DR.

RAM MANOHAR LOHIYA NATIONAL LAW

UNIVERSITY
2017-2018

FINAL DRAFT FOR

CONFLICT OF LAWS
ON

LAWS GOVERNING INTERNATIONAL CONTRACTS

SUBMITTED TO: SUBMITTED BY:

Prof. Prem Kumar Gautam ASHWIN MISRA

Assistant Professor (Law) ROLL NO: 45

SECTION A

8TH SEMESTER
 TABLE OF CONTENTS
Introduction................................................................................................................................3
Position relating to International Contracts under various Systems of Law..............................5
 Position in English Law:.................................................................................................5
 Position in Common Law:..............................................................................................5
 Position in India:.............................................................................................................6
A Three-Step Test To The International Contracts....................................................................6
 Proper Law Chosen by the Parties:.................................................................................6
 Implied Intention:............................................................................................................7
 Forum of Contract...........................................................................................................7
 The Validating Law.........................................................................................................8
 The Law of the Country with Which the Contract is Most Closely Connected.............8
Issues related to Formal & Essential Validity of a Contract......................................................9
 Interpretation of the Contract........................................................................................10
Limitations on the Power to Choose the Proper Law..............................................................10
a) Mandatory Rules:..........................................................................................................10
b) Public Policy:................................................................................................................11
Conclusion................................................................................................................................12
 INTRODUCTION

Conflict of laws is a complex topic that touches on practically every area of law. It is also
understood, as a set of procedural rules that determines which legal system and which
jurisdictions apply to a given dispute. The rules typically apply when a legal dispute has a
foreign element such as a contract agreed to by parties located in different countries. In any case
which involves a foreign element it may prove necessary to decide which system of law is to be
applied, either to the case as a whole or to a particular issue or issues. Such foreign elements may
be constituted by the central administration or headquarters of each of the parties being located
in different countries or by the fact that the site is located in a country different from the home
country of either of the parties. 1
International contracts are one such branch of conflict of laws that involves determining the
question as to which law is to be applied. For Eg- A dispute in contract which comes before the
Australian court may have foreign elements: one or both of the parties may be foreign, or the
making or performance of the contract, or its terms, may be connected with one or more foreign
countries. Like, to say, by a contract made by telex between their two countries, a Kenyan
businessman sells goods to a French businessman, the goods to be delivered and the price to be
paid in England. In an action for breach of contract brought by the French buyer in the Kenyan
court, a question arises on which rules of law the dispute will be decided either by Kenya ‘s law,
French law and English law. The general principle to this is that every international contract (i.e.
a contract containing one or more foreign elements) has a governing law, called the proper law
of the contract, by reference to which issues arising out of it are mainly, though not exclusively,
decided.2
The field of contracts in conflict of laws is important as contracts underlie many transactions in
trade and commerce. There are general rules of law applicable to all contracts and the common
law rules on choice of law in contract, have for most part, been superseded by the rules in The
Rome Convention that provides for the law applicable to contractual obligations, 1980. Position
relating to such contracts before 1980 is unstable for the reason that it was a phase when the
development and refinements in laws relating to international contracts begin to develop.3

1
Macmillan Inc v. Bishopsgate Investment Trust Plc [1996] 1 WLR 387, 391–2 per Staughton LJ; Raiffeisen
Zentral Bank O¨sterreich AG v. Five Star Trading LLC [2001] QB 825 at 840 B to 841B.
2
Dicey, Morris & Collins, Conflict of Laws, 14th edn., para 32-064, (2006).
The purpose of this paper is to provide a general overview of how conflict of laws relates to the
areas of law most relevant from an international contracts perspective. It is essential that the
parties to the contract and the courts, before which the disputes relating to such contracts come,
be aware of the key legal issues relating to which law shall be applied and to what extent it will
be applied.

POSITION RELATING TO INTERNATIONAL CONTRACTS UNDER VARIOUS SYSTEMS OF LAW

 POSITION IN ENGLISH LAW:

Since, in the early eighteen century, there was increase in the international
contracts worldwide so the countries faced the difficulties in addressing following issues
relating to governing law of the international contract:
a) Whether contracts should be governed by the law of the place of contracting or by
a law selected by a more flexible rule, such as the law chosen or intended by the
parties;
b) If contracts were to be governed by the law chosen by the parties, whether there
was any limits on the scope of that choice, and in particular whether parties could
choose a law which was intended to avoid the application of some other law or
whether they could choose a law unconnected with the contract, while doing that
what are the possible limitations on them;
c) If the parties did not choose a law, whether the governing law was the law of the
place of contracting, or was to be identified by reference to their actual intention
or their presumed intention, or by reference to objective localizing factors.4
So therefore, the English courts had considered the above issues in determining the cases and the
general principle of party autonomy began to develop.5
 POSITION IN COMMON LAW:
In the common law countries, such as Australia or Canada, the courts follow the
rules laid down by the Common Law in England and apply the “proper law’ of the
contract.6 By that it means that courts apply law chosen by the parties to the contract,
expressly or by inference and failing such choice, the law with the most closest and real

3
Dicey, Morris & Collins, Conflict of Laws, 14th edn., para 32-003, (2006); Robinson v. Bland (1760) 2 Burr. 1077;
Allen v. Kemble (1848) 6 Moo P.C. 314.
4
Dicey, Morris & Collins, Conflict of Laws, 14th edn., Pg 1188, (2006).
5
Llyod v. Guibert (1865) L.R. 1 Q.B. 115, 121.
6
Monterosso Shipping Ltd. V. International Transport Workers Federation [1982] I.C.R. 675 (C.A.).
 connection.7 The law chosen need not be connected with the contract, but the choice must
be bona-fide.8

 POSITION IN INDIA:
In the absence of any statue on the subject of choice of law in contracts in India, the
courts in India have followed and applied the common law rules relating to the proper
law of a contract.9

A THREE-STEP TEST TO THE INTERNATIONAL CONTRACTS

It has become increasingly common for parties to a commercial contract to select the forum in
which they will bring disputes arising under their agreement. 10 As a matter of general practice,
prevailing in the early times under various laws, mode for determining the appropriate law for
the international laws was decided on the basis of a three-step test laid down in the case of
Bonython v. Commonwealth of Australia.11 The test is as follows-

 PROPER LAW CHOSEN BY THE PARTIES:

The general principle of party autonomy allows contracting parties to choose the substantive law
that will govern their contract.12 Thus, a chosen law may be the principle law of one of the
contracting parties, the lex mercatoria, a general principle of law, the international law of
contracts, or a combination of these rules.13
The proper law has to be ascertainable at the time the contract was entered into; subsequent acts
by a party cannot be taken into consideration to determine the proper law.14 Applying these
7
Castel & Walker, Canadian Conflict of Laws, 6th edn., para 31.7, (2005).
8
Hunter Engineering Co. v. Syncrude Canada Ltd. [1989] 1 SCR 426, 57 DLR; Nygh & Davies, Conflict of Laws in
Australia, 7th edn., para 19.5, (2002).
9
DM Madan & Co v. Minerals & Metals Trading Corp. Of India Ltd. (1970) 1 Mad LJ 548; National Thermal
Power Corp v. Singer Co. AIR 1993 SC 998.
10
R. Leflar, American Conflicts LAW§ 52 (3d ed. 1977); W. Reese & M. Rosenberg, CONFLICT OF LAWS 183-
88 (8th ed. 1984).
11
[1951] A.C. 201, 219-N (P.C.).
12
The international recognition of the principle of party autonomy is seen in various treaties such as New York
Convention on the Recognition and Enforcement of Foreign Arbitral Awards, June 10, 1958, art. V(l)(a), 330
U.N.T.S. 38; Vienna Convention on Contracts for the International Sale of Goods, Apr. 11, 1980, arts. 2, 9, 19
I.L.M. 672, 674.
13
Mohammad Reza Baniassadi, Do Mandatory Rules Of Public Law Limit Choice Of Law In International
Commercial Arbitration, 10(1) Berkeley J. of Int’l L., 59, 61(1992).
14
Armar Shipping Co. Ltd. V. Caisse Algerienne D’ Assurance et de Reassurance [1981] 1 WLR 207.
principles, it has been held in a case that the proper law of a contract to carry out work
converting a factory Scotland was English law as the contract was in a standard English RIBA
form; it was also held it was possible to have a different law governing an arbitration; where no
choice had been made governing the arbitration, this could be inferred from the conduct of the
parties.15
Therefore, the court will give effect to a choice of law by the parties. Such a choice may be
express or implied. The choice is express when the contract contains a provision which specifies
the law by which it is to be governed, for example, a contract shall be governed by the English
law or, any dispute arising relating to the payment out of this contract shall be decided according
to French law.
As a matter of convenience, it is generally seen that the Parties to an international contract are
wise to include such a clause in their agreement, to avoid the uncertainty which may otherwise
arise in a ascertaining the proper law. While making such choice, the parties cannot act malafide
by choosing a particular system of law for the purpose of avoiding certain mandatory rules of the
forum where the contract was made. The court would, therefore, not apply a chosen system of
law if it is contrary to public policy or if it is illegal i.e. if the contract involves an illegal act.16
It is witnessed that, in most European countries the proper law of the contract has to be
determined in accordance with the so called Rome Convention. The Rome Convention also has
the force of law in the United Kingdom pursuant to Section 1 and Schedule 1 of the Contracts
(Applicable Law) Act 1990 and so in Austria, Belgium, Denmark, Finland, France, Germany,
Greece, Ireland, Italy, Luxemburg, Portugal, Sweden and Spain etc. 17 Article 3 of Rome
convention clearly enumerates freedom of choice to the parties to select the law applicable for
the whole or part of the contract.

 IMPLIED INTENTION:
The second part of the Bonython’s formula, provides that absent an express intention, the court
would attempt to infer an intention from the contract. In trying to infer the intention of the
parties, the court may consider various factors, such as the place where the contract was

15
Miller and Partners Ltd. V. Whitworth Street Estates Ltd. [1970] AC 583.
16
J.G. Castel, INTRODUCTION TO CONFLICT OF LAWS, 4th edn., pg. 198 (2002).
17
Francis J. Nicholson S.J., Chapter-2 Conflict of Laws, Annual Survey of Massachusetts Law, Vol. 1983, (5), pg.
31, (1983).
negotiated, the place of performance, nature and subject matter of the contract, the form of the
documents involved in transactions, etc.18

 FORUM OF CONTRACT
A common indication of an implied choice is the use of terminology or concepts peculiar to a
particular law, often contained in a standard form drafted against the background of that law. In
such a case the inference may be well be drawn that the parties intended the law in question to
govern. For example, in Amin Rasheed Shipping Corpn V. Kuwait Insurance Co,19 a marine
insurance policy was issued in Kuwait by the defendants, a Kuwaiti insurance company, in
respect of a ship owned by the plaintiffs, a Liberian company carrying on business in Dubai. The
policy was based on a Lloyd’s form set out in a schedule to the English Marine Insurance Act
1906. The House of Lords held that English law rather than Kuwait law was the proper law. In
view of the English form of the policy, which could only be interpreted in the light of the English
law, the parties must have intended English law to govern. This inference moreover was
reinforced by the fact that at the time the contract was made Kuwait did not have any law of
marine insurance.

 THE VALIDATING LAW

Where a contract, or a particular provision in a contract, is valid under one law with which the
contract is connected but invalid under another, the court may infer a tacit choice of the
validating law, on the basis that the parties must have intended their contract to be valid, not
void. For example, in Re Missouri Ss Co.,20 the American plaintiff made a contract in
Massachusetts with English ship-owners for the carriage of cattle from Boston to England. On
the voyage the cattle were injured through the negligence of the crew. When sued in the English
court, the defendants relied on a clause in the contract exempting them from liability in such
circumstances. By the law of Massachusetts this exemption clause was void, but it was valid by
English law. It was held that English law was the proper law, for the parties must have intended
the provisions of their contract, including the exemption clause, to be valid.

18
Castel & Walker, CANADAIN CONFLICT OF LAWS, 6th edn., para 31.2, (2005); Whitworth Street Estates
(Manchster) Ltd. V. James Miller and Partners Ltd. [1970] A.C. 583; The Komninos S [1991] Lloyd’s Rep. 370
(C.A.).
19
[1984] AC 50.
20
[1889] Ch D 321.
In the case of, Royal Exchange Assurance Corpn v. Sjo Forsakrings Akt Vega,21 it was held
that unless there is good reason to the contrary, the court will hold that the proper law is the law
which validates, rather than that which invalidates, the contract.

 THE LAW OF THE COUNTRY WITH WHICH THE CONTRACT IS MOST CLOSELY
CONNECTED
The third and the last test lays down that in the absence any kind of intention, express or implied,
the court would apply the proper law of the forum that has the “most real and substantial
connection” to the dispute.22 The objective test of “closet and most real connection” was adopted
by the Privy Council in 1950 in Bonython’s case, although it derived from Westlake. 23 The court
stated that the line between the search of inferred intention and the search for the system of law
with which the contract had its closest and most real connection was a fine one which was
frequently blurred. So, in practice, frequently the courts moved straight from the first stage to the
third stage.24 This was largely because the test of inferred intention and close connection merged
into each other.25
While interpreting the “closest and real connection” at the third stage, the surrounding
circumstances were considered to determine, objectively and irrespective of the parties intention,
with which system of law the transaction had its closet and most real connection and that process
involved the application of a rule of law, not a process of construction.26
In this connection, the European countries have been following Article 4 of Rome Convention
that stipulates that in the absence of choice of law, it shall be presumed that the contract is most
closely connected with the country where the party who is to effect the performance which is
characteristic of the contract. However, there is no unanimous position which prevails worldwide
on this account. For eg- Under the traditional conflict of laws rules in Colorado has adopted the
“most significant relationship” approach of the Restatement (Second) of Conflict of Laws for

21
[1902] 2 KB 384.
22
Francis J. Nicholson S.J., Chapter-2 Conflict of Laws, Annual Survey of Massachusetts Law, Vol. 1983, (5), pg.
35, (1983); Bonython v. Commonwealth of Australia [1951] AC 201.
23
Cheshire, PRIVATE INTERNATIONAL LAW, 3rd ed, .p. 312, (1947).
24
Armadora Occidental S.A. v. Horace Mann Insurance Co. [1977] 1 W.L.R. 520.
25
1984 A.C. 50, 69, per Lord Wilberforce.
26
Dicey, Morris & Collins, CONFLICT OF LAWS, 14th edn., Pg 1243-1247, (2006).
resolving questions in contract cases.27 While in some jurisdictions such as in France the place
where the work is carried out, is the preferred most significant relationship in contract cases.28

ISSUES RELATED TO FORMAL & ESSENTIAL VALIDITY OF A CONTRACT

The expression “material or essential validity” covers situations where something in the nature of
the contract makes it wholly or partially invalid.
A contract will be held to be formally valid if it complies with either the procedural law of the
place of contracting, or the proper law that governs the contract. 29 Formal validity includes
questions such as whether the contract must be in writing, number of witnesses, etc.
So, the essential validity (i.e. with respect to the actual provisions of the contract) is determined
in accordance with the proper law that governs the contract. 30 Questions such as whether a party
had been induced to enter into a contract by misrepresentation, duress or undue influence, or
whether the contract was void because of mistake are determined by applying the applicable law
of the contract.31

 INTERPRETATION OF THE CONTRACT

Moreover, any uncertainty as to the interpretation of the terms of the contract would be
determined by the application of the rules of construction of the proper law that applies, unless
the parties expressed a choice in the contract as to what law should govern the rules of
construction.32

LIMITATIONS ON THE POWER TO CHOOSE THE PROPER LAW

As it has been discussed above that, by the concept of party autonomy, parties to a contract are
free to determine the governing law. However, it is pertinent to note that there are certain

27
Wood Bros. Homes, Inc v. Walker Adjustment Bureau 198 Colo 444, 601 P.2d 1369 (1979).
28
Panayotis Glavinis, LE CONTRAT INTERNATIONAL DE CONSTRUCTION, note 646 et seq, (1993).

29
Greenshields Inc. v. Johnston, [1981], A.J. No. 946 (Alta. Q.B.).
30
J.G. Castel, INTRODUCTION TO CONFLICT OF LAWS, 4th edn., pg. 198 (2002).
31
Dimskal Shipping Co. SA v. International transport Workers Federation [1992] 2 AC 152; Royal Boskalis
Westminster NV v. Mountain [1999] QB 674, P. 689, [1997] 2 All ER 92 (CA).
32
P. E. Nygh & Marin Davis, Conflict of Laws in Australia, Seventh Edition, LexisNexis Butterworths, 2002.
important principles of international law that limits the freedom of the parties to choose the
governing law. 33 Those principles are discussed below:

A)
MANDATORY RULES:
The most controversial and crucial question that arises while determining the proper law of the
contract is whether parties or court should apply or take into consideration mandatory rules of
public law that are relevant, but not chosen by the parties. To settle this issue, it is firstly
important to understand what is meant by “mandatory rules.” Professor Mayer defines
mandatory rule as “an imperative provision of law which must be applied to an international
relationship irrespective of the law that governs that relationship. To put it another way:
mandatory rules of law are a matter of public policy and moreover reflect a public policy so
commanding that they must be applied even if the general body of law to which they belong is
not competent by application of the relevant rule of conflict of laws. In matters of contract, the
effect of a mandatory rule of law of a given country is to create an obligation to apply such a
rule, or indeed simply a possibility of so doing, despite the fact that the parties have expressly or
implicitly subjected their contract to law of another country.”34
The need to incorporate such rules while forming a contract is that these rules protect the social
and economic interests of a society35 and a truly general principle of private international law
justifies the application of such mandatory rules.36 These mandatory rules may also emerge from
a "truly international public policy"37 based not on national public policy concerns, but on
supranational tenets of a jus cogens nature.38
A good example for mandatory rule is the French decennial liability according to art. 1792 et
seq. French Civil Code, having been adopted by act of parliament in a number of other
jurisdictions, such as Algeria, Angola, Belgium, Egypt, Luxemburg, Malta etc. The decennial
liability has been enacted in order to guarantee the structural stability of building works, which is

33
JULIAN LEW, APPLICABLE LAW IN INTERNATIONAL COMMERCIAL ARBITRATION 350 (1978).
34
Mayer, Mandatory Rules of Law in International Arbitration, 2 ARB. INT'L 274, 274-75 (1986).
35
R. van Rooij, Conflict of Laws and Public Policy, in Netherlands Reports To The Twelfth International Congress
Of Comparative Law 175, 176-77 (1986).
36
See, e.g., Government of the State of Kuwait v. American Indep. Oil Co., 21 I.L.M. 976 (1982).
37
Jacob Dolinger, World Public Policy: Real International Public Policy in the Conflict of Laws, 17 TEX. INT'L
L.J. 167, 170 (1982).
38
Ahmed El Kosheri & Fatek Riad, The Law Governing a New Generation of Petroleum Agreements: Changes in
the Arbitration Process, I FOREIGN INVESTMENT L.J. 257, 274 (1986).
legitimised by public interest concerns. Whichever law the parties have agreed to apply to their
contract, the decennial liability of the country where the site is located will apply.39
In the leading case of Vita Foods Products Inc v. Unus Shipping Co Ltd, 40 the court held that,
the only general limitation on the parties choice is that it must Be bona fide and legal and
provided there is a no reason for avoiding the choice on the ground of public policy.
Also, by an Australian court judgment in the case of Golden Acres Ltd v Queensland Estates Pty
Ltd.,41 it was held a contract, which would otherwise have been governed by the law of
Queensland, contained a clause selecting Hong Kong law as the governing law. The court held
that this choice was ineffective because lack of bona fide, the purpose having been to evade the
application of a Queensland statute.

B)PUBLIC POLICY:
The second limitation on the choice of law by the parties is “public policy of a nation.” The
courts may decline to enforce any contractual and other obligations if they are of the opinion that
doing so would be contrary to public policy. 42 It has been held that an English court would not
enforce foreign contracts in restraint of trade even if such contracts were permissible under the
law of the place where they were made.43
For instance, an European Community law states (which applies when a court of a Member State
gives effect to Community law) that the parties’ freedom of contract can only be restricted to the
degree actually necessary for implementing a given public policy.44

CONCLUSION

The above overview attempts to encapsulate the most relevant and key issues that
Parties to a contracts and courts, in general, should focus on when dealing with a conflict of laws
issue in the context of commercial contracts. The laws that govern the sphere of international
39
Molineaux C, Moving toward a Lex Mercatoria - A Lex Constructionis, J Int Arb 14:55, (1997).
40
[1939] AC 277, [1939] I AII ER 513.
41
[1969] QdLR 378.
42
Nygh & Davies, Conflict of laws in Australia, 7th edn., para 19.24, (2002).
43
Rousillon v. Rousillon (1880) 14 CH D 351; Cheshire, North & Fawcett, Private International Law, 14th edn, p.
140.], (2008).
44
For the constitutional principle of proportionality as a restriction to limitations of contractual freedom,
see in Germany, BVerfG, 12 November 1958 (Preisgesetz) 8 BVerfGE 274 (1958) at [328]; in Belgium, eg
Cour d’Arbitrage, 28 October 2004, SA Les AP Assurances / G. Van Leekwijck et H. Wouters (2005) 10
Revue de Droit Commercial Belge 1052 at [1054].
contracts are not guided by a binding source of international legislation or principles. It is
therefore, that the development of these laws and its position varies from country to country, in
the initial stages of development. Witnessing the situation at present, the Rome Convention or
UNIDROIT Principles does not seem to have created a uniform scenario in the countries for
implementing the international contract laws. To the most, it is seen that since certain provisions
of the above-stated Conventions are of interest in countries (such as India), where though the
convention is not in force, yet are given recognition to some extent.
Therefore, concluding, the position in regard to choice of law is somewhat clarified, in the light
of the judicial decisions and principles of international law. In that regard it is pertinent to note
that, while choosing the suitable law for a contract, the domestic contract rules are not optional,
but mandatory, i.e. applicable irrespective of any agreement of the parties to the contrary and
also those rules which render contracts void on grounds of public policy, or invalidate provisions
shall have an equal bearing on determining a contract.