Contracts Choice of Law

Choice of Contract

The Rome Convention and Rome I Regulation relate to the law applicable to a contract.  The basic principle is that the choice of law expressed by the parties is respected.  If it is not expressed, the Convention defines the applicable law.

The Convention applies the domestic law of the jurisdiction chosen.  It does not apply its conflict of laws rules.  The concept of renvoi, which subsists under common law and other systems in certain cases, does not apply.

Once a law is chosen or applies under the Convention at the date of the contract, it applies thereafter.  The parties can agree during the course of the contract to vary the applicable law.

The basic principle is that a contract should be governed by the law chosen by the parties.  This freedom of contract is accepted by all EU jurisdictions. It is central to the common law freedom of contract concept.

Choice of Different Laws

Parties may apply different laws to different parts of their contract.  This may be expressed or implied.  However, it must be capable of being applied without contradictions.  There must be no logical inconsistencies.

Accordingly, a clause governed by another jurisdiction should generally be stand-alone and capable of standing differently from the rest of the contract.  If the chosen laws cannot be reconciled, both fail, and the laws that would apply under the Convention in the absence of a choice apply.

The general core obligations under the contract should be governed by one law.  It is possible further to be an express choice of law in respect of part of a contract whereby the balance is determined under the regulation.

The parties may at any time agree to subject the contract to a law other than that which has previously governed it.  It follows from the principle of freedom to choose a law that the Court should respect the freedom to choose a variation in the law applicable.  It will apply to matters and events occurring after the choice.  If no choice was initially made, then the Convention rules will apply to determine the position prior to the choice.

Restriction on Choice

It does not matter that the law chosen does not allow a variation.  Any variations by the parties of the law to be applied after the conclusion of the contract shall not prejudice its formal validity or adversely affect the rights of third parties.

There are some restrictions on the choice of governing law.  It is provided that the fact that the parties have chosen a foreign law, whether or not accompanied by the choice of foreign tribunal, shall not, where all other elements relevant to the situation at that time of the choice are connected with one country only prejudice the application of rules of law of the country which cannot be derogated from by contract.  They are called mandatory rules.

This limitation applies to a contract which is, in essence, domestic in which parties purport by choice of law to apply a foreign law to circumvent a mandatory rule of the jurisdiction. For example, consumer protection rules are typically mandatory in that contracts to the contrary are not permitted.  There are many such contracts, and in the absence of the limitation, the mandatory consumer (often consumer protection, though not necessarily limited to it) law could be circumvented.

The limitation applies when a foreign law is chosen.  This is gauged by reference to the parties at that time and circumstances at the time of the contract.

Rome Regulation Restriction

The Rome I Regulation rewords the provision in slightly different terms. Where all other elements relevant to the situation at the time of the choice are located in a country other than the country whose law has been chosen, the choice of the party shall not prejudice the application or provisions of the law of that other country which cannot be derogated from by agreement.

In addition, where all other elements relevant to the situation at the time of choice are located in one or more Member States, the party’s choice of applicable law other than that of a Member State shall not prejudice the application of provisions of EU (Community) law implemented in the State of the forum (court) which cannot be derogated from by agreement.  This encompasses EU mandatory laws, typically in the consumer protection field.

Choice Requirements

A choice of law which is inapplicable or meaningless cannot be applied.  Accordingly, the default rules apply.

The choice must be the rules of a particular country.  It may not be a non-national or artificial system of law.  Parties may choose a non-national body of law such as that provided in an international Convention, e.g. sale of goods, transport, etc.

The choice of law must be capable of being identified at the time the contract is made.  A provision whereby one party may choose the law applicable at a later date is inoperative as it does not constitute a choice.

Questions regarding the validity or existence of the choice are governed by the rules in relation to consent set out in the Convention.  The parties may incorporate foreign laws as contractual terms.

This is a different matter of incorporation and does not involve a choice of law in the current sense. For example, a foreign code can be expressly applied to a domestic contract.  Domestic law applies to the interpretation of the rules if so incorporated as contractual terms.

Infer Choice of Law

The Court may infer a choice where a choice may be demonstrated with reasonable certainty by the terms of the contract or circumstances of the case.  The Courts proceed to discern the party’s actual intentions. The Rome Regulation requires that the inferred choice of law be clearly demonstrated..

The inference of intention may arise from the other terms of the contract or the circumstances.  A choice of law may be inferred from a choice of forum or arbitration clause in themselves.  It may be inferred where the contract is in a standard form, which is governed by a particular choice of law and includes a choice of forum or arbitration clause naming a place or where specific articles of a particular law are referred to.

Inferences may be drawn from a range of factors.  Inferences may be drawn from the currency referred to.  The inference must be shown with sufficient certainty.  The choice of currency must be sufficiently certain in the circumstances.

The previous course of dealing may be relevant.  The contract may be a part of a sequence or referable to another contract in such circumstances that the choice of law in the other contract is to apply.

In some cases, the inferences may point to more than one jurisdiction.  If there are conflicting inferences which cannot infer a choice with reasonable certainty, the Court may not infer a choice.  The rules where there is no choice made apply.

Where there is a dispute as to whether a party has consented to a choice, the Regulation itself provides that issues relating to validity and existence are to be determined in accordance with the special Rules of the Convention relating to material validity, formal validity and incapacity.

Most Closely Connected

In the absence of an express or inferred choice, rules in the Convention determine which country’s laws apply.  The basic rule is that a contract is governed by the law of the country with which it is most closely connected.  There is a general presumption regarding the characteristic performance of the contract as that with which it is most closely connected.

There are special presumptions for two types of cases.  The provision is to be disregarded if it appears that the contract is more closely connected with another country.  There are special presumptions and a proviso that the presumptions do not apply if it appears the contract is more closely connected with another country.

The Regulation provides that to the extent that the law applicable to the contract has not been chosen in accordance with the general principles above, it is to be governed by the law of the country with which it is most closely connected.  This applies where there has been either no choice of law or the choice of law is ineffective.

The applicable law is decided by reference to the connections that, in an objective sense, link the contract to a particular jurisdiction. This is analogous to the proper law of the contract at common law.

The common law approach took account of residence, place of business, relationships, where the relationships between the parties were based, where the contract was made, where it was to be performed, and the subject matter of the contract. These factors are relevant under the Convention.  It is also possible to look at factors which have happened since the contract.  The Convention takes an objective test, so the notional intention of the parties under the common law approach is inapplicable.

The place of jurisdiction or arbitration clause may be relevant where an inference cannot be drawn under the more general test.  They are relevant as evidence of the objective connection rather than the party’s intention.

The Convention provides that 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 principles apply in the same way as the general principles applicable, where parties may choose more than one applicable law provided that they are not incompatible. The power of severance is an exception and should be seldom employed.  It may only be exercised if the contract is, in fact, severable.

In strict terms, the Convention applies to the country to which the contract is mostly closely connected rather than the legal system. The requisite connection must be between the country and the contract rather than the dispute or other circumstances.

Presumptions re Applicable Law

The Convention provides certain presumptions that apply to assist in the determination of the applicable law.   It is presumed that the contract is most closely connected with a country where the party who he is to effect the performance which is characteristic of the contract has, at the time of conclusion of the dispute, his habitual residence or, in the case of a body cooperate or incorporate, its central administration. The concept of the characteristic performance is not defined.

The purpose of this first presumption is to focus on a single aspect rather than multiple features, which may have a less predictable result. Where the contract is for the sale of goods, the characteristic performance is generally where they are delivered.

Where it is for the provision of a service, it is generally where the service is to be provided.  In the case of a guarantee, it is said that the characteristic performance is the payment of the money.  The concept runs into difficulty in the case of a contract where each side has obligations which do not have a close relationship with the governing law.

The Working Group on the Convention say that the payment of money is not usually the essence of the obligation.  It can, in some cases, be the characteristic performance but not generally.  This favours the seller over the buyer, who may be a larger-scale organisation.