Contract Issues EU

The Convention does not generally apply to the question of the capacity of corporations, nor to the status and capacity of individuals.   Accordingly, common law rules on the conflicts of laws apply to issues of capacity.

The common law rules on capacity do not definitively determine which law applies.  It may be the law of domicile, the law where the contract is concluded or the proper law of the contract.  Domicile is disfavored in modern times as a basis for incapacity in that it may lead to arbitrary effects which disrupts business expectations.

One approach is that validity under domicile or proper law is sufficient from a capacity perspective.  Another approach promotes the law of the place where the contract is concluded.  However, this has been criticised.

The proper law of the contract is favoured in modern decisions.  The contract must have a substantial connection with the country concerned.  A person cannot intentionally confer capacity by simply determining to apply a law with which the contract has no relationship in fact.

In a contract concluded between persons who are in the same country, a natural person who would have capacity under the law of that country may invoke his incapacity resulting from another law only if the other party to the contract was aware of this incapacity at the time of conclusion of the contract or was not aware of it as a result of negligence.

The provision does not apply to incapacity of corporate.  It applies where the natural person has capacity under the law of the place where the contract is concluded but does not have capacity under another law which may be relevant.

The place of conclusion of the contract may be less clear where the parties are in different countries given the difficulties that may arise in determining where offer and acceptance has occurred, in some cases.

Where the conditions are met, the incapacity may be invoked if the other party was aware of the incapacity or would have been but for his negligence.  The principle can be invoked only by the person who lacks capacity.

The position is same under the Rome Regulation.

Extent of applicable law

The general position is that all issues arising under the contract are governed by the applicable law except where otherwise provided under the Convention, such as in the case of material validity and incapacity.

Issues of interpretation of the contract are governed in accordance with the law chosen or the law applicable under the Convention when none is chosen.  It is possible in principle for parties to choose different laws to apply to different parts. This may exceptionally occur where the choices are not clearly incompatible.

The question of performance of the contract is governed by the chosen law or the applicable law under the Convention.  This applies to the diligence with which the obligations must be performed, conditions relating to the

• time and place of performance, the extent to which obligations can be performed by another party, conditions as to performance both in general and in relation to certain categories of obligations such as joint and several obligations, divisible and indivisible obligations;
• where performance consists of money, the conditions relating to discharge of the debtor, appropriation of payment and receipt.

The Convention provides that in relation to the manner of performance and the steps to be taken in the event of defective performance, regard shall be had to the law of the country in which performance takes place.  This applies where the country of performance differs from the law applicable.

It appears that this is intended to deal with issues specific to the place of performance such as regulatory requirements which bear on the manner of performance, customs, public holidays and definitions of time of days in which performance may take place. The rule merely requires that the court is to have regard to the law concerned.  It may apply it in whole or in part.

Subject to limits on powers conferred on the court by its procedural law, the consequences of breach including assessment of damage is governed by the law that applies under the Convention, this includes

• issues of liability, causation
• procedural requirements connected with termination and holding another party liable
• the consequences of the breach including the assessment of damages, insofar as it is governed by rules of law; if the matter is one of fact, this is determined by the court under its procedural rules.  If questions of law arise, then the Convention applies the applicable law.

The court applies its own procedural laws. The rules the court or the forum where the court is held, invariably applies in respect of basic procedural mechanisms.  Accordingly, if the foreign law allows for particular types of orders which are incompatible with the forums, this limits the availability of those remedies.

Traditionally, statute of limitations periods are procedural in nature.   However, the Convention makes it clear that issues of limitation are determined by the chosen law or applicable law under the Convention.

The consequences of nullity are determined by the chosen law or applicable law.  Nullity refers to the voidness of contract.  The United Kingdom entered a reservation in respect of this provision as voidness is not a contractual issue but an issue of quasi-contract/restitution.

The provisions under the Rome Regulation are the same as the Convention.

Illegality raises special issue.  The general principle is that the court will not enforce contracts which are illegal under the law of the jurisdiction concerned.  However, there are degrees of illegality.  The general principle under the Convention is that the chosen law or applicable law under the Convention/ Regulation apply.

However, contracts may be illegal under other law.  The discretion to apply the mandatory rules of a foreign State may be invoked to deal with issues of legality under a foreign law.

An agreement to breach domestic law is unsurprisingly unenforceable.  An agreement to breach a foreign law is generally against public policy at common law as being unenforceable, being inconsistency with the comity of nations.

Agreements may be unlawful in the foreign place in which they are to be performed.  In circumstances where domestic law applies, the court may imply at common-law, a term as to the continuing validity of the action in the place of performance.  Under the Convention, common law may deem frustration to arise where an agreement becomes unlawful under foreign law at the place of performance.

Illegality may arise under the law of the place of performance abroad where the applicable law is also foreign law, but that of another foreign country.

The Convention has no specific provision dealing with illegality in accordance with the law of performance.  The illegality may relate to a mandatory foreign rule covered by  the ordinary provisions dealing with mandatory rules of a foreign jurisdiction with which there is close connection.

Illegality may go to the manner of performance in which event the Convention may require that the law of the place of performance applies.

There is a public policy exclusion.  There may be cases where parties deliberately attempt to evade a foreign law and others where the illegality supervenes by reason of a change in law.

The courts m must give effect to an overriding mandatory provision of the place of performance in so far as it renders performance of the contract unlawful.  This will give with most of the above positions.

The Rome Regulation introduced provisions in relation to set off.  Where a right of set off is not agreed by the parties, set off is governed by the law applicable to the claim against which the right of set off is asserted.

This applies to set off arising by law.  Set off arising by contract is subject to the general provisions.