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Choice'of'Law'by'the'Parties'

Choice of Law by the Parties

forthcoming in

Jrgen Basedow, Klaus Hopt & Reinhard Zimmermann (eds), Max Planck
Encyclopedia of European Private Law, Oxford University Press (2012)

Gisela Rhl
1. Concept and function
Choice of law by the parties, also known as party autonomy, refers to the
parties right to designate the law applicable to their legal relationship.
Alongside the freedom to select the competent forum ( jurisdiction
agreements), choice of law is, thus, an expression of the parties autonomy
also to be found in substantive law. However, it goes beyond the parties
substantive autonomy ( freedom of contract) because it allows parties to
avoid the default as well as mandatory provisions of the otherwise applicable
law.
As a connecting factor ( connection and connecting factors) choice of
law plays a prominent role in a globalized world: it facilitates the proper
regulation of individual cases, fosters legal certainty and reduces the costs of
determining the applicable law. From an economic point of view, efficiency
speaks for choice of law: since rational parties only choose a law when they
expect the choice to make them better off, choice of law regularly increases
social welfare and therefore leads to the desirable economic state of pareto-
efficiency. This holds true irrespective of the reasons for the parties choice.
Therefore, it does not matter, whether they choose a law because it best fits
their needs or whether other factorsfamiliarity, neutrality, reputationare
decisive. As long as the parties freely choose a particular law the choice is
pareto-efficient. However, choice of laws fundamental role in a globalized
world stems not only from the advantages it brings to parties and the
economic efficiency it represents. It is significant, moreover, because it is an
important instrument for fostering competition between legal orders
( competition between legal systems). Since parties choosing a foreign law
can avoid the otherwise applicable law, national legal orders haveunder
certain conditionsan incentive to ensure that their rules are attractive for
contracting parties. Provided that there is no market failure, choice of law

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can thus lead to a qualitative improvement of legal rules, namely a race to


the top.
2. Development
Compared with other connecting factors ( connection and connecting
factors), choice of law is a relatively new invention. It is said to have
arrived on the stage of private international law (PIL) in the 16th century
with the Frenchman Charles Dumoulin (150066): in his Conclusiones de
Statutis et Consuetudinibis Localibus he advanced theassumedwill of
the parties in order to subject international marriages to the law of the
husbands habitual residence rather than the law where the marriage was
sworn. However, a closer look reveals that Dumolin was not concerned with
establishing choice of law as an independent connecting factor. Rather, his
interest was to argue for application of a law other than the lex loci
contractus. Therefore, the parties will was, for him, nothing more than an
argumentative aid. The same can be said for most authors of the 17th and
18th centuries: in De Conflictu Legum, the Dutchman Ulrich Huber (1636
94) relied on the assumed will of the parties to link contracts to the law of
the place of performance. In his famous obiter dictum in Robinson v Bland
(1760) 2 Burr 1077, Lord Mansfield justified application of English law as
the law of the place of performance referring to the fact that the parties had
probably wanted English law to be applied because the contractually owed
sum was to be paid in English currency. Joseph Story (17791845) also
invoked the assumed will of the parties in his Commentaries on the Conflict
of Laws only as an argumentative aid for application of the law of the place
of performance. Similarly, Carl Friedrich von Savigny did not attribute
independent significance to the parties will. Even though he emphasized in
various places that the parties willing subjugation to the law of a particular
province determines the seat (Sitz) of a contractual relationship, nowhere
did he refer to choice of law independently of the place of performance. As a
consequence, the parties will was for Savignyas for Huber, Lord
Mansfield and Storyeither an argumentative aid justifying application of
the place of performance or an expression of an indirect choice of law, which
is always possible where genuinely variable connecting factors exist.
As a self-standing connecting factor, the will of the partiesreal or
assumedonly first gained importance in the 19th century in the work of
Pasquale Stanislao Mancini (181788). Under the influence of the will
theory prevailing on the European continent, he dismissed the territorial
connecting factors, in particular the lex loci contractus which had dominated
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the discussion theretofore, and introduced choice of law as an independent


principle of private international law ( contractual obligations (PIL)). At
first, however, Mancinis ideas did not attract much attention. It was the
political and economic liberalism of the late 19th century that eventually laid
the foundation for a serious discussion of his work. However, for a long time
agreement about the role of choice of law in general and its role in the
private international law of contracts in particular could not be achieved. In
Europe, courts were divided in their attitudes. Whereas judges in England,
Germany and France generally tended to favour free choice of law, courts in
other states proved to be more hostile. By the same token, the European
academic community was split. While some followed the courts and
supported free choice of law with reference to the concept of individual
freedom as well as the virtue of legal certainty, many prominent conflicts
scholars did not allow the parties to avoid the otherwise applicable law. They
essentially argued that parties could not raise themselves above the law by
choosing another. In view of increased international trade, however, the
resistance against free party choice of law melted away in the course of the
20th century. As early as the 1960s, little was left of the former opposition to
choice of law clauses, and the parties freedom to choose was generally
accepted. The final victory came in 1980 when the principle of party
autonomy was incorporated in Art 3(1) of the Rome Convention.
In the United States as well, just as in Europe, party autonomy was the
focal point of a fierce debate up until the middle of the 20th century. And
just as in Europe, the divide ran more or less between courts and scholars.
While most American courts and especially the Supreme Court (Pritchard v
Norton (1882) 106 US 124) accepted a party choice of law, many scholars
vehemently refused to recognize the concept. Notably, Joseph H Beale, the
Reporter for the Restatement (First) of Conflict of Laws ( restatements),
considered the applicable law a matter of state sovereignty and thus beyond
the reach of the parties. As a result, the Restatement (First) remained silent
on the issue, implicitly denying any freedom to choose the applicable law.
However, over the years the judges viewpoint held sway. Today, 187
Restatement (Second) of Conflict of Laws allows for party autonomy and
even though not binding in itselfis followed throughout the United States.
Even states that formally still adhere to the Restatement (First) or apply
various forms of interest analysis accept the free choice of law as a basic
principle of contract conflicts. After lengthy discussion, choice of law has
thus been recognized as a general principle of the private international law of

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contracts in both Europe and the United States. In other fields of private
international law it is lagging behind.
3. Scope of application
The classicand until today the least contestedarea of application of
choice of law are international contracts ( contractual obligations (PIL)).
Here, with the exception of some South American and Middle Eastern
countries, it claims widespread application. In other fields, it has gained
recognition in recent years. This holds particularly true for the private
international law of non-contractual obligations ( non-contractual
obligations (PIL)). Here, national legal orders and international instruments
very often provide that agreements on the applicable law are permissible
after the event generating the non-contractual obligation has taken place. Art
14(1) Rome II (Reg 864/2007), for example, allows parties to submit non-
contractual obligations to the law of their choice by an agreement entered
into after the event giving rise to the damage has occurred. In international
family and probate law the parties are now in many legal orders allowed to
choose from a range of laws ( family law (international); international
succession law). According Art 5(1) Rome III (Reg 1259/2010), for
example, spouses may designate the law applicable to their divorce or legal
separation provided that it is the law of their common habitual residence, the
law of their last common habitual residence, the law of the nationality of
either spouse, or the law of the forum. By the same token, Art 15 of the new
Maintenance Regulation (Reg 4/2009) providesreferring to Art 8(1) of the
Protocol to the new Hague Maintenance Conventionthat the parties may
submit their maintenance obligation to the law of either partys nationality or
habitual residence.
Against this background, the scope of choice of law is already large. The
only field where it does not claim widespread application is international
property law. Here, the applicable law is for the most part determined with
the help of the lex rei sitae. A noteworthy exception to this rule is to be
found in the Hague Convention on Securities issued by the Hague
Conference on Private International Law: according to its Art 4(1) the
disposal of securities is subject to the states law, which is expressly agreed
upon in the account agreement. This version of choice of law, however, has
to be distinguished from the above insofar as it does not concern the
relationship of the parties who are privy to the transactionthe securities
transfer. The choice of law, therefore, is not made by the issuer and the

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purchaser of the security, but by the issuer and his bank on one side and the
purchaser and his bank on the other.
4. Object
The object of a choice of law can, in most national legal orders and
international instruments, only be the law of a state. Non-state law ( lex
mercatoria), like the UNIDROIT PICC ( UNIDROIT Principles of
International Commercial Contracts) or the PECL ( Principles of
European Contract Law (PECL)) cannot therefore be chosen. In view of
European private international law this follows from the fact that the relevant
or framing norms speak of the choice of a state law. In view of Art 3
Rome I (Reg 593/2008) recital 14 adds that the parties may choose
contractual instruments issued by the European Union, and in particular
the Common Frame of Reference ( European private law). This means, in
turn, that other non-state laws must not be the object of a choice of law. In
the United States the situation looks very much the same. The relevant
provisions, in particular 187 Restatement (Second) of Conflict of Laws
( restatements), 1-301(a) UCC speak of the law of a state. Only the
recently adopted private international law codifications of Louisiana and
Oregon do not use this term and mention that the parties can choose the
applicable lawand not solely the law of a state. The same holds true in the
dominantthough contestedopinion about the Mexico Convention of
1994. However, there is no express provision to this effect in the text. The
authors who support the choice of a non-state law refer to Art 9(2)2 of the
Convention which allows courts to consider and apply general principles of
trade law which are recognized by international organizations.
Further, many national orders and international instruments provide that
the object of the choice of law may only be the law of a state to which the
parties have a connection. This holds particularly true for international
family and probate law ( family law (international); international
succession law). Here, the relevant European rules provide that the parties
can only choose from a certain group of laws. Normally, these laws include
the law of the parties nationality and the law of the parties habitual
residence. In the private international law of contracts, the relevant norms
diverge: in the United States, on the basis of 187(2)a Restatement (Second)
and 1-301(a) UCC, a choice of law clause will be respected only if the
parties or the contract evince a relationship to the chosen law ( contractual
obligations (PIL)). In Europe, in contrast, the parties may submit their
contract to an unconnected law pursuant to Art 3 Rome I. Only for contracts
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of carriage and insurance contracts do Arts 5 and 7 Rome I limit the


selection of laws as in international family and probate law ( insurance
contract law (international)). In practice, however, the differences between
European and American law are far smaller, as suggested by a glance at the
relevant provisions. First, according to 187(2)(a) Restatement (Second) the
lack of a connection to a chosen law can be remedied if there is a reasonable
basis for the choice. Secondly, the US courts do not set a very high hurdle
for the establishment of a connection to the chosen law.
5. Limitations
In all legal systems and international instruments, choice of law is subject to
certain limitations. These limitations are either functional, situational or
technical.
a) Functional limitations
Functional limitations limit the free choice of law either for the protection of
a perceived weaker party or for the protection of a third party or the public at
large. With respect to the protection of weaker parties, in particular
consumers and employees, the limitation is designed to remedy the negative
effects of information asymmetries: the structurally less informed party is to
be protected from exploitation by the structurally more informed party. With
respect to the protection of third parties or the public at large, the relevant
rules are driven by the concern to avoid negative external effects. Third
parties and the public are to be protected from a situation in which the parties
externalize and therefore socialize the costs associated with their choice of
law. However, despite these shared rationales, the set-up of the functional
limitations is different in various legal orders and international instruments.
In the United States, the protection of a party or the protection of third
parties is achieved through application of the general fundamental public
policy doctrine. In Europe, the trend is for a specific regulation of relevant
cases: with respect to the protection of weaker parties, Arts 6 and 8 Rome I,
for example, limit the effect of a choice of law where it would be detrimental
to consumers and employees ( consumer contracts (PIL); employment
contracts, individual (PIL)). Arts 5 and 7 Rome I limit the selection of laws
in order to protect passengers and policyholders ( insurance contract law
(international)). Art 14 Rome II permits the choice of law only after the
event giving rise to the damage has occurred if the incident involves a party
not engaged in commercial activities. Art 15 of the new Maintenance
Regulation (Reg 4/2009)referring to the Protocol to the new Hague
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Maintenance Conventionprohibits a choice of law related to the protection


of a minor or adult who, by reason of an impairment or insufficiency of his
or her personal faculties, is not in a position to protect his or her interest.
With respect to the protection of third parties, Art 3(3)2 Rome I and
Art 14(1)2 Rome II declare that a choice of law made after the conclusion of
the contract shall not adversely affect the rights of third parties. Moreover, in
both Regulations there are specific provisions which reduce or exclude the
choice of law to protect third parties. For example, Art 14(2) Rome I limits
the effect of a choice of law between the assignor and assignee to the extent
that certain questions affecting the position of the debtor are governed by the
law applicable to the assigned or subjugated claim. And Art 6(4) Rome II
entirely excludes a choice of law in view of non-contractual obligations
arising out of an act of unfair competition, since competition law is widely
considered as serving the interests of third parties and the public at large.
b) Situational limitations
Situational limitations limit the effect of a choice of law where a certain state
of affairs prevails. The most important limitations in this sense are concerned
with purely internal situations. They are designed to prevent parties from
choosing foreign law where their bargain has no connection to a foreign
country. Pursuant to Art 3(3) Rome I and Art 14(2) Rome II, therefore,
where a case is only connected to one single state, a choice of law leaves that
states mandatory law unaffected. Pursuant to Art 3(4) Rome I and Art 14(3)
Rome II, the same applies with respect to the binding norms of Union law if
the bargain only has connections to Member States. As a result, the choice of
law in both international and Union cases is only effective in so far as it does
not contradict the mandatory provisions of the relevant state or Union law. In
the United States, the same holds true pursuant to 187 Restatement
(Second) of Conflict of Laws ( restatements). Admittedly, none of the
provisions is as clear as its European counterparts. However, the official
commentary to 187 Restatement (Second) determines that the provision
only applies if two or more states have an interest in the regulation of the
situation in question. 187 Restatement (Second) is therefore not applicable
if only one state is affected, which is the case where an internal or a Union-
based situation exists in the sense of Art 3(4) and (5) Rome I or Art 14(2)
and (3) Rome II. In international family and probate law ( family law
(international); international succession law) most legal orders arrive at the
same result by reducing the laws available for selection.

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c) Technical limitations
Technical limitations limit the freedom of choice of the parties in those
instances where a particular legal instrument favours othersuperior
interests. These instruments are overriding mandatory provisions on the one
hand ( overriding mandatory provisions; unilateralism (PIL)) and the
ordre public on the other ( public policy (ordre public)). Overriding
mandatory provisions are national prescriptions which are to be enforced
irrespective of the otherwise applicable law in international situations. They
can be recognized in that they express a public interest in the widest sense,
and, unlike norms of classical private law, do not serve merely to balance
private interests. Frequently, they are of an economic or socio-political
nature and aim at the central regulation of areas of private life. Ordre public
impedes the application of the chosen law if the result achieved violates the
public policy of the forum state. It functions as an ultima ratio if
fundamental values of the forum cannot be enforced in another manner.
Literature. Hessel E Yntema, Autonomy in Choice of Law (1952) 1 Am
J Comp L 341; Hessel E Yntema, Contract and Conflict of Laws:
Autonomy in Choice of Law in the United States (1955) 1 NYLF 45;
Andr Aloys Wicki, Zur Dogmengeschichte der Parteiautonomie im Inter-
nationalen Privatrecht (1965); Larry E Ribstein, Choosing Law by
Contract (1993) 18 J Corp L 245; Dorothee Einsele, Rechtswahlfreiheit im
Internationalen Privatrecht (1996) 60 RabelsZ 417; Peter E Nygh, Auto-
nomy in International Contracts (1999); Yuko Nishitani, Mancini und die
Parteiautonomie im Internationalen Privatrecht (2000); Stefan Leible,
Parteiautonomie im Internationalen PrivatrechtVerlegenheitslsung oder
Allgemeines Anknpfungsprinzip? in Heinz-Peter Mansel, Thomas Pfeiffer,
Herbert Kronke, Christian Kohler and Rainer Hausmann (eds), Festschrift
fr Erik Jayme, vol I (2004) 485; Giesela Rhl, Party Autonomy in the
Private International Law of Contracts: Transatlantic Convergence and
Economic Efficiency in Eckart Gottschalk, Ralf Michaels, Giesela Rhl and
Jan von Hein (eds), Conflict of Laws in a Globalized World (2007), 153;
Giesela Rhl, Rechtswahlfreiheit im europischen Kollisionsrecht in
Dietmar Baetge, Jan von Hein and Michael von Hinden (eds), Die richtige
Ordnung. Festschrift fr Jan Kropholler (2008) 187; Jrgen Basedow,
Theorie der Rechtswahl oder Parteiautonomie als Grundlage des
Internationalen Privatrechts (2011) 75 RabelsZ 32.

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