AN ANALYSIS OF PARTY AUTONOMY

IN THE INTERNATIONAL LAW OF

CONTRACT

INTERNATIONAL TRADE LAW

PROJECT
SEVENTH TRIMESTER

NATIONAL LAW INSTITUTE

UNIVERSITY, BHOPAL

SUMBITTED TO: PROFESSOR MONICA RAJE

SUBMITTED BY: ADHITYA SRINIVASAN – 2008 B.A. LL.B 55
VIKRAM NARAYAN – 2008 B.A. LL. B 39

1
 TABLE OF CONTENTS

1. INTRODUCTION 3

2. DEVELOPMENT OF THE CHOICE OF LAW DOCTRINE 4

3. COMPARATIVE STUDY OF THE OPERATION OF THE CHOICE

OF LAW CLAUSE 8

4. ECONOMIC ANALYSIS OF THE PARTY AUTONOMY DOCTRINE 12

5. CONCLUSION 14

6. REFERENCES 15

2
 INTRODUCTION

Party autonomy is a choice of law doctrine that permits parties to choose the law of particular
country or sovereign to govern their contract in a situation where the transactions under the
contract would be subject to more than one jurisdiction. Premised on freedom of contract, this
doctrine has evolved in many ways since it was introduced in the 1600′s and has become an
internationally accepted principle governing choice of law in contracts. In international
community, the doctrine of party autonomy has been adopted and applied through the rule-
based framework or mechanism.1

Choice of Law could become an issue either in the case of two sovereign states within the
same country (such as in the United States) or in a case of two different countries. In the
former case, choice of law must co-opted to deal with interstate conflict whereas in the latter
it must be designed to handle international conflict.2

There are often two fundamental questions pertaining to the choice of law doctrine. The first
question pertains to whether the parties can choose the law that will determine the legal
consequences of their contractual activities. The answer to this question will obviously affect
the freedom of parties to negotiate contractual terms and governing law. 3 The second
question has to do with whether the law chosen by the parties to a contract can be enforced in
a certain jurisdiction. In other words, the notion of party autonomy is meaningless if a choice
of law clause cannot be enforced in a particular jurisdiction.4

This project study makes an endeavour to understand and trace the development of the
doctrine of party autonomy in international contract law. Furthermore, the project examines
the operation of party autonomy in the United States and Europe and compares the two.
Finally, an effort is made to analyze the economic rationale of the choice of law doctrine.
DEVELOPMENT OF THE CHOICE OF LAW DOCTRINE
1
Zhang, Mo. "Party Autonomy and Beyond: An International Perspective of Contractual Choice of Law ⠀”
Conflict of Laws .net." Conflict of Laws .net — News and Views in Private International Law. Web. 01 Sept.
2010. <http://conflictoflaws.net/2008/party-autonomy-and-beyond-an-international-perspective-of-
contractual-choice-of-law/>.
2
Zhang, Mo. "Party Autonomy and Beyond: An International Perspective of Contractual Choice of Law." Social
Science Research Network (SSRN) Home Page. Web. 02 Sept. 2010. <http://ssrn.com/abstract=1084331>.
3
See Willis L. M. Reese. Conflict of Laws and the Restatement Second. 28 Law and Contemp. Probs. 1963.
4
Ibid.

3
Dumoulin’s conception of choice of law
The doctrine of choice of law which is the very foundation of party autonomy in international
contract law is said to originate from the writings of Charles Dumoulin (15001566), a French
scholar of the sixteenth century who was acclaimed as "the father of party autonomy." 5 It
was Dumoulin's belief that with respect to contracts, "the will of the parties is sovereign." 6
The will of the parties is, therefore, the leading factor in the determination of the law
goveming Thus, when the intention of the parties is the decisive factor, the circumstances
indicating such an intention should determine which law shall prevail. 7 Dumoulin further
articulated that under party autonomy, in the absence of express choice, the law was to be
sought in accordance with the tacit and probable intentions of the parties. 8 Thus if the will of
the parties was not expressed, it must be "sought in the surrounding circumstances."9

Conflict with Lex Loci

Historically, the party autonomy doctrine was introduced against the then prevailing approach
of lex loci contractus, namely the law of the place of contracting. Based on the notion of lex
loci, Bartolus a Sassoferrato, an Italian scholar subjected the contract to the law of place
where the contract was made.' Bartolus believed that "the law of the place of contracting
govems all questions conceming the form and substance of the contract." 10 According to
Bartolus and his followers, a contract, like a person, was subject to the law of the place of its
origin, and the origin as such was the place where the contract was bom. It was their opinion
that as a matter of law, the lex loci govemed contracts regardless of the intention of the
parties.11

The doctrine of party autonomy may be distinguished from the classic lex loci approach by
emphasizing the parties' power over choice of law.12 Realizing the fact that there were
elements that did not fit the mold of an analysis geared to the reach of local law, Dumoulin
advanced "the idea that those who enter into an agreement may stipulate the law that govems
their bargain." Due to his influence, reliance on the intention of the parties became the
5
See Ole Lando, Contracts, III-24, International Encyclopaedia of Comparative Law. 1971
6
See Ernest G. Lorenzen. Validity and Effect of Contracts in the Conflict of Laws. 30 Yale LJ 565. 1921.
7
Supra Note 5.
8
Supra Note 6.
9
Ibid.
10
Ibid.
11
Ibid.
12
See Friedrich K, Juenger. Choice of Law and Multistate Justice. 1993. .

4
goveming principle of choice of law in contracts, and as a result lex loci contractus was soon
replaced with party intention.''13

Growth of the choice of law doctrine

At the time of Dumoulin, the party autonomy doctrine seemed to have at least two
distinctions. First, the intention of the parties could be expressed or implied. The "tacit
agreement" was actually an extension of the principle of party autonomy to encompass
situations in which the parties had failed to designate the applicable law." 14 Second, the
intention of the parties governed the validity and effects of a contract, and the law so intended
applied to the whole contract.15 Also, in developing his autonomy theory, Dumoulin viewed
the intention of the parties "in a context where he discussed those parts of substantive law
where the intention and will of the parties prevailed." 16 Gradually, the party autonomy
doctrine came to be widely accepted by several countries across the world so much so that
most jurisdictions incorporated the principle of “contractual liberties of parties to a contract”
in their basic contract law.

Savigny’s conception of choice of law

The growing acceptance of the doctrine was also due to the scholarly work and influence of
major conflicts authors after Dumoulin,'' particularly Friedrich Carl von Savigny, the great
German jurist who "suggested that every legal relationship be govemed by the law of the
state or nation . . . in which it has its seat.”17 In the case of obligations, Savigny looked to "the
intimate connection between the forum and the territorial law."18 He believed that there is
thus undoubtedly a relation between taking on an obligation and the forum in which it will be
enforced.19 Savigny urged that in finding the "seat," the primary factor should be the parties'
intention; if such intention was not clearly manifested, it should be inferred from the
circumstances under which the obligation arose.20

Modern Conflict of Law Theory

13
Supra Note 5.
14
Supra Note 12.
15
Ibid.
16
Ibid.
17
See Mathias Reiman, Savigny's Triumph? Choice of Law in Contracts Cases at the Close of the Twentieth
Century, 39 VA, J. iNT'L L 571. 1999.
18
See Freidrich Von Savigny. A TREATISE ON THE CONFLICT OF LAWS. William Guthrie trans,, Rothman
Reprints 2d ed, 1972) 1881.
19
Ibid.
20
Ibid.

5
In modem conflict of laws theory, party autonomy doctrine bears a great resemblance to
Dumoulin's conception with regard to the fundamental idea that the intention of the parties
has the effect of determining which legal system governs the contract and how the legal
system is to be selected. Beyond this similarity, however, there are clear differences in terms
of the substance of the doctrine. The differences exist because many issues related to party
autonomy were impossible for Dumoulin to envision centuries ago.

Scope of Party Autonomy

The first difference is the scope of party autonomy. In Dumoulin's time, when parties
exercised their power to designate the law governing their contract, it seemed unclear as to
what matters in the contract, the goveming law would determine. 21 But it was believed that
the party autonomy doctrine was introduced as a rule of validation, meaning that the intention
of the parties determines the law governing the validity of the contract. 22 Although in the
nineteenth century the party autonomy doctrine applied to both the determination of the
validity of contracts and the determination of the rights and duties arising out of valid
contracts,' most discussions about the doctrine were centered on the validity of the contracts.

In the modem era of conflict of laws, however, the party autonomy doctrine focuses more on
the rights and obligations of the parties to a contract or on the contents of a contract rather
than simply on a contract's validity. Presently, choice of law clauses are typically phrased to
cover "any dispute arising from or out of the contract" or "all rights and obligations of the
parties" in respect to the contract.'23 From the choice of law standpoint, it appears both
necessary and logical to treat the validity and contents of a contract differently. In other
words the validity of a contract in most cases affects the fate of the contract as a whole, while
the contents of a contract are concerned with the substantive matters of the contract.24

Doctrine of Depecage
Another change related to the scope of party autonomy is the development of the doctrine of
depecage, or "splitting,"25 that "allows different aspects of a contract to be governed by
different systems of law."26 Under this doctrine, the parties may agree to split their contract,
21
Supra Note 2.
22
See Albert A, Ehrenzweig, Contracts in the Conflict of Laws: Part One: Validity, 59 COLUM. L, REV, 973. 1959.
23
Supra Note 2.
24
Ibid.
25
“Depecage” is a French word meaning “dismemberment”.
26
Supra Note 5.

6
so that its parts are subject to different laws. In other words, the parties to a contract may
designate the law applicable to the contract as a whole or applicable only to a particular
issue.27

It is believed that the use of depecage came in response to the idea of splitting the contract,
which is said to have originated in Germany where Savigny advanced his "seat" theory. 28
According to Savigny, each type of legal relationship had a seat. This analysis became critical
in an international contract where different parts of the contract had to be performed under
different jurisdictions. Depecage came to be accepted and understood as a choice of law
process that permits application of the rules of different states to determine different issues.
Today, depecage is not only frequently employed by the court, but is also widely adopted by
parties in the determination of applicable law. 29

27
For example, by application of depecage, the parties to a contract may choose to be governed by the law of
one jurisdiction with regards to issues arising out of or connected to the formation of the contract and the law
of another jurisdiction with regards to issues arising out of or connected to the performance of the contract.
28
Supra Note 5.
29
Ibid.

7
 COMPARATIVE STUDY OF THE OPERATION OF THE CHOICE OF
LAW CLAUSE

A companion to the development of the choice of law doctrine through the years has been the
different attitudes in terms of acceptance and advocacy of the choice of law doctrine. This
section of the project aims to understand the difference in the choice of law doctrine in
different jurisdictions particularly the United States and Western Europe.

Europe
At the beginning of the 20th century, the parties’ right to choose the applicable law was a
highly disputed issue on either side of the Atlantic. 30 For instance, in Europe, after Pasquale
Stanislao Manicini laid the foundation for the modern doctrine of party autonomy in the 19 th
century, courts were divided in their attitudes towards freedom of choice. Whereas judges in
England,31 Germany, and France generally tended to favour party autonomy, courts in other
states proved to be more hostile.32

By the same token, the European academic community was split. While some followed the
courts and supported free party choice of law pointing 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.33

In view of increased international trade, however, the resistance against the free party choice
of law melted away in the course of the 20th century. Already in 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 the Rome Convention.34

30
Ruhl, Giesela. "Party Autonomy in the Private International Law of Contracts: Transatlantic Convergence and
Economic Efficiency." Social Science Research Network (SSRN) Home Page. Comparative Research in Law and
Political Economy. Web. 02 Sept. 2010. <http://ssrn.com/abstractid=921842>
31
See In re Missouri Steamship Company [1889] 42 Ch. D. 321
32
For example, in Switzerland, until 1952, Courts limited the right of the parties to a contract to choose the
rules governing the performance of the contract.
33
Supra Note 30.
34
Ibid.

8
United States
In the United States, just like in Europe, party autonomy was the focal point of a fierce debate
at the beginning of the 20th century. And just like in Europe the divide ran more or less
between courts and scholars: While most American courts and especially the Supreme Court
recognized a party choice of law,35 many scholars were less favourably inclined.36 In
Pritchard v Nortan,37 the United States Supreme Court re-addressed its ruling in Wayman v
Southard38 by making it clear that “the law that we are in search of is that which the parties
have expressly or presumptively incorporated into their contract as constituting its
obligation”.

Joseph H. Beale, the Reporter for the Restatement (First), considered the applicable law a
matter of state sovereignty and thus beyond the reach of the parties. 39 Joseph Beale took issue
with the fact that choice of law doctrine permitted the parties to a contract to perform what he
believed was a legislative act. He viewed the choice of law doctrine as creating a legislative
body of any two persons who choose to get together and contract. 40 As a result, the
Restatement (First) remained silent on the issue, implicitly denying any freedom to choose
the applicable law.41

Over the years, the judges’ viewpoint held sway. Today, Restatement (Second) § 187 allows
for party autonomy and—even though not binding by itself—is followed throughout the
United States. Even states that formally still adhere to the Restatement (First)42 or apply
various forms of interest analysis accept § 187 and the free choice of law as a basic principle
of contract conflicts. As Patrick J. Borchers has pointed out: “… courts of all conflicts stripes
have flocked to the Second Restatement’s broad endorsement of party autonomy in § 187”.43

35
See London Assurance v Companhia de Moagens do Barreior, 167 U.S. 149, 17 S. Ct. 785, (1895).
36
See Joseph H. Beale, What Law Governs the Validity of a Contract, 23 HARV. L. REV. 1. 1909.
37
106 U.S. 124 (1882).
38
23 U.S. (10 Wheat.) 1 (1825).
39
Ibid.
40
Ibid.
41
AMERICAN LAW INSTITUTE, RESTATEMENT (FIRST) OF CONFLICT OF LAWS (1934).
42
Some of these states include Alabama, Florida, Georgia, Kansas, Rhode Island, Tennessee, etc.
43
Patrick J. Borchers, Choice of Law in the American Courts in 1992: Observations and Reflections, 42 AM. J.
COMP. L. 1994.

9
Comparative Analysis
After many years of discussion party autonomy, thus, has prevailed both in Europe and the
United States. It is often termed “a universal approach”44 which has also proved to be a
success in practice: The majority of international contracts provide for a choice-of-law
clause. And by far the most of these clauses are upheld by the courts when disputes arise. It is
against this background, that party autonomy—today—is not seriously called into question
on either side of the Atlantic.45

It is also important to note that neither European jurisdiction nor United States jurisdiction
grant unlimited party autonomy. In fact, both under the Rome Convention and under the
Restatement (Second) as well as under the UCC a number of restrictions on the freedom of
choice are in place. And even though not all restrictions look the same under the respective
provisions, a closer analysis proves that their application and interpretation over the last years
has often led to rather similar results in practice.46

Connection to Foreign Law

In a purely domestic contract, any choice of law clause will not operate in a manner so as to
derogate the operation of mandatory domestic law. According to Article 3 (3) Rome
Convention a choice of a foreign law, whether or not accompanied by the choice of a foreign
tribunal, does not, where all other elements relevant to the contract at the time of the choice
are connected with one country only, prejudice the application of the mandatory laws of that
country. The commentary to Restatement (Second) § 187 states that the provision does only
apply “when two or more states have an interest in the determination of the particular issue”
Therefore, it is not applicable “when all contacts are located in a single state and when, as a
consequence, there is only one interested state”.47

An important question that arises in this regard is the determination of a domestic case. In
other words, what are the elements that distinguish a domestic case from an international
case?  A look at the relevant case law shows that courts in both Europe and the United States
do not require much in order to assume a connection to a foreign country. It is usually
44
Supra Note 30
45
Ibid.
46
Ibid.
47
Ibid.

10
regarded as sufficient if one of the parties is habitually resident abroad or if one of the parties
is incorporated abroad, if one of the parties has her principle of business abroad.48

Substantial Relationship to the Chosen law

A difference in the working of the American and European law arises with regards to
substantial relationship to the chosen law. According to Restatement (Second) § 187 (2) (a)
and UCC § 1-105 (1) the law of the state chosen by the parties will only be applied if the
chosen state has a substantial relationship to the parties or the transaction. The Rome
Convention, in contrast, does not require a substantial or other relationship to the chosen law.
As long as the contract is connected with more than one country in the meaning of Article 3
(3) a choice-of-law clause will be enforced.49 However, it may be well to note that this
apparent difference in the law between the two jurisdictions can be dissolved by providing a
reasonable basis for chosen law under American jurisdiction. Moreover, courts in the United
States have lowered the judicial requirements that need to be satisfied to establish a
substantial relationship to the chosen law.

48
See Svolmar Shipping Co. Ltd. v. Hellenic Steel Co. („The Komnino S“) [1991] Llyod’s Rep. 370
49
For example, the infamous German Gran Canaria Timeshare cases in which the plaintiffs were German
nationals and resident in Germany who had, while on holiday in Spain, signed onerous timeshare contracts
relating to property situated in Spain. The choice-of-law clause in these contracts provided for application of the
law of the Isle of Man which had a connection to the transaction only insofar as the Time Share sellers were
companies registered in the Isle of Man.

11
 ECONOMIC ANALYSIS OF THE PARTY AUTONOMY DOCTRINE

This section seeks to understand whether the party autonomy doctrine is founded on any
economic reason. Conversely, an effort is also made to determine whether any limitations on
the choice of law doctrine are an outcome of economic reasons. In this regard, two issues
arise. First, is there an economic rationale for granting free party choice of law? Second, can
the limitations of the free party choice of law be justified on economic grounds?

Economic Rationale for Party Autonomy

From an economic point of view the supremacy of free choice of law in both Europe and the
United States is by no means surprising. In fact, there is general agreement in the economic
community that granting the parties the freedom to choose the applicable law is—in principle
—an efficient approach to the choice-of-law problem. This proposition is based on the
assumption that individuals are rational maximizers of their own welfare and have
idiosyncratic knowledge about their preferences unavailable to anybody else. Therefore, they
do not enter a choice-of-law agreement unless they believe that it will make them better off.50

The reasons why parties think that they will be better off with a choice of law can be
manifold: They might select a foreign law because it is better tailored to their needs than the
otherwise applicable law. The chosen law, for example, might have an established body of
case law that facilitates interpretation of legal rules and thereby avoids future disputes. Or the
parties might just want to select a neutral law different from that of their respective domestic
laws. However, no matter what the reasons for the choice are as long as the parties agree on
the applicable law and as long the choice does not reduce the welfare of third parties it will
lead to Pareto efficiency.51

Economic Basis for Limiting Party Autonomy

If the dominance of party choice of law in both the United States and Europe can be
explained with the help of economic theory the question arises whether the same holds true
for its limitations. As a matter of principle, economic theory suggests that free party choice of
law should only be limited in cases of market failure.52

50
Supra Note 30.
51
Ibid.
52
Ibid.

12
The first source of market failure that merits closer analysis here relates to externalities and
the presence of negative third party effects. In the context of party autonomy costs of this
kind may arise where the parties choose a law other than the lex fori. This is because such a
choice increases litigation costs since it requires application of legal rules that are unknown to
local courts and, therefore, usually more difficult to ascertain and apply. Under both the
Anglo-American and the continental European system the parties, therefore, bear the
increased costs of choosing a law other than the lex fori.

The second source of market failure that promises helpful insights into the limitations of
party autonomy under American and European law revolves around opportunistic behaviour.
Such behavior occurs where one party to a contract takes advantage of his superior
knowledge, in order to further his interests, by failing to disclose such information to the
other party.53 In the context of choice of law this kind of behaviour may be found where one
party knows more about the applicable law than the other. This is often the case in consumer,
employee and insurance contracts. The occasionally contracting consumer, employee or
policyholder, in contrast, faces severe informational costs and, therefore, often foregoes the
acquisition of valuable information.54 At its gravest level, this sort of opportunistic behaviour
by contracting parties may lead them to seek that jurisdiction which offers least protection to
the other contracting party and this in turn might induce a complete market break-down.55

53
Ibid.
54
Ibid.
55
Ibid.

13
 CONCLUSION

The doctrine of party autonomy or more correctly that of choice of law has always been an
intriguing area of study in the field of international contract law. Perhaps, one of the reasons
for this intrigue is the relative uncertainty and conflict that arises out of a contract premised
on a foreign choice of law. Even so, the idea in this project was not to discuss the conflict in
law between jurisdictions but to show how there is a growing convergence between
jurisdictions insofar as choice of law is concerned.

The first section traced the development of the choice of law doctrine. It was seen that in the
initial phases there was a conflict between the advocates of party autonomy and those who
believed in the doctrine of lex loci. That conflict continues till date among those who oppose
the very conception of party autonomy. Nevertheless, the choice of law doctrine survived its
opposition but was nevertheless subject to evolution through the years.

Pursuant to this the project sought to understand the separate conceptions of the choice of law
doctrines in Europe and in the United States. For practical purposes, some of the countries in
Western Europe were discussed together as if representing a European jurisdiction. It was
seen that the two principle instruments for European and American law i.e. the Rome
Convention and the Second Restatement respectively have begun to operate similarly.

Finally, an effort was made to determine the economic basis for the party autonomy doctrine.
In this regard, the study revealed that there were strong economic reasons for the choice of
law doctrine. More particularly, the doctrine is economic sound as long as it achieves Pareto
efficiency. Similarly, the limitations on party autonomy are also founded on sound economic
logic inasmuch as market failures are bound to arise in the absence of these limitations.

14
 REFERENCES

 Albert A, Ehrenzweig, Contracts in the Conflict of Laws: Part One: Validity, 59

COLUM. L, REV, 973. 1959.
 Ernest G. Lorenzen. Validity and Effect of Contracts in the Conflict of Laws. 30 Yale
LJ 565. 1921.
 Freidrich Von Savigny. A TREATISE ON THE CONFLICT OF LAWS. William
Guthrie trans,, Rothman Reprints 2d ed, 1972) 1881.
 Friedrich K, Juenger. Choice of Law and Multistate Justice. 1993..
 Joseph H. Beale, What Law Governs the Validity of a Contract, 23 HARV. L. REV. 1.
1909.
 Mathias Reiman, Savigny's Triumph? Choice of Law in Contracts Cases at the Close
of the Twentieth Century, 39 VA, J. iNT'L L 571. 1999.
 Ole Lando, Contracts, III-24, International Encyclopaedia of Comparative Law. 1971
 Patrick J. Borchers, Choice of Law in the American Courts in 1992: Observations and
Reflections, 42 AM. J. COMP. L. 1994.
 Ruhl, Giesela. "Party Autonomy in the Private International Law of Contracts:
Transatlantic Convergence and Economic Efficiency." Social Science Research
Network (SSRN) Home Page. Comparative Research in Law and Political Economy.
Web. 02 Sept. 2010. <http://ssrn.com/abstractid=921842>
 Willis L. M. Reese. Conflict of Laws and the Restatement Second. 28 Law and
Contemp. Probs. 1963.
 Zhang, Mo. "Party Autonomy and Beyond: An International Perspective of
Contractual Choice of Law — Conflict of Laws .net." Conflict of Laws .net —
News and Views in Private International Law. Web. 01 Sept. 2010.
<http://conflictoflaws.net/2008/party-autonomy-and-beyond-an-international-
perspective-of-contractual-choice-of-law/>.
 Zhang, Mo. "Party Autonomy and Beyond: An International Perspective of
Contractual Choice of Law." Social Science Research Network (SSRN) Home Page.
Web. 02 Sept. 2010. <http://ssrn.com/abstract=1084331>.

15