Law Applicable to Contracts Under English Common Law - Essay Example

?Conflict of Laws: Law Applicable to Contracts Under English Common Law, Rome Convention on the Law Applicable to Contractual Obligations 1980 and Rome I Regulation 593/2008 Introduction The law applicable to contracts refers to the law chosen by contracting parties to govern their contracts.1 The law can be chosen expressly or impliedly. Moreover, the parties may have neglected to choose an applicable law. The common law has devised a number of rules for limiting the parties’ ability to choose the applicable law or the rules of law to use for determining the applicable law when the parties have failed to choose the applicable law. The UK has had to change its common law mechanisms for determining the applicable law pursuant to the EU’s implementation of the Rome Convention on the Law Applicable to Contractual Obligations 1980 and later the Rome I Regulation 593/2008. This paper examines the changes to English common law necessitated by the 1980 Convention and the Rome I Regulation. This paper is divided into two parts. The first part of the paper examines the English common law conflict of laws rules in the context of contract law. The second part of the paper examines the 1980 Convention and the Rome I Regulation and demonstrates how they have both transformed the English common law on the conflict of law rules relative to the applicable law of the contract. I. English Common Law: The Law Applicable to Contracts Under contract law, the courts will endeavour to determine the proper law or the law applicable to the contract. The applicable law can be determined by reference to the parties’ express choice, and implied choice or an objective evaluation of the facts and circumstances of the case.2 The English courts have developed a long tradition of deferring to the express choice of law. For example in the late 16th century case of Gienar v Meyer an English court declined jurisdiction over a claim brought by a Dutch plaintiff because there was an express clause in the contract designating Dutch law as the proper law of the contract.3 The court however set some conditions to upholding the express choice of law applicable to a contract. The choice of law clause, in addition to having to be legal, in good faith and not inconsistent with public policy, the express choice of law had to be unambiguous. It also had to be enforceable otherwise the courts could ignore the parties’ choice of the law applicable to the contract.4 The courts would also refuse to uphold an express choice of law clause if it merely appointed an applicable law upon the occurrence of a specific event.5 Under the common law, the applicable law is applied or implied by the courts in cases where the parties have not expressly selected the proper law of the contract.6 In doing so, the courts will look for evidence of the intention of the parties by reference to the facts and circumstances of the case. Intention will be implied from facts such as the parties’ nationalities, the place where the contract was concluded, the monetary currency in the contract’s transaction, the place for payment and evidence of a forum preference.7 The fact that the common law looks first for an express choice, failing which, they then look for an implied choice is a manifestation of the significance of party autonomy in English contract law. It is only when both methods for determining the law applicable to the contract have failed that the English courts under the common law will attempt to determine the law applicable to the contract by reference to an objective view of the facts and the circumstances. Essentially, the courts will seek to identify the law that is most closely connected to the contract. As Singleton LJ noted: One must look at all the circumstances and seek to find what just and reasonable persons ought to have intended if they had thought about the matter at the time when they made the contract.8 It is important to note here, that even where the courts are taking an objective view of the facts and circumstances in determining the applicable law, deference is accorded party autonomy. The courts are attempting to determine what the parties might have chosen for the law applicable to the contract had they thought about it at the relevant time. The court does not select the applicable law according to its own reasoning, but by reference to the facts and circumstances of the case itself. The fact is, party autonomy is significant with respect to determining the law applicable to contracts under the common law. This position was confirmed by the Privy Council in Vita Food Products Inc v Unus Shipping Co. Ltd. In this case the Privy Council ruled that the parties are at liberty to select a law for governing their contracts, regardless of that law’s tenuous connection to the contract. The only caveat is that the choice of law is bona fide and legal and not inconsistent with public policy.9 II. Rome Convention 1980 and Rome I Regulation 593/2008 A. Rome Convention 1980 The concept of party autonomy in terms of the parties’ freedom to choose the applicable law under English common law is reflected in the Rome Convention 1980. Article 3(1) provides that: A contract shall be governed by the law chosen by the parties. The choice must be express or demonstrated with reasonable certainty by the terms of the contract or the circumstances of the case. By their choice the parties can select the law applicable to the whole or a part only of the contract.10 Like the common law, the law selected by the parties are subject to the lex fori’s mandatory rules11 and public policy.12 However, the Rome Convention 1980 diverges from the common law position in important ways.13 Since the Rome Convention was adapted by the Contracts (Applicable Law) Act 1990, the English courts are bound to alter its application of the common law rules relative to determining the law applicable to contracts so that it corresponds with the different approach taken by the Rome Convention 1980.14 The 1980 Convention’s divergence from the common law occurs in three specific circumstances where the mandatory rules of another forum is relevant to the validity of the parties’ choice of law. First, where a contract is entirely linked to one country, the mandatory rules of that forum will apply.15 Secondly, the parties’ choice of law clause will be subject to the mandatory rules of another forum in some consumer cases.16 Finally, the parties’ choice of law clause will be subject to the mandatory rules of another forum where the contract is one of employment.17 This divergence from the common law rules contradicts the party autonomy expressed in Article 1(3) of the Rome Convention 1980. Party autonomy presumably permits the parties to a contract to avoid specific legal systems and this is the intent of the English common law rules. However, the three caveats relative to the imposition of mandatory rules of another forum entirely defeats the concept of party autonomy. Parties may not agree to avoid specific legal systems in circumstances where the contract is connected to a single legal system, or the contract is a consumer contract or an employment contract. Where the parties fail to choose the applicable law, the Rome Convention 1980 is no different than the common law. Article 4(1) provides that in such a case: The contract will be governed by the law of the country with which it is most closely connected.18 The divergence from the common law occurs where the court is directed to take into account the facts and circumstances that are indicative of the parties’ intention or the country with which the contract is most closely connected. In this regard, the Rome Convention 1980 makes a number of assumptions.19 Under the Rome Convention 1980 there is a presumption that the main place of business of the party who is to perform the contract is the place where the contract has its closest connection.20 This is known as the doctrine of characteristic performance.21 This is different from the common law where the place where the contract is to be performed is more relevant for identifying the proper law of the contract when the parties have failed to expressly choose the applicable law. This presumption relative to the doctrine of characteristic performance and other presumptions under the Rome Convention 1980 can be ignored: If it appears from the circumstances as a whole that the contract is more closely connected with another country.22 Although this exception permits the flexibility accorded by the English common law relative to paying due regard to the place where the contract is going to be performed, it is unfortunate that it is the exception rather than the rule. The doctrine of characteristic performance appears to be too one-sided as it emphasizes the place where the business of the performing party is located rather than a more neutral place. A more neutral place would obviously be the place where the contract is going to be performed. The place where the contract is going to be performed is more likely to be a place that both parties deliberately chose for the performance of the contract. B. Rome I Regulation 593/2008 The Rome I Regulation replaces the Rome Convention 1980 and is applicable to all contracts executed after 17 December 2009.23 Although the UK had initially registered a reservation to the Rome I Convention, the UK eventually subscribed to it.24 As a result, the English common law has lost most of its established party autonomy principles. Like the Rome Convention 1980, Article 3(1) of Rome I Regulation contains a freedom of choice clause which mirrors Article 3(1) of the 1980 Convention and thus the English common law.25 However, the party autonomy contained in Article 3(1) of Rome I Regulation is immediately defeated by Article 3(3) which provides that: 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 choice of the parties shall not prejudice the application of the provisions of the law of that other country which cannot be derogated from by agreement.26 Freedom of choice under the Rome I Regulation is therefore quite different from freedom of choice in the English common law. By virtue of freedom of choice or party autonomy, the parties to a contract may freely choose the law applicable to their contract and that law does not have to have any connection to the parties or their contract.27 English contract law is based on the parties’ consent and the only pre-condition is that they have the capacity to consent, provided the resulting contract is legal and comports with the formalities required for forming a contract. There are yet further restrictions on the party autonomy that further diverges from English common law and restricts the freedom of choice contained in Article 3(1). Article 3(4) further restricts party autonomy by providing that: Where all other elements relevant to the situation at the time of the choice are located in one or more Member States, the 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 the forum, which cannot be derogated from by agreement.28 It therefore follows from Article 3(4) the mere presence of any element connected with the contract in at least one Member State will defeat the choice of law made by the parties. It is unclear what the relevant elements are. Assuming that the relevant elements include the subject matter of the contract, even if that element is only present in a Member State for on a transitory basis, Community law will govern the contract or at the very least be used at the exclusion of the law chosen by the parties. Article 3(3) and (4) appears to usurp the freedom of choice or party autonomy attached to contract law and instead chooses the applicable law for the parties. Article 4 goes on to prescribe the rules to be applied in circumstances where the parties have failed to choose the applicable law. Article 4(1) provides that where there is sale of goods contract, the law in the place where the seller is resident shall be the governing law.29 In service contracts, the place where the service provider is resident will govern the contract.30 Article 4 goes on to implement the doctrine of characteristic performance in the same manner as the Rome Convention 1980.31 Article 4(3) like the Rome Convention 1980 provides that if there is obviously a country with which the contract is more closely connected then the rules contained in Article 4 can be discarded in favour of the more closely connected country.32 Article 4(4) deals with the situation in which it is not possible to determine the law applicable to the contract by virtue of the rules laid out in Article 4. In such a case: The contract shall be governed by the law of the country with which it is most closely connected.33 The Rome I Regulation assumes that consumers are better off having their contractual disputes resolved in their country of residence. The English common law makes no such assumption and this is probably because consumers, like anyone else may have an interest in having their disputes resolved outside of their own countries. Article 5(1) provides that where a contract is entered into by a person who “can be regarded as being outside his trade or profession (the consumer)” with another who is acting within this profession or trade, the contract “will be governed by the law of the country where the consumer has his habitual residence.”34 Article 6(2) attempts to backtrack a bit by providing that despite Article 6(1), the parties may choose an applicable law pursuant to Article 3(1). 35 However, Article 6(2) goes on to state that: Such a choice may not, however, have the result of depriving the consumer of the protection afforded to him by provisions that cannot be derogated from by agreement by virtue of the law which, in the absence of choice, would have been applicable on the basis of paragraph 1.36 In other words, in consumer contracts the parties freedom to choose the applicable law is constrained by the overreaching provision that the law chosen must provide the same kind of consumer protection that the consumer would otherwise have benefitted from. It would therefore appear that only if applicable law chosen accords the consumer protection that he or she would not have received otherwise, will the choice of law clause be upheld. Article 7(2) permits parties to a large risk insurance to choose the applicable law pursuant to Article 3(1).37 If the law is not chosen, then the contract of insurance’s applicable law will be the place where the insurer resides, unless there is a more closely connected country.38 All other insurance contracts will be subject to Article 7(3). Article 7(3) constrains party autonomy by providing that the parties may only chose as the applicable law: (a) The law of any Member State where the risk is situated at the time of conclusion of the contract; (b) The law of the country where the policy holder has his habitual residence.39 Article 8 provides for limitations on the freedom to choose an applicable law in employment contracts. In essence, the chosen law cannot operate to deprive the employee of protections available to him/her had an applicable law not been selected.40 In the event the law is not chosen, the law where the employee works.41 In any event, where there is obviously a law more closely connected to the contract, that law will be applicable.42 Article 9 provides for further erosion of party autonomy by providing that not only will the mandatory laws of the forum override the choice of law clause in the contract, but so too will the mandatory laws of the “country where the obligations” under the contract are to be or were performed.43 This is quite similar to the provisions contained in the Rome Convention 1980. Ultimately, a law not contemplated or chosen by the parties can be forced on them. This provision makes little sense because it ignores the possibility that the mandatory laws of the country where the obligations are taking place is precisely why, the parties have chosen a different jurisdiction to govern their contracts. The concept of party autonomy is designed to permit the parties to a contract the right to agree to avoid certain laws and the corresponding right to choose another law that meets their business or other needs under a contract. Conclusion The English common law has established a long tradition of contractual freedom and the freedom to choose pursuant to the concept of party autonomy. Certainly, the common law does not permit party autonomy to function at all costs. There are limitations and those limitations however were the exception rather than the rule. With the implementation of the Rome Convention 1980, the English common law was superseded by an approach to party autonomy that basically treated party autonomy as the exception rather than the role. Although the Article 3(1) of the Rome Convention 1980 purports to confer upon parties the freedom to choose the law applicable to their contracts, the 1980 Convention sets out constraining and abortive provisions such as the mandatory laws, consumer contracts and employment contracts. Rome I Regulation forces even more changes on the English tradition of party autonomy calculated to erode the freedom of choice. In the final analysis it would appear that party autonomy is only relevant where the parties are either professionals or businessmen. Even then, the Rome I Regulation ensures that the law is chosen for the parties in so many different circumstances that arguably, party autonomy is not a part of the Rome I Regulation. The best that can be said is that party autonomy is the exception, rather than the rule. The English common law has therefore been forced to reverse its approach to party autonomy so that it is no longer the rule with some exceptions. Bibliography Textbooks Collins, L. Dicey and Morris on the Conflict of Laws. (13th Edn, London: Sweet and Maxwell 2000). Collins, H. The Law of Contract. (Cambridge: Cambridge University Press 2003). Cordero-Moss, G. Boilerplate Clauses, International Commercial Contracts and the Applicable Law. (Cambridge University Press 2011). Ferrari, F. and Leible, S. Rome I Regulation: the Law Applicable to Contractual Obligations in Europe. (Munich, Germany: Sellier European Law Publishers, 2009). Great Britain: Parliament: House of Lords: European Union Committee. European Contract Law, (London: The Stationery Shop 2009). Wood, P. Conflict of Laws and International Finance. (London: Sweet and Maxwell, 2007). Articles/Journals Carpinello, G. ‘Testing the Limits of Choice of Law Clauses: Franchise Contract as a Case Study’, (1990)74 Marquette Law Review, 57-89. Jaffey, A. ‘Essential Validity of Contracts in the English Conflict of Laws’ (1974) 23 International and Comparative Law Quarterly, 1-31. Table of Cases Compagnie D’Armenent Maritime SA v Compagnie Tunisienne d Navigaton SA [1971] AC 572. Dubai Electricity Co. and Ors v Islamic Republic of Iran Shipping Lines (The Iran Vojdan) [1984] 2 Lloyds Law Reports 380. Gienar v Meyer [1796] 126 ER 728. The Assunzione [1954] 1 All ER 278. Vita Food Products Inc v Unus Shipping Co. Ltd. [1939] AC 277. Table of Statutes Contracts (Applicable Law) Act 1990. Rome Convention on the Law Applicable to Contractual Obligations 1980. Rome I Regulation 593/2008. Read More