Contract Issues

The Rome Convention and Rome Regulations apply to most contracts.  There are special rules applicable to certain types of contract including

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

 

 

Contracts may be governed by different rules. Different rules may apply to different aspects of the contract.  Generally, the existence and validity of a contract is decided by the laws which would govern it if it is valid.  This can be complicated where there is a choice of law clause.

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 an 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.

Formal validity refers to requirements such as those for writing or completing the contract before a notary. A contract concluded by parties in the same country is valid formally if it satisfies the requirements of the applicable law as determined or the law of the country where the contract is concluded.

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.

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 place the laws as the capacity back at common law.

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

The EU rules provide for an exclusion. In a contract between parties in the same country a person who would have 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 of interpretation with this provision. The proviso applies only if there is a conflict of law. The law which governs the capacity of the person claiming to be under disability must be different to the law of the country where the contract is concluded.

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 its consequences are governed by the applicable law. Therefore, questions in relation to the type of damages and whether losses are too remote, 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 passage of time.

Legality raises separate issues. Issues in relation to formation and material validity are determined by the EU rules. 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 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 it 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.

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

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.

Once the applicable law is determined under the Convention, there are rules in respect of material validity, formal validity, capacity and 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.

Material validity refers to the existence or validity of contract.  This covers both the concepts of formation of contract (offer and acceptance consideration) and negating factors such as misrepresentation, duress, mistake in legality.  Formal validity is dealt with under a separate section below.

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 above is subject to the principle that 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 proviso cannot create contractual relationships which would not otherwise exist under the applicable law.  The issue is relevant to the existence of the contract but not its 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, consumer credit requirements.

The requirement 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 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.

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.

In the case of immovable property, notwithstanding the above provisions, a contract, the subject matter of which is right in 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.

The Provisions of the Rome Regulation are same in substance as those above.  A third alternative was introduced regarding formal validity of contracts concluded between persons in different jurisdictions.

The 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 have his habitual residence at that time.  This new additional provision also applies to legal acts, acts which are intended to have legal effect.

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, 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 contract.