UNIT-IV

CONTRACT

The contact in conflict of laws involves many transactions in trade and commerce. The
contracts are more complex when there is an involvement of foreign element; it is difficult to
determine the rights and liabilities of the parties. For instance the contract may be signed in
one country, the subject matter of the contract in another country, the place of the
performance in another country and the domicile of the contracting parties may be in another
country, so in that case there is a involvement of four different laws of four different
countries involved in the contract, so there is a conflict of laws exist there to determine
which of the following law can be applied to determine the rights and liabilities of the parties
in the contract. The nature of problem in contractual obligation is ascertaining the proper law
due to diverse connecting factors.

ROME CONVENTION:-
The Rome convention or convention on contractual obligation, 1980 is the principle
convention governing the contractual obligations. The Scope of the convention is given in
Article 1(1) provides that 'the rules of this Convention shall apply to contractual obligations
in any situation involving a choice between the laws of different Countries.

The Main purpose of Rome convention is to adopt uniform rules of conflict of laws
within the European community in which it was proposed by the Benelux nations (Belgium,
Netherlands, Luxemburg) countries in 1967 and it was finally drafted in the year 1980 and
came into force on April 1990. It is even accepted in India due to its international recognition
so that it would increase legal certainty and make it easier to anticipate more easily.

APPLICATION OF THE CONVENTION:-

1t applies to all contractual matters but does not have retrospective effect. It also does
not limit other international convention applicability to which the state is a party. For the
application two essentials are the one is contractual obligation and secondly choice of law
must be in question.

CONNECTING FACTORS:-
Two connecting factors have been appropriate to govern the law of a contract, viz;

(i) Lex loci contractus (law of the place where the contract was made);

(ii) Lex loci solutionis (1aw of the place where performance of the contract was due.)

However, each of these connecting factors has its limitations.

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THE ENGLISH CONCEPT OF PRIVATE INTERNATIONAL LAW
The English Private International Law Has Evolved The Principle Of Proper Law Of
Contract To Decide Questions Regarding Contractual Obligations Involving Foreign
Element. They Defined It As The Law Which The English Court Is To Apply In
Determining Obligations Under A Contract.

HOW TO ASCERTAIN THE PROPER LAW?

There are two theories in Determining Proper law for Contract

1. THEORY OF INTENTION OR SUBJECTIVE THEORY

It is the proper law in which the parties intended to apply and parties themselves have chosen
their rights and liabilities to determine under a particular law and when not expressly
mentioned, the relevant circumstances must be taken into consideration to determine the
intention

2. THEORY OF LOCALISATION OF THE CONTRACT OR OBJECTIVE

THEORY
The contract in which the most part of the transaction takes place which is the natural seat of
the contract, then the law of that particular country will be applicable. Weslakesays:*“proper
law should be the law of the country with in which the contract has the most real connection
and not the place of the contract will be taken into account”.

An illustration in which X is domiciled in France, Y domiciled in Italy, place of contract will

be Italy, place of performance will be Italy and the money must be paid in a French bank and
in this contract, Italy is the country in which the contract is most densely grouped or the
country which is closely connected, so the Italian law is the proper law of the contract
according to localization theory supported by Westlake.

DOCTRINE OF PROPER LAW:-

The law chosen by the parties is often referred to as the proper law of the contract' and this
choice can be express or implied. If there is no choice then governed by the most closely
connected test. Thus the law by which the contract is intended to be govemned is called
proper law contract.

Article 3 (1) of the convention says: “A contract shall be governed by the law chosen by the
parties. The choice must be express or demonstrated with reasonable certainty by the terms
of the contract or the circumstances of the case. By their choice the parties can select the law
applicable to the whole or a part only of a contract.”

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Choice is of two types express and implied choice. Both are mentioned in Article 3. In
express choice the parties themselves choose the proper law like lex domicille, lex loci
contractus etc.. Whereas in implied choice it is determined from the terms of the contract,
nature, circumstances then the proper law is determined.

The term ‘proper law’ was clearly defined in Indian General Investment Trust vs. Raja of
Kholikote as “the proper law of contract means the law which the court is to apply in
determining the obligation under the contract”.

The matter of ascertaining proper law depends on the intentions of the parties to be
ascertained in each case on consideration of: a) the terms of the contract, b) the situation of
the parties and generally on c) all surrounding facts from which the Intention of the parties is
to be gathered.

EXPRESS CHOICE
In Vita Food Products Inc. vs. Unus Shipping Co. Ltd. (1939) In this case, even though the
contract is mostly connected with just one country, the court chose to go with the law in
which the parties have chosen expressly and mentioned despite it has no connection with the
contract. Lord Wright an English jurist said that: ‘where there is an express statement by
the parties to select the law of contract, it is difficult to see other criteria to determine proper
law provided that the intention expressed is bona fide and legal, and provided there is no
reason for avoiding the choice on grounds of public policy’ the intention of the parties as to
the choice of law prevails’.

IMPLIED CHOICE
When the intention regarding governing law is not expressly stated, intention to be inferred
from the terms and nature of the contract, circumstances and the inferred intention
determines the proper law of contract. The court should find out the implied intention to
govemn the contract, in the absence of such implied intention the court has to find out the
intention. The major task of the court is that they have to find the intention under which the
reasonable man and a prudent man under the same circumstances would have did, the judges
should have placed himself in the place of the reasonable man and find out the intention of
the parties.

THE ASSUNZIONE:
The contract is a carriage of wheat from French to an Italian port on an Italian ship and the
charter party was French merchants. The wheat was shipped under an exchange agreement
between French and Italian government and this deal is not known to Italian ship owners and
the contract was concluded in France by Italian and French brokers. The contract is drawn up

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in English language in a Standard English form and the freight and demurrage to be payable
in an Italian currency in Italy. On the question of proper law of contract, we can see that the
facts and the circumstances are equally balanced between French and Italian law. The court
of appeal held that Italian law is the proper law since the contract to be performed in Italy
and the freight and demurrage to be paid in Italian currency

In Amin Rasheed vs. Kuwait insurance company, a Liberian company resident in Dubai,
insured a ship with the Kuwait Insurance Company. When a claim made by Liberian
company under this policy was rejected by Kuwait Company. Plaintiff sought an order to
serve a writ on Defendant which could be granted, providing the contract ‘by its terms, or by
implication, [was] governed by English law.” There was no express choice of English law,
nor was it clear as to what was the implied law: both Kuwaiti law and English law had
claims to being the proper law of the contract. However, based on the surrounding
circumstances as well as the terms of the contract the rights and obligations should be
determined in accordance with the English law of marine insurance'. A significant factor was
that at the time of making the contract, Kuwait had no law of marine insurance.

LIMITATIONS:-
The limitation over determining the proper law is explained with Mandatory rules and most
closely connected test.

MANDATORY RULES:-
Atrticle 3(3) of the convention speaks about mandatory rules. The purpose of this provision is
to prevent evasion of mandatory rules of law. This can be of any rules based on public policy
or invalidate provision.

MOST CLOSELY CONNECTED TEST:-

In the absence of an expressed or an implied choice of law, the contract shall be governed by
the law of the country with which it is most closely connected as per Art.4 (1) of the
convention.

The factors which help the court determine the proper law of the contract are those with
which the transaction had its ‘closest and most real connection’.

The following factors are considered by the Court when deciding this issue:

1. The form of the contract.

2. The place where the contract was concluded.

3. The place where the contract is to be performed.

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4. The parties place of residence and business.

THE PUTATIVE PROPER LAW:-

When the existence of a valid contract is in issue, perhaps because a vitiating factor is
claimed to be present, it cannot be said that the issue in question is governed by the proper
law: if there is no contract there can be no proper law. It is uncertain as to whether the parties
to a contract can choose a particular legal system as the putative proper law.

Whether a contract has been concluded is, apparently, determined by the putative proper law:
The Parouth (1982). Thus, whether an offer has been accepted is determined by the putative
proper law.

The putative proper law will also determine whether consideration is a necessary element of
a contract. If the putative proper law is English law then the absence of consideration will
render a purported contract void ab initio. However, if the putative proper law does not
require consideration as a necessary element of a valid contract, then a valid contract may
result: Re Bonacina (1912).

EFFECT OF JURISDICTION CLAUSE:

Sometimes there is a jurisdiction clause in contract like when a dispute arises in a contract, it
must be submitted to courts or arbitral tribunal situated in a particular country, in this case,
there is no express selection of law. But there is a selection of tribunal expressly so there is a
presumption that the parties intended the dispute to be governed by the law of the country
where the chosen tribunal is situated.

TZORTZIS vs. MONARK LINE

The Contract was mostly connected with the Sweden law, Hence the Swedish law is the
proper law, if determined objectively. But there is a clause in a contract that all disputes
arising should be settled by arbitration in England, so court held that that choice of law was
clearly implied, that the parties choosing an English arbitration tribunal.

ADVANTAGES AND DISADVANTAGES OF PROPER LAW DOCTRINE:

The Parties have the ultimate freedom and no restriction to select the law in which their
rights and liabilities will be governed unless it is legal and done with bonafide intention and
not chosen to avoid any public policy.

The Biggest disadvantage is that when the law is not expressly stated, intention has to be
presumed or imposed upon the parties which introduce an element of uncertainty in the
proper law.

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FORMATION OF CONTRACT:-
The formation of contract contains the essentials such as the offer, acceptance, consideration,
legal object, capacity but should not contain any vitiating factors such as fraud, mistake,
misrepresentation etc. the agreement can be seen in two ways ie. factum of the
agreement(offer and acceptance) and reality of the agreement(personal laws of the parties).

The validity of contract is of two types formal and essential validity:-

FORMAL VALIDITY:-
The concern in this is not with procedural formalities such as status of fraud but with non-
procedural formalities such as a contract for the conveyance or creation of a legal estate in
land having to be in a deed. It is likely that compliance with either the lex loci contractus or
the putative proper law will suffice to formally validate the contract.

ESSENTIAL VALIDITY
The proper law determines whether the contract or its terms, including exemption clauses,
are valid and effective. If a contract made in England is procured through pressure which
amounts to duress, it is voidable by the innocent party:

INTERPRETATION:-
Whereas interpretation of the terms of a contract is usually governed by its proper law, it is
permissible for the contracting parties themselves to nominate one legal system to govern the
contract and to specify that another system be used to interpret it, i.e. ‘the parties may well
contemplate that different parts of their contract shall be governed by different law’.

PERFORMANCE OR DISCHARGE OF OBLIGATIONS:

The proper law is to determine whether the parties obligations have been discharged.

CAPACITY:-
The three possibilities are,:

Capacity can be governed by;

(i) the lex domicilii of each contracting party (unreasonable); or

(ii) the proper law of the contract or

(iii) the lex loci contractus (which may be entirely fortuitous).

Ralli Bros. Case.

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