DETERMINING THE PROPER LAW OF CONTRACT UNDER PRIVATE INTERNATIONAL LAW
Where a dispute arises from the breach of a term or terms of a contract between ‘A’ a Nigerian and ‘B’ an Italian, the court which entertains the action will employ an objective test in order to determine the law to govern the resolution of this dispute. Before arriving at this law, the court considers the intention of the parties regarding their choice of law.
The parties’ intention could be expressed where they provide that “Nigerian law shall govern the construction of this contract”, or their intention could be implied where, from the terms of the contract, the court could hold that the parties’ intention is that Italian law should govern the contract. Where their intention is neither expressed nor to be inferred from the terms of the contract, the court could hold that the system of law with which the transaction has its closest and most real connection shall be the proper law of the contract and this is arrived at by looking at the surrounding circumstances of the case.
The above explanation is what “Determining the Proper Law of Contract under Private International Law” is all about and it is that proper law so determined that is applied in all issues or matters arising from international contract disputes brought before the court for resolution.
Business men and women, the world over, are continually entering into agreements. It is therefore necessary to know which law should be applied to govern these agreements, because every international contract must be governed by a particular law, if not it is no longer a contract which the court must enforce. Generally, the law of contract has uniqueness of its own, in that it is the only branch of the law in which broadly speaking parties are free to make their own choice of law. The court will apply this law if it passes the objective test. The courts follow a procedure in conducting this test; it is the result that constitutes determining the proper law of contract. At first the choice of law was fixed, rigid and arbitrary but as times went on, the law became flexible, more reasonable and universally acceptable.
The Proper Law of Contract was defined in Coast Lines Ltd. v. Hudig and Veder Chartering N.V.1 “as the system of law (e.g. Nigerian Law, English Law, German Law or Italian Law) by which the parties intended 16 the contract to be governed, or, where their intention is neither expressed nor to be inferred from the circumstances, the system of law with which the transaction has its closest and most real connection.”The proper law of contract was also defined by Lord Wright in Mount Albert Borough Council V. Australasian Temperance & General MutualLife Assurance Society2 as “that law which the English court is to apply in determining the obligations under the contract. English law in deciding these matters has refused to treat as conclusive, rigid or arbitrary criteria such as lex loci contractus or lex loci solutionis, and has treated the matter as depending on the intentions of the parties to be ascertained in each case on a consideration of the terms of the contract, the situation of the parties, and generally on all surrounding facts. It may be that the parties have, in their agreement expressed what law they intend to govern, and in that case prima facie their intention will be effectuated by the court. But in most cases they do not do so. The parties may not have thought of the matter at all.
Then the court has to impute an intention or to determine for the parties what is the proper law which as just and reasonable persons they ought to or would have intended if they had thought about the question when they made the contract.”
It can be deduced from the above definitions that what constitutes the proper law of contract is not very easy to determine, because of its complex nature. One cannot at a glance pick a particular law as the proper law of contract.
The difficulty arises from the fact that businessmen and women representing their companies from different parts of the world, enter into various kinds of contracts; such as contracts of sale of goods, hire purchase contracts, contracts of employment, equipment leasing agreements, consolidation contracts, etc. In Nigeria, commercial banks for example, are required to raise their minimum share capital from N2 billion to N25 billion. To meet this target, banks enter into merger agreements with other banks both local and international. Therefore the proper law to govern contract of sale of goods is not the same as contract of hire purchase or contract of employment or equipment leasing contract or a share acquisition contract.
These contracts contain terms, conditions and multiplicity of connecting factors. These terms and conditions form the constitution of the contract of which the breach of any clause will lead to action for claims.
At first and in relation to the determining of the proper law of contract, there may be no problem among the parties to the contract, where each respects or carries out his obligation under the contract. But problem arises where one party to the contract breaches or fails to perform his own obligation under the contract.
Where the contract is a domestic one, the issue in dispute before the court may not pose much problem, because the domestic law i.e. Nigerian Law of Contract, which is based on common law principles as well as on legislation, shall apply. However, where a Nigerian company enters into a contract with an Italian company and the issue before the court involves a foreign element, problem arises as to which country’s proper law, Nigerian Law or Italian Law is the applicable law in resolving the matter.
Where the matter is brought before a Nigerian Court and the parties file their pleadings and tender various documents including a copy of the contract which binds them, the court will of course study the parties’ pleadings including the agreement. In the course of the study, the court may discover that the Agreement provides that foreign law governs the contract.
The court can determine the applicable law by looking at the place where the contract was made. It can also look at the place where the contract is to be performed, from the intention of the parties, the domicil, nationality or business centre of the parties; the situation of the subject matter, the nationality of the ship in the case of a charter party etc. The place of contracting, place of performance and intention of parties represent the old and classical theories, which were relevant for some time before they were discarded and replaced by more flexible rules.3
3 The examples of the recent principles are:
- where there is an express choice of the proper law
- where there is an implied choice of the proper law
- where there is no choice of the proper law express or implied
The proper law applies either because the parties have chosen it and the choice has been objectively tested by the court, or because it is the law most closely connected with the contract. In the absence of strong evidence to the contrary, the parties must be deemed to have intended to refer to the domestic rules and not to the conflict rules of their chosen law, and the connection with a given legal system is a connection with substantive legal principles and not with conflict of laws rules.4 The development of this area of private international law is still at its infancy in Nigeria. This is because industrial growth in the country has been at its lowest ebb, with few local companies having international connections and associates. Therefore foreign elements in contracts between Nigerian companies and their foreign counterparts are not so rampant and hence, our courts are not so burdened with such cases for determination. There are also very limited local legal materials on the subject matter. For instance there are few Nigerian text books on the subject with heavy reliance on foreign cases and legislation. Also there is yet __no local legislation on proper law of contract as we have in Europe. These problems have made reliance on opinions of foreign writers and decided cases inevitable in this research.
DETERMINING THE PROPER LAW OF CONTRACT UNDER PRIVATE INTERNATIONAL LAW
1.2 AIMS AND OBJECTIVES OF THE RESEARCH
This work aims at highlighting the various rules which courts follow in determining the proper law to apply in resolving disputes arising from international contracts. It is also the aim of the work to examine and determine the various problems encountered by the courts in choosing the proper law. In trying to do this, the researcher will look into the various theories and solutions postulated in resolving the problems.
1.3 SCOPE OF THE RESEARCH
This research work focuses attention on various rules for determining the proper law of contract entered into between parties from different countries, such as between a corporate organization in Nigeria and another corporate organization doing business in Germany. Also attention shall be focused on some essential requirements such as offer and acceptance, consideration, capacity, performance of the contract, illegality and interpretation of the contract.
Recommended: LEGAL EXAMINATION OF THE ROLE OF TAXATION IN REVENUE GENERATION AND ECONOMIC DEVELOPMENT IN NIGERIA
1.4 STATEMENT OF THE PROBLEM
International contracts entered into between parties from different countries for the execution of their various obligations is a document of extreme importance. Once parties endorse the agreement, they are bound by its terms and conditions.
The area that is very crucial in realizing their dreams is that which deals with determining the proper law that governs their rights and obligations in the contract should any dispute arise.
In the event of such dispute, the court is normally saddled with the onerous task of determining the proper law to apply in order to resolve the dispute. If the parties have expressly chosen a law of a particular country, say English law as the law to govern the contract, the problem is not over till the parties can prove that their choice is bona fide and legal.5
Where the parties have expressly chosen the governing law can the courts go ahead to apply the law chosen? This is a problem because the law expressly chosen by the parties can only become the proper law to be applied by the court if it passes the objective test. However where the parties cannot expressly choose the law, problem arises as to which law of a particular country can be implied to govern the contract. To solve this problem the court has to look at the terms of the contract to be able to know which elements of the contract constitute the natural seat and thereby determine the proper law. The court can also look at the system of law with which the contract had its closest and most real connection.
This search is cumbersome because it does not entail looking at the facts of the case from one aspect. It entails looking at all the relevant facts and all the surrounding circumstances of the transaction in order to choose the proper law of the contract. Again,
does the alleged contract fulfill all the essential requirements of a valid contract notwithstanding the fact that the parties have chosen the governing law? All these and more, form the statement of the problem.
1.5 JUSTIFICATION OF THE RESEARCH
The subject matter of this research – determining the proper law of contract under Private International Law is a subject of monumental importance. As a result of the emergence of technological advancement in virtually all spheres of human endeavour, the effect of globalization, the need for stronger and well managed organizations, companies all over the world embrace mergers, acquisitions, restructuring, consolidations etc in order to form a stronger group and dominate the world market.
To achieve above objectives there is the need to make contacts and search for investors. This search always results, in the final analysis, into signing of contract documents which bind parties to it. One of the important terms of this contract is the law that will govern the contract in the event of dispute. Therefore certain clause(s) stipulating the governing law and place of arbitration are commonly provided in these contracts.
These provisions will enable the parties to resolve disputes that may arise as the courts will rely on them when such problems arise. Therefore the proper understanding of the subject matter and resolution of business disputes based on them will go a long way in enhancing business harmony, co-operation and growth among different corporate organizations around the world. It must be emphasized that it is not only in the formation of companies that the proper law is relevant, the proper law is also relevant in resolving contractual disputes between companies and individuals as well as companies and companies.
Therefore once a dispute resulting from an international contract is resolved through the application of the proper law of contract, it enables the parties and their various organizations to move forward and forget about the past, learn from the consequences of their actions, principles and rules of law are made by the decisions of the court which create precedents for the courts below. All these combined results in the development of private international law as it relates to contracts.
1.6 SIGNIFICANCE OF THE RESEARCH
This research work is of importance to legal practitioners on international business law, legal advisers to multinational companies. It is also of importance and beneficial interest to private international law students. The Judges of our various courts of record who are saddled with adjudicating on issues brought before them – deciding on proper law governing international contracts, will immensely benefit from this research. Businessmen and women, who have interest in legal literature, will find the research work equally beneficial.
1.7 LITERATURE REVIEW
The subject matter – determining the proper law of contract under private international law has generated heated comments and contributions by eminent legal scholars who propounded various theories which have assisted the courts of both Anglo-American and Continental countries in resolving issues emanating from international contracts. Despite their contributions, confusion and lack of proper understanding of the subject matter have made further inquiries inevitable.
Also many of these legal writers who have contributed much on this topic, have not fully discussed thoroughly the technicalities involved in determining the proper law of contract in a simplified and lucid manner for proper understanding by legal practitioners and non-legal practitioners alike. Consequently we had a situation where courts of different countries apply rules quite different from the others. For example, American courts apply the lex loci contractus, following the English courts. Later Lex loci solutionis was applied only as an exception. American courts refused to apply the intention rule. Some Continental countries apply intention theory while some apply lex loci contractus and lex loci solutionis.
At a point, the doctrine of the proper law of contract in Europe became a legislative matter, making the decisions of courts tied to the provisions of the law. In this way, legal provisions became superior to judicial decisions thereby making it difficult to follow precedents. For example, Articles 3(1) and 4(1) of the Contracts (Applicable Law) Act 1990 of the Contractual Obligations Convention 1980 (usually referred to as the Rome Convention), provide that a contract ‘shall be governed by the law chosen by the parties. Their choice must be express or demonstrated with reasonable certainty by the terms of the contract or the circumstances of the case’ failing which, ‘the contract shall be governed by the law of the country with which it is most closely connected’.
In as much as this Law tries to solve the problem of determining the proper law of contract, it gives room for forum shopping and does not affect a party from a non-European country. The law only binds parties from different countries within Europe. It has therefore compounded the problem of determining the proper law because a party from non-European country may opt out of the provisions of this law and lean on the theory or principle applied by the courts of his own country.
It is therefore the responsibility of this research to as much as possible simplify these complications and technicalities arising from the writing of such authors and the certain comments by some Judges. This will go a long way in the proper understanding of what is determining the proper law of contract.
The need for the proper understanding of the subject matter is very crucial in that international contract as it stands today is the bedrock of industrial growth and development. No country is an island; therefore there is the need for business co-operation and understanding between parties from different countries. The interdependence nature of world commerce has made this co-operation unavoidable. For example the recent world economic summit which was held in Switzerland brought together various countries of the world for discussions which bothered on cross fertilization of ideas on economic cooperation and integration. In this type of forum, various contracts are entered into and concluded by businessmen and women who participated from various countries of the world. In these agreements, legal practitioners who are versed in private international law, particularly those knowledgeable in issues of proper law of contract shall be consulted before the final signing ceremonies.
The Scholars who made significant contributions in this area of the law can be categorized into ancient and modern writers. The early writers have propounded theories which enabled the courts then to resolve conflict matters in contracts entered between parties from different countries. Huber6 for example, propounded the lex loci contractus theory. This theory states that the law of the place where a contract is entered constitutes the governing law. However, where parties have another place in mind, then the law of the place of contracting will give way. The lex loci solutionis which means the law of the place where the contract is to be performed became an exception to the theory of place of contracting. ________
Dumoulin7 propounded the theory of party autonomy. It states that parties have unrestricted freedom to enter into contract. He stated with respect to contracts the principle that the will of the parties is sovereign, and that, if the will is not expressed, it must be sought in the surrounding circumstances, the place of contract being one, but only one of these circumstances. The question to ask is whether this autonomy is unlimited. As we shall see later, the autonomy of parties is not unrestricted.
The First American Restatement had made matters worse when it stated that the courts are considered powerless to depart from the firm grip of lex loci contractus rule.8 And because of the influence of Professor Beale, party autonomy or intention of parties was also not followed. According to him the rule that the governing law for a contract is the law that the parties intend did not find any viable repose in the early American law. The intent of the parties to contract was far from the mind of the court. It was felt that the law must intend the place to govern the contract. He stated that allowing __________the intention of the parties would not only be objectionable, it would be wholly unreasonable.9
It is difficult to agree with the provisions of the First Restatement and the writings of Beale, when one considers that at a point when the strict adherence of the lex loci contractus and lex loci solutionis rules could not produce the desired results in the resolution of contract disputes brought before the courts, they were abandoned and replaced with the principles of intention or party autonomy, a sort of the stone which the builders refused is become the head stone of the
The confusion of the cases, so often deplored, would have been relieved in part, if the courts had always been told in no uncertain words that it is not at all in their discretion and free decision to refuse to apply a law which the parties agreed to apply.
The intention theory as we shall see later became the forerunner and guiding light to the modern view of the proper law. In fact the proper law in the modern view is the modification of the intention theory. Intention therefore became the foundation on which the proper law was built. It cannot be said to have been abandoned completely and or replaced with a different theory and therefore no longer relevant.
Ademola Yakubu branded this theory as obsolete and imaginary when he said “the modern approach has not done away with the idea that the parties are free to choose the law to govern their contract, but what is considered now is not the obsolete or imaginary choice of law but whether the parties have chosen the proper law or not.”12 This expression could lead a reader to believe that the intention theory is ______
This writer disagrees with the notion that intention theory is obsolete. The word obsolete means “no longer used because something new has been invented”13 Parties to a contract till date have the freedom to enter into a contract, negotiate on their terms and conditions which bind them, sign the agreement and exchange same, as evidence of the contract.
Parties also have the freedom to choose their governing law, which will be applicable in settling any dispute that may arise out of that contract. Are all these not evidence of intention? What Ademola regards as obsolete is the selection of the law by the parties, which is subjected to further inquiry by the courts, as parties are no longer required to choose the governing law at will. This law is subjected to further test, to see whether it was chosen in good faith without any hidden agenda or capriciously made for the parties advantage. If this limitation on the parties is what constitutes ‘obsolete’ in the thinking of Ademola, I disagree with him, with all due respect. Rather what _________has happened is that, parties can choose their law but they must make sure that that law was chosen in good faith i.e. there was no attempt on their part to choose a law in order to make valid a contract which is already invalid.
Therefore, parties are still at liberty to choose their law or where they could not choose one, the court will imply or infer one for them or still where the terms and conditions could not enable the court to imply the proper law, the court could import the most closely connected rule to determine the proper law for them. It could be seen from the above that the intention theory is still very much valid and at the end of the parties’ negotiation, their intention metamorphoses into what is called Memorandum Of Understanding (MOU) which leads to the final conclusion and signing of the contract proper.
Furthermore, the courts have not helped matters in the proper explanation of the proper law of contract. Their decisions brought confusion and complications.
The problem with above decisions is the use of the word intention without further explanation of what it meant. Intention is a problematic word which requires precise explanation so that we can know where we are going. Therefore there is apparent ambiguity in the use of the word intention by the two Law Lords. The complication and complexity involved raises some important questions. One, is intention used here subjectively – based on one’s own ideas or opinion rather than facts, as to what constitutes the test to ascertain the________proper law of contract or objectively – not influenced by personal feelings or opinions but on clear facts i.e. the use of connecting factors as a test to ascertain the proper law of contract.
Secondly, does it mean that the parties directed their minds to the matter and in fact reached an agreed conclusion? In other words, should the test of reasonable man (i.e. looking at the objective angle as suggested by Willes, J.) be relied on as the true test or should the subjective test be applied? The two Law Lords did not proffer solutions.
From whatever angle the issue of intention is looked at, and the suggestions as to how to discover the intention of parties, no headway can be reached unless formidable and acceptable rules or tests are propounded to unravel the all time deadlock of discovering the intention of the parties. These theories shall form part of discussion in chapter three.
1.8 RESEARCH METHODOLOGY
The methodology adopted is the doctrinal research method – that is library oriented research and divided into two: (a) Primary Authorities which are Acts of the National Assembly and of the States and case laws. (b) Secondary Authorities consisting of relevant information from leading authoritative text books on the subject matter, international journals, opinions of specialists and practitioners on private international law. Adequate references have been made to all the materials consulted.
1.9 ORGANIZATIONAL LAYOUT
Chapter one of this research work introduces the subject matter by defining what is the proper law of contract and stating the aims and objectives of the research, scope of the research, statement of the problem, justification of the research, significance of the research, literature review, research methodology and organizational layout.
Chapter two starts with introduction of the old and classical theories. It discussed the lex loci contractus, lex loci solutionis and the theory of intention. The merits and demerits of these theories were also discussed.
Chapter three introduces determining the proper law of contract -the modern position and goes further to discuss its meaning, the express selection, limitation on the parties to choose the proper law, implied selection and the closest and most real connection.
Chapter four introduces the essential requirements and the proper law of contract and goes further to discuss offer and acceptance, consideration, capacity, performance of the contract, illegality and interpretation of the contract.
Chapter five which forms the concluding part of this research work consists of a summary of the entire work; as well as the writer’s recommendations.