Conflict Of Laws In The Banking Industry - Essay Example

Conflict of Laws in the Banking Industry Facts: Our case gives us a scenario where a foreign company is about to enter into a loan agreement with a bank located in the UK. Proceeds of the loan shall be used for mining activities in the foreign company. Collateral for the loan is a corporate property located in the foreign country. Shares of the foreign company are owned by the state of its origin. A. Conflict of Laws The absence of the choice of governing law would raise the question as to which country would have jurisdiction of the contract. In the case at bar, we can clearly see the potential conflict in terms of the location of the collateral and the fact that the shares of the company are owned by the State of Ruritania. Under Article 4(1) of the EC Convention on the Law Applicable to Contractual Obligations (Rome 1980), “To the extent that the law applicable to the contract has not been chosen in accordance with article 3, the contract shall be governed by the law of the country with which it is most closely connected. Nevertheless, a severable part of the contract which has a closer connection with another country may by way of exception be governed by the law of that other country.” The second sentence on Article 4(1) would make jurisdiction of the transaction highly debatable as the location of the collateral would make it closer to Ruritania thus the question of whether or not the laws which will govern the disposal thereof would fall under the “severable”. In some countries, foreign entities are not allowed to own properties within its jurisdiction, which would bring about a conflict of laws on properties. Note also that is Article 4(2) of EC Convention on the Law Applicable to Contractual Obligations it is provided that “Subject to the provisions of paragraph 5 of this Article, it shall be presumed that the contract is most closely connected with the country where the party who is to effect the performance which is characteristic of the contract has, at the time of conclusion of the contract, his habitual residence, or, in the case of a body corporate or unincorporated, its central administration. However, if the contract is entered into in the course of that partys trade or profession, that country shall be the country in which the principal place of business is situated or, where under the terms of the contract the performance is to be effected through a place of business other than the principal place of business, the country in which that other place of business is situated.” The interpretation of the law is clearly enunciated in the leading case of Sierra Leone Telecommunications Co. ltd. v. Barclays Bank Plc (1998) where it reiterated the general rule established under the case of Libyan Arab Foreign Bank v Bankers Trust Co [1989] that “where there is no choice of venue for redress or no provisions as to which law would apply is laid in the case of that the contract between a bank and its customer is governed by the law of the place where the account is kept, in the absence of agreement to the contrary” was affirmed. This is consistent with the views expressed by the Giuliano and Lagarde Report (see OJ 1980 C282 p 21), where it was averred that in a banking contract the law of the country of the banking establishment with which a transaction is made will normally govern the contract. Now we come to the question as to what extent will the law of the country apply? Rule 180 in Dicy and Morris on the Conflict of Laws so states that the law applicable to a contract by virtue of Rules 175 and 176 governs in particular its interpretation, performance within the limits of powers conferred on the court by its procedural law, the consequences of breach, including the assessment of damages in so far as it is governed by rules of law, and the various ways of extinguishing obligations and prescription and limitations of action. However, our potential conflict would be again the collateral since it is located in the state of Ruritania. Will we apply the law of Ruritania in cases of foreclosures? Wouldn’t the jurisdiction of the loan carry with it the authority over the collateral wherever it is located? Sound judgment would tell us that collateral is part of the loan and jurisdiction of both should fall under same law but this may not be the case as we are dealing with cross-border transactions where the two States involved have conflicting laws. Another potential conflict of law would be in provisions of the terms and conditions of the contract where the named parties would include the government of the state of Ruritania. In cases of political destabilization where a treat to the seat of governance of the country is present, the legality of the transaction may be put into question. Legitimacy of the signatories of the contract may be affected. A clear example would be where a “coup de etat” occurred in the State of Ruritania and the new government would refuse the honor the contract entered into by the previous government. What rules would govern in determining the legitimacy of the entities that entered into the contract of loan? In the case of Carl-Zeiss-Stiftung v Rayner & Keeler Ltd (1966), the court ruled that the law of the place of incorporation determined who are the corporation’s officials authorized to act on its behalf. Thus, the capacity of the corporation to enter into any legal transaction shall be governed by both the constitution and by-laws of the corporation and the law of the country where it was incorporation. B. Agreed Governing Law is English Law Where the parties of the contract so stipulates that the contract shall be governed by English law, Article 3(1) of the EC Convention on the Law Applicable to Contractual Obligations applies. Under this article “A contract shall be governed by the law chosen by the parties. The choice must be expressed 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.” The selection of the governing law will simplify the transaction as the parties now bind themselves to adhere to a certain governing law. However, this does not purport to preclude any conflict of laws, which may arise in certain cases where fraud or insolvency is involved. Bibliography 1. Carl-Zeiss-Stiftung v Rayner & Keeler Ltd (1966) 2 All ER 536 at 556, 568 and 588, [1967] 1 AC 853 at 919, 939 and 972 2. Libyan Arab Foreign Bank v Manufacturers Hanover Trust Co [1988] 2 Lloyds Rep 494 at 502 3. Dicy and Morris (1993) the Conflict of Laws (12th Edition) vol. 2, page 1259 4. EC Convention on the Law Applicable to Contractual Obligations (Rome 1980) 5. Sierra Leone Telecommunications Co. ltd. v. Barclays Bank Plc (1998) 2 All E.R. 820 6. Giuliano and Lagarde Report (1980) OJ 1980 C282 p 21 7. Egon Olderdorff v Libera Copr [No.2] C.L.C. 482 Read More