provisions are not identical, they are rather similar and will be interpreted similarly (Koelzsch v Luxembourg (2012)). The default rule under Art. 8(1) is that an individual employment contract is regulated by the law selected by the parties. This option is limited, however, by the fact that it cannot deprive the employee of the security provided by conditions that cannot be waived by an agreement under the law that would have applied elsewhere in the absence of choice under Article 8.
The basis for these special provisions may be found in Recital (23) where it is indicated that when contracts are formed with weaker parties, those parties should be protected by the conflict of law principles that are more favourable to their interests than the general standards.
Consent and material validity
The law that would apply if the contract or term were legitimate under the appropriate instrument determines the existence and validity of a contract or any term of a contract, according to Article 8(1) of the Convention and Article 10(1) of the Regulation. The “putative relevant law” is a term used to describe this situation. According to the Giuliano–Lagarde report (p 28), this provision was meant to encompass all aspects of contract formation “other than general validity,”. This phrase is recognized to mean that each instrument’s respective article is intended to cover any matter relating to the formation of the contract that is not governed by the other provisions of the relevant instrument, i.e. those issues referred to as matters of essential validity under common law.
Article 10(2) of the Regulation goes on to say that a party may rely on the law of the country in which he has his habitual residence to establish that he did not consent if it appears from the circumstances that determining the effect of his conduct according to the law specified in Article 10 would be unreasonable. Article 8(2) of the Convention contains a similar provision, although with somewhat different language.
The introduction of this discretionary authority is intended to address the problem that in certain legal systems, the offeree’s silence is seen as acceptance (Giuliano–Lagarde Report, p 28). Ex-Judge Mance remarked in Egon Oldendorff v Libera Corp (1995) that implementation of Article 8(2) of the Convention should have a “dispassionate, globally-minded attitude”.
Article 11 of the Regulation, which is analogous to Article 9 of the Convention, governs issues of formal validity. The Giuliano–Lagarde report (p 29) defines “form” as “any outward manifestation necessary on the part of a person expressing the intent to be legally bound, and without which such expression of will would not be completely effective”. Article 11 promotes formal validity by outlining a variety of laws that may be used to evaluate it; compliance with any of these criteria will ensure formal validity.
The main rule of Article 11(1) is that a contract is officially legitimate if it meets the formal criteria of the legislation that regulates it in substance under the Regulation, or the law of the country where it is concluded.
Article 11(2) states that a contract concluded between persons who, or their agents, are in different countries at the time of its conclusion is formally valid if it meets the formal requirements of the law that governs it in substance under the Regulation, or the law of either of the countries where either of the parties or their agent is present at the time of conclusion, or the law of the country where either of the parties or their agent is present at the time of conclusion, or the law of the country where either of the parties or their agent is present.
Article 11(3) covers “unilateral activities” intended to have legal effect in connection with a current or future contract.
Article 11(4) states that the law of the nation where the consumer has his usual abode governs the formal validity of consumer contracts.
Article 11(5) specifies a particular norm for the formal validity of contracts involving immovable property.
Article 1(2)(a) excludes questions of natural people’s legal capacity from the Regulation’s reach, however, this is declared to be without prejudice to Article 13. “In a contract concluded between persons who are in the same country, a natural person who would have the capacity under the law of that country may invoke his incapacity resulting from the law of another country only if the other party to the contract was aware of that incapacity at the time of the contract,” says this article, which is almost identical to the earlier Article 11 of the Convention.
This rule is quite limited in scope, particularly because it only applies to natural people and only when those individuals contract in the same nation. The reference to an inability coming from the legislation of “another nation” is less explicit, with no further direction as to how this other legislation should be determined.
Nature of law applicable
The applicable law identified by the Regulation governs, in particular,
- matters of interpretation (Article 12(1)(a));
- performance (Article 12(1)(b));
- the consequences of a total or partial breach of obligations (Article 12(1)(c));
- the various ways of extinguishing obligations, as well as prescription and limitation of actions (Article 12(1)(d)); and
- the consequences of nullity of contravention (Article 12(1)(e)).
The terms of Article 12(1) are nearly identical to the Convention’s comparable Article 10(1). Article 12(2) (Article 10(2) of the Convention) states, “regard shall be given to the legislation of the country in which performance takes place in regards to the mode of performance and the procedures to be taken in the event of faulty performance.”
Restrictions on the applicable law
Overriding mandatory provisions
Overriding mandatory provisions are those that a country considers essential for safeguarding its public interests, including its political, social, or economic organization, to the point where they apply to any situation falling within their scope, regardless of the law that would otherwise apply to the contract under the Regulation (Article 9(1)). The notion of overriding mandatory provisions is the same in both agreements, they are provisions that a legal system believes so vital that they should be enforced regardless of the prevailing law under its Private International Law norms.
According to Article 9(2) of the Regulation, “nothing in this Regulation shall limit the implementation of the overriding mandatory provisions of the law of the forum.” Article 7(2) of the Convention achieves the same purpose, though in a different way. This means that the forum is free to apply the overriding required elements of its law regardless of whether another law applies to the contract.
Article 9(3) states that the overriding required provisions of the law of the nation where the contract’s duties must or have been executed may be given effect since those overriding mandatory laws render contract performance unlawful.
The public policy of the forum
According to Article 21 of the Regulation, “the implementation of a provision of any country’s law named by this Regulation may be rejected only if such application is clearly incompatible with the public policy of the forum.” This is nearly identical to the wording of its predecessor in Article 16 of the Convention. It is not the foreign provision in general that is opposed to Article 21’s application, but its application in the specific matter before the court.
Article 16 of the Convention was cited in Duarte v Black & Decker Corp (2007) to overturn a restrictive covenant governed by Maryland law in circumstances where the employee was working in England at the time he signed the covenant, the job he wanted to take was based in England, and the covenant would be unenforceable under English law.
While the Private International Law of obligations (jurisdiction and choice of law) has been largely transferred to European Private International Law, the process is far from complete, and some problems of choice of law in the context of the law of obligations are still left to the common law. The common law’s methodologies are not completely foreign to European Private International Law, which was established on the foundations of national laws, including English law; and, above all, the common law of Private International Law is how the subject was formed and polished in English courts. Its techniques offer a useful alternative to the new framework of Private International Law being established by European Union institutions; however, knowing them shows why they have no position in the European law field of Private International Law.
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