Essay: Choice of Law Clause

INTRODUCTION
Private International Law or Conflict of Laws is that branch of law which regulates the various law suits consisting of a foreign law ingredient wherein the distinction in result occurs depending on the fact as to which laws are put into application as the lexcausae. This branch of law is private in certain states and public in others. Firstly, it concerns the determination of jurisdiction that is whether a particular forum chosen has the jurisdiction for adjudicating a particular suit or whether it is the correct venue for dealing with the dispute. Secondly, it deals with the determination of the state’s laws which must be applied for resolution of dispute. Apart from these, the enforcement of foreign judgments is also dealt with.
In the modern era of globalization, contracts contain more than one foreign element and hence, ascertainment of the applicable law becomes a complicated question. This complexity originates because of the multiple and diverse inter – connected factors which may arise out of different jurisdictions for instance, the place where the contract was put in paper, the performance place, place of business of the parties in question, the place concerning payment, the currency in which the payment is to be done, the parties domicile or nationality and others. In order, to evade such a complicated situation, parties are themselves given the opportunity to carry out selection of law governing the contract as under the Rome convention. This choice of law clause has become so important in international contracts that defying it would in effect be ignoring the commercial realities.
CHAPTER I – DOCTRINE OF PUBLIC POLICY
Public Policy is among others, the most important factor for regulating the acceptance as well as the application of both the general and particular rules of Private International Law. It is further, a significant decisive factor for accepting or excluding foreign law proceedings in a particular country.
The doctrine of public policy is define as,
“The principles and standards regarded by the legislature or by the courts as being of fundamental concern to the state and the whole of the society. In other words it is the principle that a person should not be allowed to anything that would tend to injure the public at large.”
“A condition is against public policy if it is in the interest of the state that it should not be performed. What is contrary to public policy has varied from time to time, and many conditions now upheld which in former days would have been declared to be contrary to the (public) policy of the law. The rule remains, but its application varies with the principles which for the time being guide public opinion.”
So by applying the doctrine of public policy the court can state that the contract is opposed to the fundamentals of public policy that is it would harm the public or is against the fundamental principle of law and public morality or the public interest and so on that basis the court can refuse to enforce the contract. In the case of Central Inland Water Transport Corporation v. Brojo Nath, the court applied the principle of public policy and noted that the concept of public policy is not fixed and it varies from time to time and so when applying this doctrine the court must look at whether the act or the clause is actually against the public policy or public interest at that time.
One of the most leading examples of the doctrine of public policy and its application can be seen in the case of Hendry v. Zimmerman, where one party had agreed to testify in the court if and only if the other party had agreed to leave something for him in their estate, the court in this case refused to enforce this agreement as it was against public policy.
CHAPTER II – CHOICE OF LAW
“Choice of Law’’ holds the center of attraction in the study of conflicts especially in the domestic arena. Other subject matters in the field of conflict of law such as jurisdiction and recognition of judgments have a close connection with the difficulty of choice of law. Mostly this concept is put into application in the cases of international contracts which are commercial in nature and what exactly happens in such situations is that parties themselves chose the law applicable to the contract in case a dispute arises or for any other case in which it is likely that a dispute might arise out of the contract.
The problem arises in situations where in the dispute has connection with more than one state and laws pertaining the subject matter differ in both the states, the issue which then occurs is to find the most suitable and appropriate law applicable. This is where the choice of law becomes helpful by providing the applicable law which is in fact, was negotiated and agreed by the parties themselves.
Another concern that exists in the choice of law concept is why would a forum court use any other source apart from the law of its own forum or state in coming to a decision in any case? For solving this difficulty, there various attempts made in the international sphere and few of the important ones which shall be discussed in the paper include the following:
1. Rome I & II Regulation,
2. Hague Principles on Choice of Law in International Commercial Contracts.
Rome I & II Regulations:
The contractual obligations arising out of contracts entered in or after 1st of April 1991, the rules governing choice of law in the civil and commercial matters are found in the Rome Convention on the law applicable to contractual obligations 1980, which was to be put in application to the then Member States of the European Union. Thereafter, in the year 2007, for non- contractual obligations, a regulation for choice of law was adopted which was referred as the “Rome II” and the former Regulation was to be referred “Rome I”. Thus, beginning from 17th December 2009, both the both Rome I and Rome II Regulations administers the choice of law matters.
Discussed below are few of the relevant characteristics of the Regulations:
Article 3:
The principle of “party autonomy” has been embodied in Article 3 of the Rome Convention, here parties have the privilege to select the law and the contract would be governed by that law. Although generally the selected law has some association with the transaction, but if also happens that the chosen law has no association, or evident link with the transaction. It is noticeable here that the Rome Convention allows selecting a law which has no relation with the agreement.
Article 1(1) of the Rome Convention says that the rules apply to contractual compulsions “in any situation involving a choice between the laws of different countries.” And Article 3(1) of the convention utters that the contract would be governed by the law which the parties have chosen. The consolidated impact of these articles is that parties who resides in the same nation, and whose transaction is linked just with that nation, might pick the law of another nation, and the courts of contracting nations are bound to give effect to the choice made. Art 3(3) of the Rome Convention made it apparent that the parties are free to choose a foreign law regardless of the fact that all the pertinent components are connected with one nation only.
It clearly shows that a law can be chosen even if it does not have a nexus with the transaction. But the parties are bound to demonstrate reason either by the circumstances of the case or by the terms of the contract.
Express Choice:
A choice of law would be held as express if the contract itself contains a provision and specifies that which law would be used to govern the contract. In the case of Vita Food Product Inc v Unus Shipping Co.Ltd, the Privy Council had held that the parties has the freedom to choose any governing law, regardless of any nexus with the contract, but the choice must not be in opposition to English public policy and has to a legal and bonafide one. Where the parties have recognized the governing law there is no trouble in offering impact to the choice made by the party. But in cases where the parties select the governing law indirectly the adequacy of the choice depends upon the interpretation of the clause being referred to.
In the case of Companie Tunisienne de Navigation SA v Companie d’ Armament Maritime SA a French company and a Tunisian company entered into a contract in Paris, for the carriage of the consignment of oil. They agreed to adopt a charter party, Clause 13 states that the contract would be governed by the laws of the nation whose flag is on the vessel carrying the products. When the contract was about to be concluded the parties appeared to have accepted that the French company would be using its own ship, which flew the flag. Before the conclusion of the contract a war broke out and depending on the French law as the relevant law frustration of contract was asserted. The question which arose before the court was whether Clause 13 was a successful decision of French law, considering the fact that forth fifth six voyages the ships which were being employed by the defendant carried five different flags. The answer of the court was in affirmation and held that the parties have conceived that the French company would be using French vessels in order to conclude the contract and it was held to be sensible to presume that the parties had picked French law as the relevant law, despite the fact that when the parties were contracting their assumption was wrong.
Choice Demonstrated With Reasonable Certainty:
It is not mandated by the convention that the choice has to be express for it to be effective. The convention makes it amply clear that it suffices if a choice can be ‘established with reasonable certainty’ by the ‘circumstances or terms of the contract’ of the case. It is to be noted here that the Convention provides no guidance with respect to how the inference has to be determined.
The Courts find assistance from the Guiliano Lagarde Report in order to infer a choice of law as the report provides examples for certain factors to be considered. The Guiliano Lagarde factors comprise, inter alia, of arbitration clause or : a choice of jurisdiction ; earlier transactions of the parties ; the usage of a standard form ; a connected transaction etc.
Thus, in the much quoted decision of Gan Insurance v Tai Ping Insurance the presiding judge notably pointed out that the contract of reinsurance was located in London on the London market; the judge further added that the terms of the slip and the claims co-operation clause, ‘demonstrated with reasonable certainty by the terms of the contract and the circumstances of the case’ and made it clear that the implied choice was that of English law.
Shortcomings:
The foremost downside of these regulations is that they find application only on the members of the European Union who happen to be the contracting parties to these regulations and the regulations do not apply to countries other than those members of the European Union and consequently their application happens to be very narrow in its scope.
Hague Principles on Choice of Law in International Commercial Contracts:
The Hague Principles on Choice of Law in International Commercial Contracts was officially approved on March 15th 2015. The Hague Conference on Private International Law was first time when the Choice of Law concept was elaborately deliberated upon. The Hague Principles on Choice of Law in International Commercial Contracts provide the rules that would oversee the international commercial contracts.
The Hague Principles were developed to ensure certainty in rules applicable in such cases which is there under the laws of certain states but to ensure better justice in disputes of such kind the law has to be uniform and applicable to all the parties so as to ensure that the confusion or lack of certainty in case of laws applicable to the international commercial contracts is not there.
The Hague Conference considers that the benefits of party autonomy are noteworthy and encourages this concept to further spread to the States that are yet to adopt it, or those who have done so with substantial limitations, moreover, the constant progress and improvement of the notion in places where it is already acknowledged. The uniqueness of the Hague Principles is that it is a “non-binding soft law”.
It is relevant to note that the choice of law of the parties must be distinguished from the main contract of the parties. The parties can have a clause in their main agreement as to the choice of law, if not; they can also consider having a separate agreement altogether regarding the same.
Further, it is pertinent to note that the agreements relating to the choice of law must not be confused with the following clauses:
1. Jurisdictional or Forum Selection or Choice of Court Clauses: These clause determine the forum or court that would decide the issue;
2. Arbitration Clauses: This displays the intent of the parties to submit their dispute to the arbitral tribunal.
The above mentioned are also in common parlance known to be dispute resolution agreements. The point at which they may be confused with clauses of choice of law is that they are, in general practice, used in combination with the agreements or clauses in relation to the choice of law. The Hague Principles feature choice of law alone. Dispute resolution agreements are not a part of the Hague Principles.
Nature of the Principles:
The Hague Principles doesn’t constitute a binding instrument which the States are obligated to directly incorporate into their own domestic law. It is neither a model law that all the states are encouraged to enforce. It is, rather, a set of principles which are non-binding. The Hague Conference encourages nation States to translate these set of principles into their domestic law regimes in a manner they see convenient depending upon the circumstances and ability of each State. Thus, the Hague Principles can guide the reformation of domestic law on the topic of choice of law and operate parallel to the existing instruments on the said subject. As an instrument which is non-binding, these Principles are different than the other instruments that the Hague Conference develops.
While the endorsement of principles which are non-binding is a new domain for the Hague Conference, such instruments are comparatively common. Undeniably, the Principles further add up to a growing number of instruments of a non-binding given by other organizations that have accomplished success in harmonizing and developing law. A few of them are the effect of the UNIDROIT Principles and the PECL on the development of law of contract.
Purpose and scope of the Principles:
The primary aim is to support and strengthen the point of party autonomy and to make sure that the law that has been chosen by the contracting parties has the widest scope in relation to its application, subject to well defined limitations.
Two criterions that are to be fulfilled for the application of the principles are:
1. Firstly, the contract that is in question must be an “international contract”. A contract is termed as “international” when the establishments of the parties or other relevant elements of the contract are not belonging to one state.
2. Secondly, all the parties to the contract must act in the exercise of its profession or trade. Certain specific categories which provide for a presumptively weaker employee or consumer have been expressly excluded from the principles.
While the Principles aim at promoting party autonomy in relation to the choice of law, they also provide for the limitations of the same. One such important limitationis contained in Article 11 which addresses limitations which are a resultof overriding of mandatory rules and public policy. The aim of such limitations is to make sure that, under certain circumstances, the choice of law the parties make doesn’t lead to the exclusion of certain policies and rules that are of utmost importance to the States.
The rules that are provided are only for situations where the parties, either expressly or tacitly, have made a choice of law by the way of agreement. It isn’t provided that what will happen in cases where the parties have not made a choice as to the law that is to be made applicable. Two main reasons for such exclusion are:
i. Firstly, the aim of the Principles is to supplement and promote party autonomy instead of providing a body of principles for the determination the law that is to be made applicable to commercial contracts which have an international element.
ii. Secondly, a consensus is lacking in relation to rules that regulate the law that is to be made applicable in the case where the party choice is absent.
Principles: Elaborated:
It is an expected act that a state adopting a regime favorable to party autonomy must have rules that are in consonance with the given provisions –
The most imperative Principles in Hague Principles on Choice of Law in International Commercial Contracts are:
1. Article. 2(2) : ability of parties to choose different laws to apply to different parts of their contract,
2. Article. 2(3) : to tacitly choose the applicable law (see Art. 4) and to modify their choice of law,
3. Article. 2(4) : the lack of a required connection between the chosen law and the transaction or the parties,
4. Article 7 : It provides for the separate treatment of the validity of a choice of law agreement from the validity of the main contract which is in line with many national regimes and regional instruments,
5. Article 9 : It defines the scope of the applicable law,
6. Article. 10 : It provides guidance as to how to determine the scope of the application of the chosen law in the context of a triangular relationship of assignment,
7. Article. 12 : It talks about and how to deal with parties that have establishments in more than one State.
These model provisions are guiding advice extended to States as to be considered while adopting or imbibing a regime which is pro-party autonomy. Though, the conference of Hague recognizes the existence of a reliable and well-functioning party autonomy regime despite of non-recognition of these model principles and practices.
Important Characteristics of The Hague Principles:
I. Article 3: This principle of The Hague conference allows the autonomy to choose the “rules of law” and not just the law of a State, within the limits of certain parameters, such “rules of law” emanates for non-State sources.
Historically, the autonomy for choosing certain norms or “rules of law” are usually deliberated only in cases of Arbitration. While, whenever a dispute is under the process of litigation in a State court, conflict of law regime requires the parties choice of law agreement decides upon the Law of a State. However, in progression, certain state regimes have allowed parties incorporation of “rules of law” in their contract though this incorporating by referring is not the same as allowing parties the autonomy to choose “rule of law” as law governing their contract.
II. Article 5: There is no particular format for a choice of law agreement to be valid according to the substantive rule of private international law.
III. Article 6: provides solution to the problem of battle of forms or what we more specifically known as the dispute arising out of the exchange of “standard terms” while makes choices of law.
IV. Article 8: Excludes Renvoi, however, allows autonomy to parties to allow the same if agreed upon by parties.
CHAPTER III – LIMITATIONS ON CHOICE
Limitations upon the exercise of choice of law are as follows:
1. Mandatory Rule:
The operation of the laws of the parallel connected system is inevitable avoided while exercising choice of law in a contract that is international. There are situation when such evasion of one system and prioritizing other is not incidental but intentional done by the parties to avoid one system of law. Such evasions are censored by application of mandatory rule. A mandatory rule is such rule of law of a country which cannot be deviated from by way of a contract.
The provision of Art 3(3) of Hague Rules state that wherever all elements relevant to a situation while making a choice are relevant on to one particular country, choosing a foreign law in such a situation, despite of having a foreign law clause, will not prejudice the application of mandatory rules related to that country.
2. Overriding Statute:
The second limitation is by virtue of determining whether the choice of governing law is by Article 3 or is being governed by the close connection test in accordance with Article 4. Article 7(2) is such that Rome convention doesn’t restrict the application of rule of law of form wherever it is a situation where such rule is mandatory. It is hence clear that express choice can be nullified and not be allowed in favor a foreign law by the terms of the legislative provisions of the governing forum. Wherever there is an overriding position of law despite of the governing law, the provisions chose by the parties of a foreign law to govern their contract can only be effectuated to the extent allowed by the statute.
3. Consumer And Employment Contracts:
The subsequent limitations are in relation to consumer-employment contract. Article 5(2) and 6(1) enunciates that choice of law or forum made by parties has no effect as to deprive an employee or consumer from the protection of certain mandatory laws, consumer falling under the law of their habitual residence and employee whatever law would be applicable in absence of choice.
4. Public Policy:
If the choice of foreign law is such that its application would be incompatible with public policy, then the choice of such a foreign law will not be allowed by the court. This has been accepted and incorporated in the Hague Principle on Choice of Law in International Commercial Contracts as a limitation upon the choice of law in accordance with Article 11.
CHAPTER IV– PUBLIC POLICY AS LIMITATION
It is a much accepted and understood principle of conflict of laws that any court of a state will not incorporate any such foreign law that is in contravention of the fundamental public policy of the lex fori. All countries insist upon application of the law of their own land despite being governed by foreign law as their own law is governed by the express idea of basic morality.
A contrary view is reflected in the words of Justice Beach:
“It would be an intolerable affectation of superior virtue for the courts of one state to pretend that the mere enforcement of a right validly created by the laws of a sister state ‘would be repugnant to good morals, would lead to disturbance and disorganization of the local municipal law,’ or would be, of such evil example as to corrupt the jury or the public.”
CHAPTER V – POSITION IN INDIA
It is a widely accepted notion that public policy isn’t static. Public policy implies something that is in public interest or is in relation to public good; also, what thing might be injurious or harmful to the public interest or public good has never stayed static and has varied with time. The Apex Court has, in addition stated that going by predominant social circumstances; a contract having a tendency or ability to injure public welfare or public interests is against public policy. The judiciary has come to honor the public policy doctrine as encompassing also to harmful tendencies. In cases where the objective of any agreement has any harmful tendencies, the agreement would be void for the reason that it is contrary to public policy.
On the ground of the rules of choice of law, local courts preferably apply the foreign law rather than the domestic one in order to provide justice to the parties. The courts will continue with the same practice even when such an application of the foreign law is, under any given set of circumstance, against the public policy of the country which has been made applicable in the Indian cases.
Contract Act:
Sec 23, Indian Contract Act, 1872, puts a bar on the Courts in India from either enforcing or recognizing an agreement where, on the face of it, such an enforcement or recognition will be against the Public Policy of India, or where such an agreement was obtained by the way of fraud.
Despite of the statutory limitation put out by the 1872 Act as mentioned above, the common law of India upholds that a local court in India will not enforce or recognize a right that is based on a foreign judgment in cases where such an enforcement or recognition of the right is against morality or justice, is unconscionable, or cases where the judgment is attained by the way of a fraud.
Based on the public policy, the Contract Act, 1872 makes the following transactions void:
i. Trade,
ii. A contract which is in restraint of marriage,
iii. An agreement the fulfillment of which is not certain or possible of being made certain,
iv. Legal proceedings,
v. A wagering contract, etc.
Nonetheless, in cases where a particular contract is falling in a space where it has two jurisdictions, the contracting parties have the autonomy to select the jurisdiction they wish to submit to. On the happening of such an event, it cannot be termed as against public policy and the contract shall be held to be a valid one. Additionally, in the case where the contracting parties have selected a particular forum, if they are backed by balance of convenience, they can select another forum, or it is contributory in the promotion of international trade and commerce.
In cases when both the parties belong to India and are selecting by their free will that they wish to be governed by the laws of a third country, they will be said to be acting against public policy as such an act would mean that they are trying to unnecessarily move away from the Indian law.
It is a part of the countries’ public policy that in cases where no foreign element is involved and the parties are Indians, they shall not be allowed to derogate from the laws applicable in India. However, in the case of Delhi AME Pvt. Ltd. v CAF India and Reliance Industries v UOI a contrary view was given by the Apex court.
CONCLUSION
From the above discussion on the doctrine of public policy, on choice of law and the limitations that public policy possess on the choice of law we see that the need for the concept of party autonomy the international community has felt the need to have some rules or law relating to the choice of laws, as there are none in the international sphere which leads to a lot of confusion and confusion among the parties to the contract and the states as to whether they should apply the law that the parties have chosen or whether they must apply the law of their law that is their “lex fori”, now as we have seen that there have been many attempts to get a uniformity in the laws relating to choice of law starting with the Rome I & II Regulations which was only for the member states of European Union to the recent Hague Principles which is aimed to apply to all the states. This has helped sort out the principles relating to choice of law.
But, we have also seen that all the above mentioned statutes have specified that any law in the choice of law in the contracts if against the public policy of that state where it is to be enforced can be held to be invalid and not applied or given effect to by the courts of that land and that is how the doctrine of public policy acts as a limitation to the choice of law in the international contracts and this also changes from time to time as what is against public policy is also not static that is it also is subject to change and hence public policy as a limitation to choice of law also varies from time to time.