Reconsidering the Proper Law of the Contract

Marshall, Brooke Adele, Melbourne Journal of International Law

This article appraises the choice of law rule that applies where parties have either impliedly chosen, or failed to choose, the law governing their contract. It reconsiders the problems besetting the common law rule, known as the proper law of the contract, that were identified by Australia's Law Reform Commission twenty years ago. While the choice of law rule in Australia remains unchanged, it has undergone significant reform in the European Community and is now the subject of reform at the Hague Conference on Private International Law. Despite these reforms, a comparative analysis reveals that several of the common law problems persist. This article proffers a proposal for Australian legislatures based on the author's refined version of the Draft Hague Principles and the Rome I Regulation. It also suggests that the Hague Conference adopt these refinements. Under this proposal, tacit choice of law is absorbed as a subset of express choice and must be clearly established by the terms of the contract or the circumstances of the case. The probative value of an exclusive jurisdiction agreement will be made apparent in the drafting of the clause on tacit choice of law itself. It is further proposed that, in the absence of choice, the closest connection test be reduced to an escape clause applicable in default of fixed rules tailored to the exigencies of commercial contracting. The reformulated test will be used to ascertain the law of the country most appropriate for determining the issues arising in the case.

CONTENTS

I  Introduction
II Tacit Choice of Law
     A The Nature of the Problem
     B Re-Evaluation of the Classification of a Subjective Form of
       Choice of Law
         1 Implied Proper Law: Real or Illusory?
         2 Second Tier: Subset of the Third Tier?
         3 Second Tier: Subset of the First Tier?
     C Re-Evaluation of the Concept of Choice: 'Common Intention or
       Mutual Agreement'.
     D Re-Evaluation of the Extent to Which Tacit Choice Must be
       Demonstrated in Order for the Court to Give It Effect
     E Re-Evaluation of the Indicators that Evidence a Tacit Choice
         1 Qui elegit judicem elegit jus?
         2 Choice of Law Clauses in Related Transactions
     F Re-Evaluation of the Continuing Relevance of Any Form of
       Intermediate Category
         1 Indicators of Tacit Choice Inter Se
         2 Indicators of Tacit Choice and Their Relationship to
            Objective Connecting Factors :
III Applicable Law in the Absence of Choice :
     A The Nature of the Problem
     B The Proposed Solution
        1 Step 1 : Provision for, and Potential Expansion of, Fixed
          Categories of Contractual Case
        2 Step 2: The Presumption of Characteristic Performance
        3 Step 3: Escape Clause
IV  Concluding Remarks

I INTRODUCTION

The proper law of the contract is the system of law which the parties expressly or impliedly choose as the law governing their contract or, in the absence of such choice, the 'system of law with which the contract has its closest and most real connection'. (1) This common law tripartite hierarchy is traditionally seen as comprising the following tiers: express choice, inferred choice and objective choice. (2) While the High Court of Australia has held that conceptually the first and second tiers 'are but species of the one genus, that concerned with giving effect to the intention of the parties', (3) evidential differences between them (4) necessitate three distinct inquiries. (5) In 1992, the Law Reform Commission ('LRC') released its Choice of Law Report, which stated that 'the proper law of the contract as developed by the common law is ill-defined and uncertain in scope and inadequate to deal with modern developments in international contracts'. (6) The LRC made numerous recommendations--modelled on the provisions of the Rome Convention 1980 on the Law Applicable to Contractual Obligations ('Rome Convention') (7)--that have not been adopted by Australian legislatures. (8) Meanwhile, this field has become increasingly dynamic at an international level. Conflict rules for contract have been the subject of significant statutory incursion in the European Community ('EC') through the Rome I Regulation. (9) The Rome I Regulation modifies the Rome Convention and transforms it into a Community instrument. (10) China, Australia's largest trading partner, has similarly adopted a legislative model by introducing the Law on the Application of Law to Foreign-Related Civil Relations ('Foreign-Related Civil Relations Law'), (11) which confines party choice to an express choice of law. Further, a global model for choice of law in international contracts is currently being explored at the Hague Conference on Private International Law ('Hague Conference'). In 2011, the Working Group on Choice of Law in International Contracts ('Working Group') of the Permanent Bureau of the Hague Conference ('Permanent Bureau'), finalised the draft articles (12) of a future non-binding (13) instrument (14) for conflict rules applicable to international commercial (15) contracts. These developments provide a fresh impetus for reform in Australia.

It is a 'perennial struggle' for the law reformer to balance the need for certain and predictable solutions against the desire for 'flexible and individualised' ones. (16) Although careening too far in one direction is undesirable, legal certainty ought to be the point de depart for choice of law in contracts. (17) As Scoles puts it, '[p]arties enter into contracts with the intent and expectation to mutually bind themselves. Thus ... "in contracts.... there is but one basic policy, namely protection of the expectations of the parties"', (18) including those expectations as to choice of law. 'Predictability in choice-of-law ... is served, and party expectations are protected, by giving effect to the parties' own choice of the applicable law (party autonomy)' (19) where they have expressly or tacitly (20) made a choice. In the absence of party choice, predictability and legal certainty must be tempered by the need to accommodate unanticipated or exceptional contractual arrangements in a rational and individualised manner. A further, overarching ideal is to harmonise Australia's conflict rules with those of other nation states. (21)

To this end, this article posits that Australia should introduce legislation (22) modelled on the Rome I Regulation and the Draft Hague Principles. (23) Tacit choice of law will be considered, while the applicable law in the absence of choice will be addressed in Part III.

Consistent with the approach of the High Court of Australia in Akai Ply Ltd v The People's Insurance Co ('Akai'), (24) it is proposed in Part II that tacit choice be absorbed as a narrow subset of express choice in order to give primacy to party autonomy. For this two-tiered test to operate effectively, only those choices that reflect the true will of the parties should be admissible.

In pursuit of harmonisation, it is also contended in Part II that the author's proposal on tacit choice, which refines art 3 of the Draft Hague Principles, be adopted by the Working Group of the Hague Conference. This is justifiable not only on the basis of harmonisation but a fortiori in light of the following. First, in order for the court to give effect to parties' tacit choice, it need only be demonstrated that the parties shared a common intention to contract with reference to the law of a particular country and not that the parties have reached a mutual binding agreement as to the same. The circulus inextricabilis occasioned by the use of 'agreement' in the context of formation and the possibility that a tacit choice of law agreement constitutes a source of contractual obligation both justify the preference for this common intention formulation.

Secondly, a formulation which requires a tacit choice to be clearly established or clearly demonstrated is sufficiently stringent and strikes an appropriate balance between giving effect to party autonomy on the one hand and ensuring predictability in contractual decision-making on the other. Finally, if a textual reference to an exclusive jurisdiction clause is to be made within the provision on tacit choice itself, a second explanatory sentence should be included to clarify its weight. It would also be instructive to provide clarification as to the stage, or stages, of the choice of law enquiry under which an expression of choice in a previous course of dealing and an expression of choice in a related transaction have relevance. This could simply be embodied in a recital.

With respect to a legislative provision in the absence of choice, it is proposed in Part III that a 'rules/approach combination' (25) be adopted by Australian legislatures. This process would involve: first, transposing the fixed categories of case enunciated in art 4(1) of the Rome I Regulation into legislation and potentially expanding these to encompass contracts commonly encountered in commercial transactions; secondly, adopting the presumption of characteristic performance, which mirrors art 4(2) of the Rome I Regulation, for all contracts falling outside or within two or more of these categories; and thirdly, providing for an escape clause. The escape clause would be activated in two situations. The first is where the law (26) cannot be determined by placing the contract within a fixed category or via the presumption of characteristic performance. The second is where the law of another country is substantially more appropriate for the applicable law. The judge would be required to engage in an issue-by-issue evaluation and take account of various principles enunciated in the legislation. The escape clause would be phrased with reference to the 'law of the country'--as per the Rome 1 Regulation, as opposed to the 'system of law' formulation existing at common law--in order to prevent non-state bodies of law applying in the absence of party choice.

II TACIT CHOICE OF LAW

A The Nature of the Problem

It is almost universally (27) accepted that, subject to limited exceptions, (28) the law chosen by the parties governs a contract. (29) Accordingly, it is unproblematic to give effect to this choice where it has been made expressly. Where a choice of law is not made expressly, giving effect to that choice is significantly more difficult. In such circumstances, the common law provides that the proper law of the contract is the system of law that the parties impliedly choose as the law governing their contract. The common law model is beset by divergent conceptualisations of the implied proper law and scepticism as to the reality or artificiality of the connecting factor of inferred intention by which it is ascertained. Of equal concern is the scope of the proper law, brought about by: ambiguity surrounding the concept of 'choice'; the leniency of the standards by which a choice of law is inferred; and the probity and propriety of various indicia of inferred intention.

These issues justify a re-evaluation of: the classification of a subjective form of choice of law; the conceptualisation of choice as tantamount to mutual agreement or common intention; the extent to which a subjective choice must be demonstrated in order for the court to give it effect; and the indicators which evidence a subjective choice. To this end, a critical analysis of the reforms effected under the Rome I Regulation and those to be effected under the Hague Principles will be undertaken in Part II. To the extent that certain problems persist under these models, it is instructive to conclude with an assessment of the continuing relevance of any form of intermediate category subsisting at common law or transposed into statute.

B Re-Evaluation of the Classification of a Subjective Form of Choice of Law

1 Implied Proper Law: Real or Illusory?

Although flawed, the current test of inferred intention by which the implied proper law is determined is a welcome change from its predecessor. Under the doctrine of implied choice, which prevailed until the mid-1930s, the implied proper law was determined by a presumed intention imputed to the parties. (30) By 1939, the doctrine had evolved such that the search for presumed intention was only enlivened in the absence of express intention. (31) The notion of presumed intention nevertheless came to be seen as illusory. In 1950, Carter stated that there is an 'absurd artificiality involved in attempting to apply a rule of law based on presumed common intention, to fact situations in which either such common intention is non-existent or its determination is a matter of the merest conjecture'. (32) The concept had likewise been discredited many years earlier in continental jurisdictions by the likes of Pillet, (33) Niboyet, (34) and Zitelmann. (35)

By the 1980s, the 'mythical' notion of presumed intention had been displaced by the current concept of inferred intention, as the connecting factor for the second step in the tripartite test. (36) The obvious difficulty, however, is distinguishing between inferred intention and presumed intention in so far as both concepts glean 'intention' by reference to the same 'terms and nature of the contract' and the 'general circumstances of the case'. (37)

2 Second Tier: Subset of the Third Tier?

Falconbridge postulates that inferred intention is 'merely a judicial mode of expressing the rule that the proper law is that of the country with which the transaction has the most real connection'. (38) In effect, this postulate conflates the second tier with the third. Cohn attributes this conflation to the rift between theory and practice. (39) While in theory, the objective test is only enlivened in the absence of inferred intention, 'in practice the implied intention disappears from the scene. There is no serious attempt to ascertain it. Where there is no express choice of law, the courts pass straight to a finding based on the "objective" test'. (40) North similarly criticises the relevance of the second tier as being nothing more than an example of the third, where 'identification of the most closely connected law ... [is] relatively easy'. (41) Sykes and Pryles (42) and Carter (43) also express similar sentiments.

3 Second Tier: Subset of the First Tier?

Conversely, Nygh avers that inferred intention ought to be reconceptualised as 'tacit choice' and absorbed as 'a narrow subcategory of express choice'. (44) Indeed, this is the aim of the Draft Hague Principles and the Rome I Regulation which attempt to exorcise the spectre of inferred choice from the choice of law regime. (45) Granted, as Joubert remarks, inferred choice and tacit choice both constitute an 'unexpressed choice'. (46) The nuanced distinction between them, however, can be seen as one of inferred versus true intention. Nygh, Scherer and Joubert contend that only those situations in which there has been an actual choice made by the parties--albeit communicated through means other than a choice of law clause--fall within the ambit of tacit choice. (47) Nygh's and Joubert's conception of tacit choice is consistent with the approach envisaged by the majority of the High Court of Australia in Akai. (48) The majority stated:

   There is, in truth, only one question here ... whether, upon the
   proper construction of the contract (which may include an
   expression of choice in direct language), the court properly may
   conclude that the parties exercised liberty given by the common law
   to choose a governing law for their contract. If the answer to this
   is in the negative, then the law itself will select a proper law.
   (49)

Australia's reclassification of tacit choice as a subspecies of express choice in Akai (50)--consistent with the approach taken under the Rome I Regulation and the Draft Hague Principles"--not only gives primacy to party autonomy, but is a positive step towards predictability and certainty as to choice of law. However, it is clear from the operation of the Rome Convention that for this two-tiered test to operate effectively in Australia, (51) the scope of tacit choice must be narrowed to exclude purported choices that do not reflect the true will of the parties.

C Re-Evaluation of the Concept of Choice." 'Common Intention or Mutual Agreement' (52)

If a choice is to be considered real, must it be demonstrated that the parties have reached a mutual agreement--that is, a consensus ad idem--in order for the court to give effect to their tacit choice? (53) Low argues that the answer ought to be no, asserting that if the 'parties shared a common intention that a particular system of law should apply to their transaction', then this should be sufficient. (54) This approach contests what is, according to Low, a 'widely held assumption' that the 'concept of the proper law ... must be determined by an agreement as to the same by the parties'. (55) Briggs suggests that Low overstates this problem, observing that

   [t]hough there were occasions on which judges referred to an
   'agreement' as having generated the proper law of the contract, the
   majority of judicial statements and observations lend more support
   to the view that it was simply common intention, expressed with
   sufficient clarity for the court to treat it as decisive, which
   determined the proper law ... [F]or the court to give effect to
   that common intention was, for all practical purposes, for the
   court to give effect to an agreement on choice of law. There was no
   case in which an English court declined to give effect to an
   agreement on choice of law or refused to implement the parties'
   common intention as to the choice of law ... (56)

While the distinction between common intention and mutual agreement might seem academic, continued consternation …

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Publication information: Article title: Reconsidering the Proper Law of the Contract. Contributors: Marshall, Brooke Adele - Author. Journal title: Melbourne Journal of International Law. Volume: 13. Issue: 1 Publication date: June 2012. Page number: 505+. © Not available. COPYRIGHT 2012 Gale Group.

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