Contract Issues I

Table of Contents

Overview

The Rome Convention and Rome Regulations apply to most contracts. Different rules may apply to different aspects of the contract.

Generally, the existence and validity of a contract are decided by the laws which would govern it if it is valid. This can be complicated where there is a choice of law clause.

Once the applicable law is determined under the Convention, there are rules with respect to material validity, formal validity, capacity and the number of other matters relevant to contractual disputes. These concepts were traditionally classified in accordance with domestic law. The Convention, however, has its own definitions and classifications in relation to these concepts.

There are special rules applicable to certain types of contracts, including

contracts for the carriage of goods,
contracts concerned with immovable property,

Formation

Material validity refers to the existence or validity of the contract. This covers both the concepts of the formation of a contract (offer and acceptance consideration) and negating factors such as misrepresentation, duress, and mistakes in legality.

The existence or validity of a contract or of any term of a contract is determined by the law, which would govern it under the Convention if the contract or term were valid. Accordingly, the Convention’s general rules on the applicable law determine material validity. The Rome Regulation is virtually identical.

In effect, it must be assumed that the contract or term is valid in the first place for the purpose of determining the applicable law under the rules. This is logically necessary, as otherwise, applicable law could not be determined in such cases.

Similar provisions apply in the context of arbitration where arbitration disputes. Their existence and validity are assumed for this purpose, notwithstanding that it might be argued that no agreement to arbitrate exists.

The EU rules provide that the existence and validity of the choice of law is to be decided in accordance with the general principles that apply to other questions relating to contract formation. Therefore, the existence and validity of a choice of Irish law is determined by Irish law.

This rule can lead to complexities and illogicalities. There is an exception. A party may rely on the law of the country where he is habitually resident to establish that he did not consent if it appears in the circumstances that it would not be reasonable to determine the effect of his conduct in accordance with the law specified by the above general rules. This rule allows a person to negate a contract that might otherwise exist.

Habitual Residence

A party may rely upon the law of the country on which he has his habitual residence to establish that he did not consent if it appears from the circumstances that it would not be reasonable to determine the effect of his conduct in accordance with the laws specified under the above provisions.

The onus is on the person who seeks to displace the general presumption to show that this latter presumption applies. In effect, he must show that it is unreasonable in the circumstances to have the matter governed by the law other than that of his habitual residence.

This provision cannot create contractual relationships that would not otherwise exist under the applicable law. The issue is relevant to the existence of the contract but not its validity.

Formal Validity

Formal validity refers to legal requirements for contracts to be in a certain form in order to be valid. Formal validity under the Convention includes every manifestation required on the part of the person expressing the will to be legally bound, the absence of which could not be regarded as legally defective.

This would include, for example, wills, formalities regarding signed contracts, and consumer credit requirements. Formal validity includes requirements such as those for writing or completing the contract before a notary.

A contract concluded by parties in the same country is formally valid if it satisfies the requirements of the applicable law as determined or the law of the country where the contract is concluded. This does not apply to requirements which apply in order to make the act or contract valid as against third parties. This would include, for example, requirements to register or give notices of assignments of debt, etc.

The Convention provides that a contract concluded between persons who are in the same country is formally valid if it satisfies the formal requirements of the law which governs it under the Convention or under the law of the place where it is concluded. The effect is to reduce the risk of contracts being invalidated by lack of formal compliance by giving two alternative choices of law for contracts between parties in the same country.

Where parties are in different countries, it is formally valid if it satisfies the requirements of the applicable law or the law of either country. Therefore, a contract made over the telephone between two EU countries would be valid if it satisfies the laws of either country.

In the case of consumer contracts, the formality is governed by the law in which the consumer is habitually resident.

Under the Rome Regulation, a contract is formally valid if it satisfies the requirement of the law which governs 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 has his habitual residence at that time. This new additional provision also applies to legal acts, acts which are intended to have legal effect.

Illegality/ Validity

If a contract is invalid under the purported applicable rules, an Irish Court will hold it invalid. If the contract is illegal under the foreign law, which is neither the applicable law nor the place of performance, this will be ignored if it is valid under the applicable law.

Where a contract is valid under the applicable law but invalid in the place of performance, difficult issues arise. There is a distinction between cases where the contract is unlawful at the outset or where it becomes subsequently invalid by a change in the law.

A contract governed by Irish law will not be enforced if its performance is illegal under the place of performance, either initially or subsequently. Where the contract is not governed by domestic law, the position is slightly more complex. The overriding laws of the country with which it has close connection may be applied.

Capacity

Capacity deals with the ability of a person to be bound by a contract. Issues may arise in relation to persons lacking mental capacity and children. The EU rules on the laws as to capacity refer back to the common law position.

Traditionally, capacity was common law dealt with by domicile or the place where it was made, but this may have unreasonable consequences. Common law is uncertain, but the modern position appears to be that a person has the capacity if it is valid by the proper law. The proper law is that of the country with which the contract is most closely connected.

The EU rules provide for an exclusion. In a contract between parties in the same country, a person who would have the capacity under the law of that country may invoke his incapacity resulting from another law only if the party to the contract was aware of his incapacity at the time of conclusion or was unaware due to negligence. This is to protect the person contracting in good faith with a person who believes to be of full capacity.

The burden of proof is on the incapacitated person to prove the other party knew or should have known the incapacity. There are difficulties in the interpretation of this provision. The proviso applies only if there is a conflict of law. The law that governs the capacity of the person claiming to be under disability must be different from the law of the country where the contract is concluded.

Interpretation

Questions as to the interpretation of the parties’ rights are governed by the applicable law. The Courts ascertain the intention of the parties but use the principles of interpretation of the applicable law.

The applicable law governs performance. What is or is not defective performance will be determined by it.

Breach and Effect

Breach and its consequences are governed by the applicable law. Therefore, questions in relation to the type of damages and whether losses are too remote, as well as questions of contributory negligence causation, are determined by this law.

The applicable law governs questions in relation to frustration and termination. It also deals with claims barred by the passage of time.

EU rules provide that within the limits of the powers conferred by the court’s procedural law, the applicable law covers the consequences of the breach, including the assessment of loss and damage.

The quantification of damages is procedural to some extent and substantive to another extent. An Irish Court may grant judgment in a foreign currency. If this is enforced, the date of conversion into Euro is the date the Court authorises enforcement.

Questions of remedies and damages are regarded as matters for the forum where the proceedings are heard. Therefore, issues such as procedures and whether an injunction or specific performance will be granted depending on the law of where the court hearing the matter is situated. Similarly, evidence and procedure are determined by that Court.

Consumer

A contract concluded between persons who are in different countries is formally valid if it satisfies the formal requirements of the law which governs it under the Convention or the law of one of those countries.” This scenario may arise where there are questions as to in which country the offer is made and in which country the acceptance takes place, by way of correspondence, simultaneous communication or e-mail.

Consumer contracts are governed by the law of the country in which the consumer has his habitual residence. Accordingly, the formal validity is determined in the same way as other contractual issues in respect of consumer contracts. The country of habitual residence of the consumer generally applies.

Immovables

In the case of immovable property, notwithstanding the above provisions, a contract, the subject matter of which is the right to immovable property or a right to use immovable property, is subject to the mandatory requirements of the law of the country in which the property is situated, if by that law those requirements are imposed irrespective of the country where the contract is concluded and irrespective of the law governing the contract.

Carriage & Insurance

The rules in relation to carriage of goods and movable property apply principally to the choice of law. The employment and consumer rules are by way of protection of the presumed weaker party and apply irrespective of choice. Special provisions are made for consumer contracts and contracts relating to immovable property.

There are special rules for contracts of carriage. The Rome Regulation extends these rules to the carriage of passengers.

The Rome Regulation also provides and introduces special provisions for insurance contracts. It applies to insurance contracts covering large risks whether or not situated in the State and two other insurance contracts covering risks within an EU State. General rules apply to other insurance contracts.