Choice of law, international

contracts and Indian

jurisprudence
A contract is a backbone of trade at a domestic or an international level. In
India, the Indian Contract Act, 1872 (ICA) forms the governing and foundational
law in terms of regulation of all forms of contract, however, one must also
appreciate that the business contract between individuals, institutions,
companies, etc. have also grown beyond the boundaries of the ICA. When
contracts transcend national boundaries, the legal regime of a single country
becomes inadequate to regulate and control the implications of the international
contracts.

Thus, when parties to a contract are from different countries, at least two
systems of law impinge upon the transaction and the rules and guidelines of
private international law come into play. Hence, there are multiple international
conventions such as the United Nations Convention on Contracts for the
International Sale of Goods (CISG), or the clauses of International Arbitration
that play their role in the formation as well as governance of contracts in India.
In this article, we explore the challenges of choice of laws in the context of
international commercial contract and then briefly look at the practices
prevailing in India regarding the principles governing the choices of law.

Conflict of laws and contracts

When parties to a contract reside in different countries, different problems pose
themselves such as what law one or both the parties should follow or in which
country the claim is justiciable and in what way. Conflict of laws or private
international laws is a set of laws or guidelines that determine which legal
system or jurisdiction may apply in a dispute related to contracts between
parties. These rules typically apply when a dispute has a ‘foreign’ element.
Thus, these laws and rules seek to reconcile the disparities among laws of
different countries. The conflict of laws may be seen at multiple levels, like,
whether the court or the forum has the power to decide the case presented
before it, secondly, if the court or forum has the forum has the jurisdiction, then
which country’s law must be applied by the court or the forum to decide the
case, and thirdly, whether the courts have the ability to recognize and enforce a
judgment from a foreign forum or the court within its jurisdiction.

In a dispute related to contracts, as noted earlier, there may appear foreign

elements, for instance, in a case where an Indian businessman entered into a
contract with its French counterpart, and they decided that the goods will be
delivered and paid for in the United Kingdom. Consequently, however, one of
the contracting parties breaches the contract, and in an action brought in an
Indian court, a question arises which country’s law should be considered by the
Court in deciding the case because laws of India, France and the UK might be
different in certain aspects. In that case, a general principle is that every
international contract (that is, a contract containing one or more foreign
elements) has a governing law, which is most often termed as the ‘proper law
of the contract’.

The proper law of the contract, thus, helps in deciding the issues in a case. The
parties have the power to choose the proper law of the country with which the
contract has the most real connection. However, this may not entirely resolve
the issue, because the idea of proper law itself is ambiguous. It is possible that
the law of a single country may not be adequate to deal with the whole of the
contract, since it may not deal with certain aspects of the contract. Thus, some
of the aspects may be subjected to one country’s law and some aspects of the
same contract may be subjected to other country’s law. Hence, the application
of proper law may itself become complicated for the courts and the forum.

Choice of the proper law

There has been a conflict persisting in the scholarships whether the place of
contracting or the place of performance should be the criteria to determine
which law should be applied to the problem. But under Indian and English
private international law the autonomy of the parties in this matter has been
recognized multiple times, which means the parties are deemed to choose any
law which could govern their contract. For international contracts, in the
absence of any domestic codification on that aspect, the Indian judiciary relies,
for its persuasive value, on the traditional common law position as enunciated
in Vita Food Product Inc v Unus Shipping Co.Ltd, wherein it was held by the
Privy Council that the parties were free to choose any governing law,
irrespective of its connection with the contract, provided that the choice was
bonafide, legal and not contrary to public policy. Thus, The proper law of the
contract under the Indian private international law is determined on the grounds
of justice, equity, and good conscience.
It has also been observed that such a choice of the proper law of the contract
may either be express or implied. The choice may be considered express when
the contract contains an explicit provision of the specific governing law, in a
situation of conflict. Thus, ideally, parties of different nations are required to
provide the provision for proper law. However, it may not be possible in every
case.

On the other hand, when the contract does not contain any such explicit
provision for the proper law of contract, in that case, the principle as laid down
by Lord Simonds in the case of Bonython v. Commonwealth of Australia is
referred which says that the proper law of the contract is the system of law by
reference to which the contract was made or that with which the transaction has
its closest and most real connection. The idea that the contract was made with
a reference to a certain system of law represents the implied choice of the
parties as the proper law governing the contract. The most prominent example
of an implied choice can be the choice of a governing forum by the parties, that
is, the contract contained a clause providing the court of the jurisdiction of a
particular country. In international commercial contracts, the arbitration clauses
which stipulate the place for arbitration may provide the choice of the proper
law.

The validating laws

Similar to the idea of the implied choice of the proper law of the contract, where
a contract or a particular provision in the contract is valid under the law of one
country but invalid under the another country’s law, the court may infer the
tacit choice of validating law on the basis that the parties had intended their
contract to valid from the beginning and not void. For instance, in In re Missouri
S.S. Co., there was an exemption clause in a contract that was void under the
law of Massachusetts, however, the same was valid in English law. Thus, it was
held that the English law was the proper law, as the parties must have intended
that their contract as well as the exemption clause in question must be valid.
Thus, until there appears anything contrary in the contract, the court will
consider the proper law in the law which validates, rather than invalidates the
contract.

Restrictions on the power to choose the proper law

There are many reasons for the power of choosing the proper law in the very
beginning of the contract, firstly, it gives the parties a feeling of certainty as to
the governing law, secondly, in domestic systems of law, the parties are largely
free to choose the terms of their contract for themselves, from which the power
to choose the governing law automatically follows as an apparent and rational
expansion. However, there are some limitations as well to the power of parties
to choose the proper law such as :

1. Mandatory rules of domestic law- Some rules of the domestic law are
not optional, but mandatory, which means they are applicable
irrespective of any agreement of the parties to the contrary. For
instance, the rules which render the contracts void on the ground of
public policy, etc. This is to say that if parties are allowed an
unrestricted choice of the governing law, there will be chances on
evasion from mandatory rules of the country with which the contract is
most closely connected, whose purpose may be to protect the public
interest or to protect the interests of a particular class, such as
employees or consumers. Moreover, in the Vita Foods case, it was held
by the court that the only general limitation on the choice of the
parties regarding the governing law is that it must be made with
bonafide intention and it must be legal.
2. The law of the country with which the contract is most closely
connected- in some cases, where the choice of proper law cannot be
derived either expressly or impliedly from the contract, then the law of
the country with which the contract is most closely connected is
deemed the proper law. The court, in this regard, considers various
factors such as the place of making the contract, the place of
performance of the contract, the connection of the parties with the
countries, the site of any immovable property which is the subject
matter of the contract, etc. However, it is sometimes hard to
determine the close connection itself.
3. Convenience and business efficiency- When the interest of the parties
is emphasized in the contract, then the court evaluates the contract in
terms of business efficiency and convenience. For this, the court looks
at multiple factors with varying relevances while deciding these
connections, for instance, the factors like the place of making the
contract or the place of performance may not be as important as the
place where the parties carried their business or where they reside in.
Moreover, in relation to the interest of the parties, the law of that
country with whom the party belongs will usually be the accurate law.
However, it is still not easy to answer the question that the law of
which party must be preferred, in an international contract.

Conflict of laws and Indian jurisprudence

Indian private international law is majorly governed by judiciary decisions in
concrete cases. The courts have generally adopted the English rules of private
international law. The Supreme Court in Delhi Cloth and General Mills v. Harnam
Singh had to decide whether Indian private international law gave the parties
the freedom to choose whatever governing law from any part of the world. The
case pertained to the recovery of balance from the plaintiff who resided in
Pakistan and was in business with the defendant in India.

Justice Bose observed that the subjective theory may produce strange results
because of the unconnected law and it is possible that there must be difficulty in
enforcing the law if it is illegal or against the public policy. Similar observation
was provided in the case of British India Steam Navigation Co Ltd v
Shanmughavilas Cashew Industries, the court emphasized the law laid down in
ista Foods case and held that the choice of proper law must be bonafide and
legal, and not against public policy. And also observed that it may not be
permissible to choose a wholly unconnected law. Similarly, the Calcutta High
Court in Rabindra N Maitra v Life Insurance Corporation of India upheld the
same principle and observed that there would be no justification for a choice of
an unconnected law in the contractual agreement between international parties,
unless the law is also the proper law.

However, it has been argued that the position has changed subsequently, and in
the case of National Thermal Power Corporation v Singer Company, the
Supreme Court abandoned the restrictive approach that confined the parties to
make a choice of the governing law that was unconnected to the contract. The
parties were permitted to make a choice of law even if there was no
geographical nexus between the obligation in the contract and the chosen law.
Thus, it implied that the parties became more autonomous in their choice of
law. The court also extended the autonomy by observing that the parties were
free to choose different laws to govern different parts of the contract. It also
observed that the only limitation to the parties’ freedom to choose a governing
law for their international commercial contract would be that such choice was
not bonafide or was opposed to public policy. Similarly, in Modi Entertainment
Network and Another v WSG Cricket Pte Ltd, the Supreme Court again clarified
that Indian private international commercial law permits the choice of any legal
system even if the legal system does not have any connection with the
contractual obligation in question.

However, in these judgments, there still persists an ambiguity about the

meaning of ‘bonafide and opposed to public policy’ since there can be wide
parameters for adjudicating these requirements. Thus, it has been argued that
although the Indian private international commercial law corresponds with the
global best practices on the subject, still the ambiguities regarding these terms
makes it unpredictable and uncertain for the courts to apply these principles
efficiently.
Party Autonomy

Article 3 embodies the principle of party autonomy, giving the parties freedom to select the law, which
is to govern the contract. Although very frequently the chosen law has some connection with the
transaction, it often happens that commercial contracts contain a choice of law, which has no
connection, or no apparent connection, with the transaction. The Rome convention allows the choice of
the law, which has no connection with the contract. By Art 1(1) of the convention, its rules apply to
contractual obligations in any situation involving a choice between the laws of different countries. And
Article 3(1) states that the law chosen by the parties governs a contract. The combined effect of these
articles is, however, that parties who are in one country, and whose transaction is connected only with
that country, may choose the law of another country, and the courts of contracting states must, subject
to mandatory rules, give effect to that choice. It is apparent from the Art. 3(3) that the convention
contemplates that the choice of a foreign law may be made even if all the relevant elements are
connected with one country only.

This shows that there is no requirement that the chosen law has a connection with the transaction. The
choice of the parties must be 'express or demonstrated with reasonable certainty by the terms of the
contract or the circumstances of the case'.

Express Choice

A choice of law is express when the contract contains a provision, which specifies the law, which it is to
be governed*. Privy council in Vita Food Product Inc v Unus Shipping Co.Ltd. held that the parties were
free to select any governing law they wished, irrespective of any connection with the contract, provided
that the choice was bonafide, legal and not contrary to English public policy. Where the parties have
identified the applicable law there is no difficulty in giving effect to the choice of the party. But where
the parties selects the applicable law indirectly the effectiveness of the alleged choice depends on
interpretation of the clause in question.

In Companie Tunisienne de Navigation SA v Companie d' Armament Maritime SA[2] a contract was made
in Paris between D, French Company and P, a Tunisian company, for the carriage of the consignment of
oil. Parties adopted a charterparty, clause 13 of which provided that the charterparty was governed by
the law of the flag of the vessel carrying on the goods. At the time of the conclusion of the contract the
parties seemed to have assumed that D would be using its own ship, which flew the flag. Before
performance of the contract a war broke out and relying on the French law as the governing law
frustration of contract was alleged. The question before the court was whether clause 13 was an
effective choice of French law, in view of the fact that forth first six voyages the defendant had
employed ships flying five different flags. The court answered the question affirmatively and held that
the parties have envisaged that D would use French vessels in performing the contract and it was
reasonable to conclude that the parties had chosen French law as the governing law, even though the
parties' assumption at the time of the contracting were erroneous.

Choice Demonstrated With Reasonable Certainty

The convention does not require choice to be express in order to be effective. It is sufficient if a choice
can be 'demonstrated with reasonable certainty' by the 'terms of the contract or the circumstances' of
the case.[3] Convention gives no such guidance as to how such an inference may be determined.
However Guiliano Lagarde Report provides example for certain factors which may be of assistance to
the court's attempt to infer a choice of law. Such factors may be: a choice of jurisdiction or arbitration
clause[4]; previous dealings of the parties[5]; a connected transaction[6]; the use of a standard form[7]
and so forth. Thus in Gan Insurance Co Ltd v Tai Ping Insurance Co Ltd[8] the judge said that the
reinsurance contract was placed in London on the London market, the terms of the slip and the claims
co-operation clause pointed to an implied choice of English law 'demonstrated with reasonable certainty
by the terms of the contract/the circumstances of the case'

Limitation On Choice

Mandatory Rule

Every choice of law in a contract that is genuinely international inevitably avoids the operation of the
laws of other connected system. Sometimes the evasion is not incidental but intentional i.e. the parties
consciously choose one system in order to avoid another. Such evasions are controlled by the use of the
concept of the mandatory rule. A mandatory rule is a rule of the law of the country, which cannot be
derogated from by contract. The provision of Art 3(3) states that, where all the other elements relevant
to the situation at the time of the choice are connected with one country only, a choice of a foreign law,
whether or not accompanied by a foreign jurisdiction clause, will not prejudice the application of the
mandatory rules of the solely connected system[9]. The Rome convention 1980 applies only to
contracts, which involve a choice between the laws of different countries, and the situation envisaged
here is not such a case as, on the facts, all the connections are with a single country. What brings it
within the Rome convention is the selection by the parties of a governing legal system which is factually
unconnected with the contract.

Overriding Statute

The second limitation applies whether the governing law is determined by choice under Article 3 or by
the close connection test under Article 4.
Article 7(2) provides that is nothing in the Rome Convention is to restrict the application of the rule of
the law of the forum in a situation where they are mandatory irrespective of the law otherwise
applicable to the contract. This provision makes it clear that the effect of an express choice of foreign
law may be nullified[10] or limited by the terms of the statute of the forum e.g. English legislation.
Where an overriding statute applies regardless of the governing law, the effect of an express choice by
the parties of a foreign law to govern their contract is limited to the extent required by the statute.

Consumer And Employment Contracts

The third and fourth limitation relates to the consumer and employment contract. Article5 (2) and 6(1)
provides that a choice of law made by the parties does not have the effect of depriving an employee or
consumer of the protection of certain mandatory rules, in case of consumer under the law of their
habitual residence, and in the case of employees under the law which would be applicable in the
absence of choice of law.

Public Policy

A choice of foreign law will not prevent the court from disregarding it if the application of rule of foreign
law would be manifestly incompatible with public policy[11].

Splitting of Applicable Law

The parties are free to select the law to govern the whole of their contract or a part of it only, or,
indeed, to have a series of choices for different parts. A multifaceted international contract requiring
performances in various countries might be one reason for the parties wishing to split up the whole into
component parts or the parties might wish to select one law to interpret the contract and another to
implement the terms so interpreted.

Variation of Choice

The convention enable the parties at any time to alter the applicable law, whether they are revising an
earlier choice, have discovered the benefits of choice after the contract is underway or have decided
that they don't wish to be subjected to the law, which the convention would impose on them. The new
or revised choice may apply to the contract as a whole or to any severable part of it.

While the convention permits changes to be made at any time, the effect of any agreement between
the parties, which is made after the dispute has come to litigation, will depend on the attitude of the
forum and its rules about amending pleadings. There are four potential dangers in respect of a change of
applicable law:

(a) the new law might contain requirement for formal validity not present under the prior law;

(b) the right of third parties might be effected;

(c) attempt might be made to avoid mandatory rules arising under the prior applicable law; and

(d) under the newly chosen law, the contract might be invalid.

Thus, no change in the applicable law can adversely affect the formal validity of the contract or operate
to the prejudice of third party rights acquired under the former applicable law. The object of the
qualification concerning formal validity is to avoid a situation whereby the agreement to vary the
governing law may create doubts as to the validity of the contract during the period preceding the
agreement between the parties; the preservation of third parties who have acquired rights is to protect
the rights of third parties who have acquired rights under the contract during the period it was governed
by a law which permits the acquisition of rights by third parties under a contract.

Reference And Incorporation

Under the Rome Convention, there is a clear distinction between reference to a foreign law as a choice
of that law to govern the contract on the one hand and incorporation of some provisions of a foreign
law as a term or terms of a contract on the other hand[13]. The distinction between incorporation of
foreign law and an express choice of the applicable law is seen most clearly if there is a change in the
law between the time of making and contract and its performance. The applicable law is a living law and
must be applied as it is when the contract is to be performed and not as it was when the contract was
made[14]. Thus legislation passed in the country of applicable law may have the effect of modifying or
discharging the contractual obligation, e.g. by reducing the rate of interest[15] or declaring a gold value
clause invalid[16]. On the other hand where a foreign statute is incorporated in a contract, although as a
statute it may have been amended or repealed.