Reconsidering the Proper Law of the Contract

Article excerpt

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.


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


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. …


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