Choice of law in international commercial contracts

Party autonomy can facilitate economic transactions as it gives the parties to the contract a measure of control and therefore enhances predictability and certainty as to the consequences of the contractual relationship. This makes trading abroad more accessible and this can be positive for economic growth.

A long historical overview of party autonomy falls beyond the remit of this chapter so a couple of points will suffice. One of the earliest references to the modern concept of party autonomy was in 16^th century France, where the parliamentary lawyer, Charles Dumoulin was consulted by Mr and Mrs de Ganay who wished to know the law applicable to their matrimonial regime. The couple possessed properties in both Paris and in the Bourgogne, which had different laws at the time. In his response Dumoulin stated that marriage is a contract and that the matrimonial regime is found by looking at the intentions of the parties. The parties make a tacit choice for the applicable law to their marriage and this choice can be deducted by looking at the first marital residence. Dumoulin thus advanced the theory that a contract can be submitted to another law than the law of the place where the contract was concluded, and that the intentions of the parties (explicit or implied) should be the point of departure to find the applicable law to the contract.^[1] The Parisian parliament agreed with this hypothesis, and consequently the custom of Paris where the couple established themselves upon getting married was held to be the applicable law.

In the common law party autonomy was considered by Lord Mansfield in the 18'^h century: ‘T/zc general rule established ex comitate et jure gentium is, that the place where the contract is made, and not where the action is brought, is to be considered in expounding and enforcing the contract. But this rule admits of an exception where the parties (at the time of making the contract) had a view to a different kingdom. ⁴⁰ This general rule is known as the vested rights theory: that a state should have a say over all that takes place on its territory. Therefore, the lex loci contractus should be the applicable law. The second point is that parties can select a different applicable law if that is their wish. In the US, in the case of Wayman v Southard, the Supreme Court expressed in 1825 that ‘in every forum a contract is governed by the law with a view to which it was made.⁴¹

The tendency of the courts in the US, England, and France was to recognise party autonomy, although the concept was contested at times. In the US Joseph Beale wrote: ‘the applicable law is a matter of state sovereignty and [...] it is thus beyond reach of the parties.* Yet, in Pritchard v Norton the Supreme Court expressed that: ‘the laws we are in search of... is that which the parties have, either expressly or presumptively, incorporated into their contract as constituting its obligation.* The gap between courts (which generally accepted choice of law clauses) and scholars (who were more doubtful of whether these should be allowed) led to the Restatement (First) of the Conflicts of Law (1934) being silent on the issue. This can, at least partly, be ascribed to the influence of Joseph Beale on the Restatement (First) for which he was die Chief Reporter.¹⁶ Taking into account the case law of the US Supreme Court it is evident that courts endorsed the principle of party autonomy.¹⁷ On the issue of party autonomy there was thus a gap between theory and practice. Practice was more likely to subscribe to party autonomy than theory where there were severe differences of opinion.¹⁸ In the end practice prevailed and when the Restatement (Second) of the Conflicts of Law was published in 1971 it recognised the parties’ freedom to choose the applicable law.¹⁹

In the UK the concept of party autonomy developed following Lord Mansfield’s initial considerations. This came to be known as the proper law of the contract doctrine.²⁰ There are three stages to this process whereby the court establishes first whether the parties have made an express choice of law, second the court looks at whether there is an implied choice of law, and only when no choice is made the court establishes the applicable law.²¹ In 1937 Lord Atkin said: ‘the proper law is the law which the parties intended to apply’¹² In 1939 this was confirmed by Lord Wright under the caveat that the choice (express or implied) is made in good faith and should not be made to avoid public policy.²³

In France the idea of party autonomy that started with Dumoulin developed relatively unchallenged. Although the Code Napoleon did not address the issue of party autonomy directly, courts continued to affirm the principle.²⁴ In 1910 the Cour de Cassation affirmed party autonomy.²⁵ In a dispute

• 16 Symeon C Symeonides, ‘Party Autonomy in International Contracts and the Multiple Ways of Slicing the Apple’ (2014) 39 Brooklyn Journal of International Law 1123, 1125
• (who notes that others resisted Beale’s view upon this issue)

Joseph H Beale, ‘What Law Governs the Validity of a Contract?’ (1910) 23 Harvard Law Review 260.

• 17 See for instance Mathias Reimann, ‘Savigny’s Triumph? Choice of Law in Contracts Cases at the Close of the Twentieth Century’ (1998-1999) 39 Virginia Journal of International Law 571.
• 18 Hessel E Yntema, ‘Autonomy’ in Choice of Law’ (1952) 1 The American Journal of Comparative Law 341.
• 19 Restatement (Second) of Conflict of Laws s 187 http://www.kentlaw.edu/perritt/con-flicts/rest 187.html.
• 20 Chris M V Clarkson and Jonathan Hill, Jaffey on the Conflicts of Laws (Second Edition, Oxford University Press 2002) 198

Lord Mansfield is also credited with beginning the process of absorbing the lex mer-catoria into the common law through his qualification of trade customs as legal rules (see for this Filip de Ly, International Business Law and Lex Mercatoria (T.M.C Asser Instituut 1992) 17).

• 21 Chris M V Clarkson and Jonathan Hill, Jaffey on the Conflicts of Laws (Second Edition, Oxford University Press 2002) 198.
• 22 R. v. International Trustee for the Protection of Bondholders Aktiengesellschaft [1937] A..C. 500
• 23 Vita Food Products, Inc. v. UnitsShipping Co., Ltd. [1939] A.C. 277.
• 24 Private international law is not extensively codified in French law. Articles 3, 4 and 5 of the Civil Code give some general principles to the courts. Article 3 covers the applicable law to immovable property and the applicable law to French citizens with regards to personal status and covers applicability of mandatory laws. Article 4 states that even when the law is silence the judge must still decide on the issue whereas article 5 prohibits the judge to deduct general principles from individual cases.
• 25 Arrêt American Trading Company, Cour de Cassation, Chambre Civil, 5 Décembre 1910, Revue Droit International, 1911, 395.

Part)' autonomy 95 regarding spoiled merchandise during a maritime transport one of the questions raised was that of the applicable law. The court stated that the applicable law to contracts between parties of different nationalities is the law of the place where the contract is concluded unless the parties have chosen a different law.²⁶ In 1959 the Cour de Cassation affirmed again that the applicable law is the one the parties choose.²⁷ Thus the dominant view in both Europe and the US favours party autonomy.²⁸

Choice of law clauses arc not accepted to the same degree in all jurisdictions. In Latin America theories such as the vested rights doctrine and ter-ritorialism were persuasive, especially through the influence of scholars who were involved in drafting private international law legislation.²⁹ Some Latin American states still have a limited recognition of party autonomy.³⁰

Criticism levelled against party autonomy mainly concerns the protection of parties, the state, or society'. There can be a perceived clash between party autonomy and fundamental values such as access to justice and protection of

• 26 'Attendu, d’autre part, que la loi applicable aux contrats, soit en ce qui concerne leur formation, soit quant à leurs effets et conditions, est celle que les parties ont adoptée ; que si, entre personnes de nationalités différentes, la loi du lieu où le contrat est intervenu est en principe celle à laquelle il faut s’attacher, ce n’est donc qn’autant que les contractants n’ont pas manifesté une volonté contraire ; que non seulement cette manifestation peut être expresse, mais qu’elle peut s’induire des faits et circonstances de la cause, ainsi que des termes du contrat.’
• 27 ‘La loi applicable aux contrats est celle que les parties ont adoptée : à défaut de la déclaration expresse de leur part, il appartient aux jupes du fond de rechercher d’après l’économie de la convention et les circonstances de la cause, quelle est la loi qui doit réagir les rapports des contractants.’

Arrêt FourruresRenel, Cour de Cassation, Chambre Civil, 6 Juillet 1959,

Note Henri Battifol, Revue Critique du Droit International Privé [1959] 708

28 Giesela Rühl, 'Party Autonomy in the Private International Law of Contracts: Transatlantic Convergence and Economic Efficiency’ (2007) 3 Comparative Research in Law & Political Economy Research Paper, 4

http://digitalcommons.osgoode.yorku.ca/clpe/227

See also: Russell J Weintraub, 'Functional Developments in Choice of Law for Contracts’ (1984) 187 Recueil des Cours Academic du Droit International 271

• 29 Maria Mercedes Albornoz, ‘Choice of Law in International Contracts in Latin American Systems’ (2010) 6 Journal of Private International Law 23, 49.
• 30 Argentina (although caselaw has widened the acceptance of party autonomy), Bolivia, Brazil, El Salvador, Honduras, Nicaragua, and Uruguay have restricted party autonomy to a degree
• (Lauro Gama Jr, 'Prospects for the UNIDROIT Principles in Brazil’ (2011) 16 Uniform Law Review 613

Lauro da Gama e Souza Jr. 'The UNIDROIT Principles of International Commercial Contracts and their Applicability in the MERCOSUR Countries’ (2012) 36 Revue Juridique Themis 375)

In other Latin American countries party autonomy is accepted without restrictions. For instance, Paraguay which has recently adopted The Hague Principles on Choice of Law (this will be discussed further on in the chapter) and Venezuela which has incorporated provisions from the Inter-American Convention on the Law Applicable to International Contracts into its 1998 Private International Law Act.

the weaker party.^[2] The degree to which party autonomy should be extended is questioned. Symeonides writes that in his analysis of American choice-of-law cases, which he has conducted for over 30 years, he has come across many cases where one of the parties uses choice of law to the detriment of the other party. An example of how the rights of the parties can be negatively affected are cases where one of the parties was not part of the original contract, such as when a bill of lading (containing a choice of law clause) is sold on to a third party that is now bound by a choice of law that he had no say in and may not protect his rights sufficiently. In developing states there is concern that unrestricted party autonomy can give multinational companies further influence to the detriment of smaller local businesses. Multinationals can impose a choice of law and jurisdiction clause on weaker parties and as such exclude the developing state where the contract is performed from the judicial process. As it is more expensive to present a case in a foreign forum and to deal with an unfamiliar law (additional legal costs, translation costs etc.) this can be detrimental for smaller local businesses as it limits their access to justice.

Muir Watt discusses that only private interests arc promoted when a case is put before a forum that has no connection to the case and is governed by a law, which is not connected to either the contract or the forum. This forum would be less concerned with protecting societal interest than a forum, which has a substantive connection to the case. It limits the control the state has over activities taking place on its territory, including protecting local companies, employment, and wider societal issues such as environmental protection. Thus, extensive party autonomy can negatively affect the interests of society, which is why states curb the effects through (international) public policy and mandatory laws.

Party autonomy is directly linked to freedom of contract: as the parties shape the contract to their intentions they choose the applicable law to fit these intentions. Party autonomy comes from the freedom of the parties to

Party autonomy 97 contract, which also gives the parties the freedom to localise their contract where they wish.^[3] As such party autonomy is directly connected to that cornerstone of contract law: freedom of contract, where the parties are best situated to understand which law (and forum) will form the best legal framework for their contractual relationship.

• [1] 2 Robinson v. Bland W. Bl. 234, 96 E.R. 129 (1760). 3 Wayman v. Southard 10 Wheat. (23 U.S.) 1 (1825) ‘in every forum a contract is governed by the law with a view to which it was made’ And later confirming this: Pritchard v Norton 106 U.S. 1224 (1882). 4 Mathias Reimann, ‘Savigny’s Triumph? Choice of Law in Contracts Cases at the Close of the Twentieth Century’ (1998-1999) 39 Virginia Journal of International Law 571, 575. 5 Joseph H Beale, A Treatise on the Conflicts of Laws Volume 2: Choice of Law (Baker, Voorhis & Co 1935) 1079/1080 See also Joseph H Beale, ‘What Law Governs the Validity of a Contract?’ (1910) 23 Harvard Law Review 260 for a further treatment of this issue Joseph Beale was a proponent of the vested rights doctrine. He also noted that allowing party autonomy would decrease certainty for the parties because they could never be sure whether on grounds of public policy their choice would be refused. 6 Pritchard v Norton 106 U.S. 1224 (1882). 7 Mathias Reimann, ‘Savigny’s Triumph? Choice of Law in Contracts Cases at the Close of the Twentieth Century’ (1998-1999) 39 Virginia Journal of International Law 571, 575.
• [2] Cecilia Fresnedo de Aguirre, 'Party Autonomy - A Blank Cheque?’ (2012) 17 Uniform Law Review 655, 658. 2 Symeon C Symeonides, ‘The Hague Principles on Choice of Law for International Contracts: Some Preliminary Comments’ (2013) 61 American Journal of Comparative Law 873, 878 These cases do not just include B2B contracts, but also B2C contracts. 3 Horatia Muir Watt, 'Party Autonomy in international contracts: from the making of a myth to the requirements of global governance’ (2010) 6 European Review of Contract Law 250, 275. 4 Ingeborg Schwenzer, and Pascal Hachem, 'The CISG- Successes and Pitfalls’ (2009) 57 The American Journal of Comparative Law 457, 464. 5 Horatia Muir Watt, 'Party Autonomy in international contracts: from the making of a myth to the requirements of global governance’ (2010) 6 European Review of Contract Law 250, 275. 6 Matthias Lehmann, 'Liberating the Individual from Battles between States: Justifying Party Autonomy in Conflict of Laws* (2008) 41 Vanderbilt Journal of Transnational Law 381,415.
• [3] Henri Battifol, Les Conflits de Lois en Muriere des Contraes (Librairie du Recueil Sirey 1938). 2 Dana Stringer, ‘Choice of Law and Choice of Forum in Brazilian International Commercial Contracts: Party Autonomy, International Jurisdiction and the Emerging Third Way’ (2005-2006) 44 Columbia Journal of Transnational Law 959. 3 Carmen Tiburcio, ‘Private International Law in Brazil: A Brief Overview’ (2013) 1 Panorama of Brazilian Law 11,37. 4 Brazil is a signatory of the New York Convention of1958 on Recognition and Enforcement of Arbitral Awards. The Brazilian Arbitration Act also allows free choice-of-law (Article 2, §1 and §2). The comments on party autonomy in Brazil should therefore be read strictly in the context of court litigation. 5 Lei de Introdúcelo às Normas do Direito Brasileiro/ decreto-lei (n. 4657/42). 6 The original text in Portuguese reads: Art. 9o Para qualificar e reger as obrigaçòes, aplicar-se-á a lei do pais cm quest constituirem. § lo Destinándose a obrigaçào a ser executada no Brasil e dependendo de forma essencial, será esta observada, admitidas as peculiaridades da lei estrangeira quanto aos requisitos extrínsecos do ato. § 2o A obrigaçào resultante do contrato reputase constituido no lugar cm que residir o proponente. 7 Nadia de Araujo. Fabiola I Guedes de C. Saldanha, ‘Recent Developments and Current Trends on Brazilian Private International Law Concerning International Contracts’ (2013) 1 Panorama of Brazilian Law 73, 77.