Applicable Law Issues

General

Questions about which law is to apply arise where there is an international element. A separate issue to the issue of which Court hears the dispute is the question of which country’s or jurisdiction’s laws apply.

For example, there may be a contract by which an Irish trader agrees to sell goods to a German buyer in France. In the case of a claim brought by the German buyer, questions arise as to whether Irish, German, or French rules apply.

It might be thought attractive that each jurisdiction would simply apply its own law. However, this would have the invidious effect that the outcome of the case would depend on where litigation is brought.  It may well be the case that the appropriate Court to hear the dispute is not necessarily the appropriate law to govern (although it usually will be so).

The question of which country’s laws is the so-called proper or appropriate law is determined by conflicts of law rules. As with jurisdiction, there are common EU rules which apply where EU parties are involved. Where these rules do not apply, older common law rules, which are similar but different, apply.

Federal

Some countries have multiple jurisdictions, particularly federal systems. The two well-known examples are the United States and the United Kingdom. The United States consists of 50 States with their own laws together with an overarching federal law dealing with certain subject matter and certain types of disputes between citizens of two States.

The United Kingdom has three jurisdictions, namely Northern Ireland, England, and Wales (single jurisdiction) and Scotland. In addition, several islands associated with the UK Crown, which are not strictly part of the UK, have their own separate jurisdictions; the Isle of Man and the individual Channel Islands.

EU Harmonisation

The Rome Convention deals with the harmonisation of contractual laws governing contracts after 1991. The Rome Convention has been updated and replaced by EU-wide regulation.

The contract laws of different EU states differ. However, they have many broadly similar features.  In common law countries, the basic principles of contact are very similar. The law of contract in the Republic of Ireland, Northern Ireland and England and Wales is barely distinguishable except for certain cases where legislation in one jurisdiction or the other makes specific provisions for changing the common law rules.

The EU rules do not apply to the status or legal capacity of persons. They do not apply to contracts referring to wills, succession, or family law issues. Bills of exchange, cheques and promissory notes are excluded and are separately governed. It does not apply to arbitration agreements and agreements on the choice of Court. Questions relating to trusts and beneficiaries are excluded.

Issues of evidence and procedure are excluded. They are governed by the law of the place where the dispute is heard.

The EU rules apply directly in each EU state. The European Court of Justice is the ultimate arbiter in interpreting the rules.

Express or Implied Choice

Under the common law rules, a choice of law made by the parties in a prior contract will usually govern the position, provided it is bona fide legal and not contrary to public policy. In the absence of a choice of law in the contract, the courts seek to imply a choice.

The choice may be implied by the type of contract. This may be implied, for example, from a clause dealing with jurisdiction or an arbitration clause.

If the parties do not make a choice, the contract is governed by what is objectively the proper law of the contract. This is the law with which the transaction has the closest and most real connection.

Commercial Freedom

In commercial matters, the parties are free to choose the law that governs the contract. The choice must be expressed or demonstrated with reasonable certainty by the terms of the contract or the circumstances of the case.

A contract may state that it shall be governed by the laws of England and Wales and that any dispute arising out of it may be referred to the laws of the Republic of Ireland.

Generally, the choice must be expressed.  Stating that the contract should be governed by the laws of the place where one person has their business may not be sufficient.

Choice Factors

A choice of jurisdiction clause is not a choice of law. It is a factor. It may show clearly that it is intended to be governed by the law of that country. However, this will not necessarily be the case, particularly if the contract has no connection with that particular jurisdiction.

The use of a particular form may imply that the laws of a particular jurisdiction are to apply. A previous course of dealings may point to a particular law. The choice of law in related transactions, use of standard forms, and reference to particular rules and provisions may point to the laws of a particular state. If a contract is valid under one law but not under another, the courts may interpret that it must have been intended to be governed by the law that validates the contract.

There is a limit to the scope for implication, as the Regulation presupposes an express choice of law. The implication may apply under the default rule, the most closely connected law, where there is no express choice of law.

Choice of Law Issues

There may be different laws applicable to aspects of the contract. This may cause anomalies. It is required that the parties’ choices be logically consistent so that the different laws can apply and they do not lead to contradictions. For example, if one party’s obligations are governed by the law of one jurisdiction and another by that of another, this would be logically inconsistent.

The issue commonly arises in relation to contracts. More than one law may govern different aspects of the case or claim.  For example, with companies, the law of where they are formed governs their capacity to undertake a transaction.

The legality of the transaction may be governed by the law of another jurisdiction. The actual contract may be interpreted in accordance with the laws of yet another jurisdiction.

Close Connection

In the absence of choice, the contract is governed by the law most closely connected with the contract.  It is a matter for the court to interpret which law this is.

There is a presumption that a contract is most closely connected with the country where the party who was to effect performance which is characteristic of the contract, has, at the time of conclusion, his habitual residence or, in the case of a company, its central administration.

If a contract is entered in the course of that party’s trade, it should be the country in which the principal place of business is situated or if under the terms of the contract, the performance is to be affected in a place of business other than the principal place, the country in which that other place of business is situate.

Characteristic Performance

The contract is most closely connected to the place where the person undertaking the characteristic performance has the closest territorial connection.  Where a (B2B) contract is for payment of money in return for a service or goods, the characteristic performer is that of the party who performed the service or transferred the goods rather than the payment of the money. Therefore, in a contract for the sale of goods, it is presumed that the law of the supplier’s place of business is applicable.

Where both performances involve the payment of money, the person carrying the greater risk is presumed to be the characteristic performer. Where both parties undertake a performance of the same type, it may be difficult or impossible to determine the characteristic performer. It may be difficult to apply the principle to a complex agreement such as a joint venture.

A territorial link is made between the characteristic performer and a jurisdiction. It may be the habitual residence, central administration or principal or another place of business of the party. Generally, it is presumed that it is most closely connected with the country in which the principal place of business of the characteristic performer is situated.

Other Factors

Where there is no characteristic performance or no presumption applies, the applicable law is the law of the country with which the contract is most closely connected. The Courts have regard to the elements that connect the contract. They look at the centre of gravity of the interests most closely affected by the contract. Importance may be laid on the place where the contract is to be performed.

The above presumptions, e.g., characteristic performance, provision do not apply if it appears in the circumstances the contract is more closely connected with another country.  There are differences of opinion and views regarding the relative weight to be given to the connection and characteristic performer. One view puts the connection as more of a tiebreaker, whereas the alternative view gives it more weight.

The proper approach appears to apply the presumption unless there is a valid reason, looking at the circumstances as a whole, not to do so.

Mandatory Rules

Most contract law rules are optional in that they fill gaps in the contract that the parties do not specify. However, some rules are rules of public policy and mandatory law. There are two types of mandatory rules. C. ain mandatory rules must be applied whatever the law applicable to the contract. These are overriding rules. Parties are not allowed to choose a contract in order to evade the mandatory rules of a country with whom the contract is closely connected.

Those rules may be to protect the public interest or that of a particular group of persons, such as employees or consumers. The overriding rule of the forum (the court) cannot be restricted. This is not necessarily the case in relation to the overriding rules of a country whose laws are chosen.

Laws that imply terms into a contract are not generally mandatory. However, if they are aimed at consumer protection, they are usually mandatory.

The EU rules distinguish between overriding or mandatory rules and so-called rules of public policy. The application of a rule of law of a country specified may be refused if the application is manifestly incompatible with the public policy of that state. Public policy refers to rules and principles that are less thorough than the overriding mandatory rules.

See the sections in relation to contract law in respect of differences between contracts void and unenforceable as a matter of public policy and those specifically illegal. A contract may be void for public policy reasons in Ireland, but that does not mean Irish law is invoked if foreign elements apply and applicable foreign law is chosen instead.

Enforcement may be refused if it would tend to injure the public interest in the way that the domestic rule is designed to prevent. In this case, public policy is only invoked if the contract has a connection with the country concerned.

Special Rules

Special presumptions apply to contracts relating to property and the carriage of goods. To the extent that contracts relating to immovable property or the right to use it, it is presumed to be most closely connected to the country where the immovable property is situated.

In the case of contracts for the carriage of goods, they are presumed connected to the country where the carrier has its principal place of business if that country is the place of loading or discharge or the principal place of business of the consignor. If the country in which the carrier has its principal place of business does not coincide with other connecting factors, then the presumption does not apply.