Contract (conflict)
Encyclopedia
In the conflict of laws
, the validity of a contract
with one or more foreign law elements will be decided by reference to the so-called "proper law
" of the contract.
s applied the lex loci contractus
or the law of the place where the contract was made to decide whether the given contract was valid. The apparent advantage of this approach was that the rule was easy to apply with certain and predictable outcomes. Unfortunately, it was also open to abuse, e.g. the place could be selected fraud
ulently to validate an otherwise invalid contract; it might lead to the application of laws with no real connection with the transaction itself, say, because the parties signed the agreement while on holiday; or it might have been difficult to decide where the contract was made, e.g. because it was negotiated and signed on a railway journey through several states.
To avoid these difficulties, some courts proposed applying the lex loci solutionis
or the law of the place of performance of the contract. This produced difficulties in cases where the contract required each party to perform its obligations in a different country, or where the place of performance was dictated by later circumstances. However, as the public policies
driven by the theory of freedom of contract
evolved, the Doctrine of Proper Law
emerged.
which applies the provisions of the proper law as it is when the contract is to be performed and not as it was when the contract was made.
The parties to a valid contract are bound to do what they have promised. So, to be consistent, the Doctrine of Proper Law examines the parties'
intention as to which law is to govern the contract. The claimed advantage of this approach is that it satisfies more abstract considerations of justice
if the parties are bound by the law they have chosen. But it raises the question of whether the test is to be subjective, i.e. the law actually intended by the parties, or objective, i.e. the law will impute
the intention which reasonable men in their position would probably have had. It cannot safely be assumed that the parties did actually consider which of the several possible laws might be applied when they were negotiating the contract. Hence, although the courts would prefer the subjective approach because this gives effect the parties' own wishes, the objective test has gained in importance. So the proper law test today is three-stage:
It is only fair to admit that the task of imputing an intention to the parties in the third situation presents the courts with another opportunity for uncertainty and arbitrariness, but this overall approach is nevertheless felt to be the lesser of the available evils.
).
. Article 3(1) of the Rome Convention on the law applicable to contractual obligations
expressly recognises dépeçage in contracting states.
from two related, but distinct, conceptual directions:
Many states have policies which protect the young and inexperienced by insulating them from liability even though they may have voluntarily committed themselves to unwise contracts. The age at which children achieve full contractual capacity
varies from state to state but the principle is always the same. Infants
are not bound by many otherwise valid contracts, and their intention is irrelevant because of the legal incapacity imposed on them by the state of the domicile
(the lex domicilii
) or nationality
(the lex patriae
). This recognises a set of social values that requires exculpation even though there is relevant action and consent freely given.
Equally, states have an interest in protecting the normal flow of trade within their borders. If businesses had constantly to verify the nationality or domicile of their customers and their ages, this might slow down business and, potentially, infringe privacy legislation. Hence, conflicts of public policy can emerge which complicate the choice of law decision and invite forum shopping
, i.e. traders will always seek to sue infants with whom they have contracts in those states which accord priority to commercial interests, while children will seek the avoidance of liability in the courts which protect their interests. This would be achieved during the characterisation
stage by classifying the issue as status
and its incidents rather than contract because a party's status and lack of capacity would be in rem
.
, i.e. the defect is so serious that it prevents an agreement from ever coming into being. If this happens, every term in the contract including the express selection of the proper law, would be unenforceable. This raises the question of whether the lex fori should operate a policy of saving the validity of contracts wherever possible. Suppose that a contract would be valid under many potentially relevant laws but not under the putative proper law, and that, until problems arose, the parties have acted in good faith
on the assumption that they will be bound by the agreement, some courts might be tempted to ignore the apparent proper law and choose another that would give effect to the parties general contractual intentions.
, the Contracts (Applicable Law) Act 1990 formally incorporates the Convention on the Law Applicable to Contractual Obligations the "Rome Convention
") opened for signature in Rome on June 19, 1980 and signed by the United Kingdom
on December 7, 1981; the Convention on the Accession of the Hellenic Republic to the Rome Convention (the "Luxembourg Convention") signed by the United Kingdom in Luxembourg on April 10, 1984; and the first Protocol on the Interpretation of the Rome Convention by the European Court (the "Brussels Protocol") signed by the United Kingdom in Brussels
on December 19, 1988.
Conflict of laws
Conflict of laws is a set of procedural rules that determines which legal system and which jurisdiction's applies to a given dispute...
, the validity of a contract
Contract
A contract is an agreement entered into by two parties or more with the intention of creating a legal obligation, which may have elements in writing. Contracts can be made orally. The remedy for breach of contract can be "damages" or compensation of money. In equity, the remedy can be specific...
with one or more foreign law elements will be decided by reference to the so-called "proper law
Proper law
The Doctrine of the Proper Law is applied in the choice of law stage of a lawsuit involving the conflict of laws.-Explanation:In a conflicts lawsuit, one or more state laws will be relevant to the decision-making process. If the laws are the same, this will cause no problems, but if there are...
" of the contract.
History
Until the middle of the 19th century, the courtCourt
A court is a form of tribunal, often a governmental institution, with the authority to adjudicate legal disputes between parties and carry out the administration of justice in civil, criminal, and administrative matters in accordance with the rule of law...
s applied the lex loci contractus
Lex loci contractus
In the conflict of laws, the lex loci contractus is the Latin term for "law of the place where the contract is made".-Explanation:When a case comes before a court and all the main features of the case are local, the court will apply the lex fori, the prevailing municipal law, to decide the case...
or the law of the place where the contract was made to decide whether the given contract was valid. The apparent advantage of this approach was that the rule was easy to apply with certain and predictable outcomes. Unfortunately, it was also open to abuse, e.g. the place could be selected fraud
Fraud
In criminal law, a fraud is an intentional deception made for personal gain or to damage another individual; the related adjective is fraudulent. The specific legal definition varies by legal jurisdiction. Fraud is a crime, and also a civil law violation...
ulently to validate an otherwise invalid contract; it might lead to the application of laws with no real connection with the transaction itself, say, because the parties signed the agreement while on holiday; or it might have been difficult to decide where the contract was made, e.g. because it was negotiated and signed on a railway journey through several states.
To avoid these difficulties, some courts proposed applying the lex loci solutionis
Lex loci solutionis
The lex loci solutionis is the Latin term for "law of the place where relevant performance occurs" in the conflict of laws. Conflict is the branch of public law regulating all lawsuits involving a "foreign" law element where a difference in result will occur depending on which laws are...
or the law of the place of performance of the contract. This produced difficulties in cases where the contract required each party to perform its obligations in a different country, or where the place of performance was dictated by later circumstances. However, as the public policies
Public policy (law)
In private international law, the public policy doctrine or ordre public concerns the body of principles that underpin the operation of legal systems in each state. This addresses the social, moral and economic values that tie a society together: values that vary in different cultures and change...
driven by the theory of freedom of contract
Freedom of contract
Freedom of contract is the freedom of individuals and corporations to form contracts without government restrictions. This is opposed to government restrictions such as minimum wage, competition law, or price fixing...
evolved, the Doctrine of Proper Law
Proper law
The Doctrine of the Proper Law is applied in the choice of law stage of a lawsuit involving the conflict of laws.-Explanation:In a conflicts lawsuit, one or more state laws will be relevant to the decision-making process. If the laws are the same, this will cause no problems, but if there are...
emerged.
Proper law
The proper law of the contract is the main system of law applied to decide the validity of most aspects to the contract including its formation, validity, interpretation, and performance. This does not deny the power of the parties to agree that different aspects of the contract shall be governed by different systems of law. But, in the absence of such express terms, the court will not divide the proper law unless there are unusually compelling circumstances. And note the general rule of the lex foriLex fori
Lex fori is a legal term used in the conflict of laws used to refer to the laws of the jurisdiction in which a legal action is brought...
which applies the provisions of the proper law as it is when the contract is to be performed and not as it was when the contract was made.
The parties to a valid contract are bound to do what they have promised. So, to be consistent, the Doctrine of Proper Law examines the parties'
Party (law)
A party is a person or group of persons that compose a single entity which can be identified as one for the purposes of the law. Parties include: plaintiff , defendant , petitioner , respondent , cross-complainant A party is a person or group of persons that compose a single entity which can be...
intention as to which law is to govern the contract. The claimed advantage of this approach is that it satisfies more abstract considerations of justice
Justice
Justice is a concept of moral rightness based on ethics, rationality, law, natural law, religion, or equity, along with the punishment of the breach of said ethics; justice is the act of being just and/or fair.-Concept of justice:...
if the parties are bound by the law they have chosen. But it raises the question of whether the test is to be subjective, i.e. the law actually intended by the parties, or objective, i.e. the law will impute
Imputation (law)
In law, the principle of imputation or attribution underpins the concept that ignorantia juris non excusat—ignorance of the law does not excuse. All laws are published and available for study in all developed states...
the intention which reasonable men in their position would probably have had. It cannot safely be assumed that the parties did actually consider which of the several possible laws might be applied when they were negotiating the contract. Hence, although the courts would prefer the subjective approach because this gives effect the parties' own wishes, the objective test has gained in importance. So the proper law test today is three-stage:
- it is the law intended by the parties when the contract was made which is usually evidenced by an express choice of law clauseChoice of law clauseA choice of law clause or proper law clause is a term of a contract in which the parties specify that any dispute arising under the contract shall be determined in accordance with the law of a particular jurisdiction.-Explanation:...
; or - it is implied by the court because either the parties incorporated actual legal terminology or provisions specific to one legal system, or because the contract would only be valid under one of the potentially relevant systems; or
- if there is no express or implied choice, it is the law which has the closest and most real connection to the bargain made by the parties.
It is only fair to admit that the task of imputing an intention to the parties in the third situation presents the courts with another opportunity for uncertainty and arbitrariness, but this overall approach is nevertheless felt to be the lesser of the available evils.
Express selection
When the parties express a clear intention in a formal clause, there is a rebuttable presumption that this is the proper law because it reflects the parties' freedom of contract and it produces certainty of outcome. It can only be rebutted when the choice is not bona fide, it produces illegality, or it breaches public policy. For example, the parties may have selected the particular law to evade the operation of otherwise mandatory provisions of the law which has the closest connection with the contract. The parties are not free to put themselves above the law and, in such cases, it will be for the parties to prove that there is a valid reason for selecting that law other than evasion.Implied selection
When the parties have not used express words, their intention may be inferred from the terms and nature of the contract, and from the general circumstances of the case. For example, a term granting the courts of a particular state exclusive jurisdiction over the contract would imply that the lex fori is to be the proper law (see forum selection clauseForum selection clause
A forum selection clause in a contract with a conflict of laws element allows the parties to agree that any litigation resulting from that contract will be initiated in a specific forum...
).
Closest and most real connection
In default, the court has to impute an intention by asking, as just and reasonable persons, which law the parties ought to, or would, have intended to nominate if they had thought about it when they were making the contract. In arriving at its decision, the court uses a list of connecting factors, i.e. facts which have an unambiguous geographical connection, and whichever law scores the most hits on a league table created from the list will be considered the proper law. The current list of factors includes the following:- the habitual residenceHabitual residenceIn conflict of laws, habitual residence is the standard used to determine the law which should be applied to determine a given legal dispute. It can be contrasted with the law on domicile, traditionally used in common law jurisdictions to do the same thing....
/domicileDomicile (law)In law, domicile is the status or attribution of being a permanent resident in a particular jurisdiction. A person can remain domiciled in a jurisdiction even after they have left it, if they have maintained sufficient links with that jurisdiction or have not displayed an intention to leave...
/nationalityNationalityNationality is membership of a nation or sovereign state, usually determined by their citizenship, but sometimes by ethnicity or place of residence, or based on their sense of national identity....
of the parties; - the parties' main places of business and of incorporationIncorporation (business)Incorporation is the forming of a new corporation . The corporation may be a business, a non-profit organisation, sports club, or a government of a new city or town...
; - the place nominated for any arbitrationArbitrationArbitration, a form of alternative dispute resolution , is a legal technique for the resolution of disputes outside the courts, where the parties to a dispute refer it to one or more persons , by whose decision they agree to be bound...
proceedings in the event of a dispute (the lex loci arbitriLex loci arbitriThe lex loci arbitri is the Latin term for "law of the place where arbitration is to take place" in the conflict of Laws. Conflict is the branch of public law regulating all lawsuits involving a "foreign" law element where a difference in result will occur depending on which laws are...
); - the languageLanguageLanguage may refer either to the specifically human capacity for acquiring and using complex systems of communication, or to a specific instance of such a system of complex communication...
in which the contract documents is written; - the formatFormatFormat may refer to:* File format, layout for electronic files* Text formatting, typesetting of text elements* Format , a command-line utility in many computer operating systems* Format , a computer command to prepare hard disks...
of the documents, e.g. if a form is only found in one relevant country, this suggests that the parties intended the law of that country to be the proper law; - the currencyCurrencyIn economics, currency refers to a generally accepted medium of exchange. These are usually the coins and banknotes of a particular government, which comprise the physical aspects of a nation's money supply...
in which any payment is to be made; - the flagFlagA flag is a piece of fabric with a distinctive design that is usually rectangular and used as a symbol, as a signaling device, or decoration. The term flag is also used to refer to the graphic design employed by a flag, or to its depiction in another medium.The first flags were used to assist...
of any ship involved; - the place where the contract is made (which may not be obvious where negotiations were concluded by letter, fax or e-mail);
- the place(s) where performance is to occur;
- any pattern of dealing established in previous transactions involving the same parties; and
- where any insuranceInsuranceIn law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the...
companies or relevant third parties are located.
Dépeçage
Some legal systems provide that a contract may be governed by more than one law. This concept is referred to as dépeçageDépeçage
In law, dépeçage refers to the concept in the conflict of laws whereby different issues within a particular case may be governed by the laws of different states. In common law countries dépeçage is usually used to refer to a single contract which provides that different parts of the contract shall...
. Article 3(1) of the Rome Convention on the law applicable to contractual obligations
Rome Convention (contract)
The Convention on the Law Applicable to Contractual Obligations 1980 is a measure in private international law or conflict of laws which aims to create at least a harmonised, if not a unified, choice of law system in contracts within the European Union...
expressly recognises dépeçage in contracting states.
Problems
There are many problems affecting this area of law, but two of the most interesting are:Incapacity through age
States approach the issue of intentionalityIntentionality
The term intentionality was introduced by Jeremy Bentham as a principle of utility in his doctrine of consciousness for the purpose of distinguishing acts that are intentional and acts that are not...
from two related, but distinct, conceptual directions:
- liabilityLegal liabilityLegal liability is the legal bound obligation to pay debts.* In law a person is said to be legally liable when they are financially and legally responsible for something. Legal liability concerns both civil law and criminal law. See Strict liability. Under English law, with the passing of the Theft...
in which the law holds individuals responsible for the consequences of their actions, and - exculpability in which fundamental social policies exclude or diminish the liability that actors would have incurred in different circumstances.
Many states have policies which protect the young and inexperienced by insulating them from liability even though they may have voluntarily committed themselves to unwise contracts. The age at which children achieve full contractual capacity
Capacity (law)
The capacity of both natural and legal persons determines whether they may make binding amendments to their rights, duties and obligations, such as getting married or merging, entering into contracts, making gifts, or writing a valid will...
varies from state to state but the principle is always the same. Infants
Minor (law)
In law, a minor is a person under a certain age — the age of majority — which legally demarcates childhood from adulthood; the age depends upon jurisdiction and application, but is typically 18...
are not bound by many otherwise valid contracts, and their intention is irrelevant because of the legal incapacity imposed on them by the state of the domicile
Domicile (law)
In law, domicile is the status or attribution of being a permanent resident in a particular jurisdiction. A person can remain domiciled in a jurisdiction even after they have left it, if they have maintained sufficient links with that jurisdiction or have not displayed an intention to leave...
(the lex domicilii
Lex domicilii
The lex domicilii is the Latin term for "law of the domicile" in the conflict of laws. Conflict is the branch of public law regulating all lawsuits involving a "foreign" law element where a difference in result will occur depending on which laws are applied....
) or nationality
Nationality
Nationality is membership of a nation or sovereign state, usually determined by their citizenship, but sometimes by ethnicity or place of residence, or based on their sense of national identity....
(the lex patriae
Lex patriae
The term lex patriae is Latin for the law of nationality in the conflict of laws which is the system of public law applied to any lawsuit where there is a choice to be made between several possibly relevant laws and a different result will be achieved depending on which law is...
). This recognises a set of social values that requires exculpation even though there is relevant action and consent freely given.
Equally, states have an interest in protecting the normal flow of trade within their borders. If businesses had constantly to verify the nationality or domicile of their customers and their ages, this might slow down business and, potentially, infringe privacy legislation. Hence, conflicts of public policy can emerge which complicate the choice of law decision and invite forum shopping
Forum shopping
Forum shopping is the informal name given to the practice adopted by some litigants to get their legal case heard in the court thought most likely to provide a favorable judgment...
, i.e. traders will always seek to sue infants with whom they have contracts in those states which accord priority to commercial interests, while children will seek the avoidance of liability in the courts which protect their interests. This would be achieved during the characterisation
Characterisation (conflict)
In conflict of laws, characterisation is the second stage in the procedure to resolve a lawsuit involving a foreign law element. This process is described in English law as classification and as qualification in French law...
stage by classifying the issue as status
Status (law)
A person's status is a set of social conditions or relationships created and vested in an individual by an act of law rather than by the consensual acts of the parties, and it is in rem, i.e. these conditions must be recognised by the world. It is the qualities of universality and permanence that...
and its incidents rather than contract because a party's status and lack of capacity would be in rem
In rem
In rem is Latin for "against a thing." In a lawsuit, an action in rem is directed towards a piece of property rather than against a person . The action disputes or seeks to transfer title to property. When title to real estate In rem is Latin for "against a thing." In a lawsuit, an action in rem...
.
Mistake, misrepresentation, etc.
In many states, fundamental mistakes, misrepresentations and similar defects may make a contract void ab initioAb initio
ab initio is a Latin term used in English, meaning from the beginning.ab initio may also refer to:* Ab Initio , a leading ETL Tool Software Company in the field of Data Warehousing.* ab initio quantum chemistry methods...
, i.e. the defect is so serious that it prevents an agreement from ever coming into being. If this happens, every term in the contract including the express selection of the proper law, would be unenforceable. This raises the question of whether the lex fori should operate a policy of saving the validity of contracts wherever possible. Suppose that a contract would be valid under many potentially relevant laws but not under the putative proper law, and that, until problems arose, the parties have acted in good faith
Good faith
In philosophy, the concept of Good faith—Latin bona fides “good faith”, bona fide “in good faith”—denotes sincere, honest intention or belief, regardless of the outcome of an action; the opposed concepts are bad faith, mala fides and perfidy...
on the assumption that they will be bound by the agreement, some courts might be tempted to ignore the apparent proper law and choose another that would give effect to the parties general contractual intentions.
English law
In English lawEnglish law
English law is the legal system of England and Wales, and is the basis of common law legal systems used in most Commonwealth countries and the United States except Louisiana...
, the Contracts (Applicable Law) Act 1990 formally incorporates the Convention on the Law Applicable to Contractual Obligations the "Rome Convention
Rome Convention (contract)
The Convention on the Law Applicable to Contractual Obligations 1980 is a measure in private international law or conflict of laws which aims to create at least a harmonised, if not a unified, choice of law system in contracts within the European Union...
") opened for signature in Rome on June 19, 1980 and signed by the United Kingdom
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
on December 7, 1981; the Convention on the Accession of the Hellenic Republic to the Rome Convention (the "Luxembourg Convention") signed by the United Kingdom in Luxembourg on April 10, 1984; and the first Protocol on the Interpretation of the Rome Convention by the European Court (the "Brussels Protocol") signed by the United Kingdom in Brussels
Brussels
Brussels , officially the Brussels Region or Brussels-Capital Region , is the capital of Belgium and the de facto capital of the European Union...
on December 19, 1988.