(What a huge) Choice of Law!

14 March 2020

Applicable Law

Right at the end of a contract you will find (normally) a jurisdiction clause and a choice of law clause. The two are not the same: the jurisdiction clause will tell you which national courts have the job of dealing with disputes arising under the contract (e.g English or French courts) whereas the choice of law clause tells those courts which legal system’s rules are to be applied to the dispute (e.g. French or English Law).

They don’t have to be the same – so an English court may find itself having to apply French Law or vice-versa simpy because that is what the contractual provisions direct. Normally you do not want this to happen – the court would have to receive evidence as to what the foreign law is and then do its best to apply it. The end result may not be pretty – you would normally want English judges to apply English Law as that is what they know best.

What happens if you have a jurisdiction clause, but no choice of law clause? This arose in GDE v Anglia Autoflow [2020] EWHC 105 (Comm) and the result may come as a surprise. It is a really important point in international contracts.

Background – Rome Convention

The Rome Convention 1980 provided rules for the law applicable to contractual obligations. It was given legal effect in the UK by the Contracts (Applicable Law) Act 1990 and it applies to contracts made between 1 April 1991 and 16 December 2009. In case you were wondering what happens to contracts made as from 17 December 2009, then Rome I applies to those contracts – in fact Rome I largely follows the format of the Rome Convention so decisions on the Rome Convention are by and large relevant to understanding Rome I.

(In case you were really interested: for contracts made prior to 1 April 1991, common law rules apply. As there is a Rome I, so there is a Rome II – it applies to the applicable law for non-contractual obligations. Since these are EU instruments, they will be affected by Brexit, though exactly what is going to happen remains of course to be seen).

The Rome Convention has two basic provisions which are relevant to the case under consideration in this note:

  • Article 3 – the parties can choose their own choice of law but it must be “expressed or demonstrated with reasonable certainty by the terms of the contract or the circumstances of the case”
  • Article 4 – this deals with what happens where the parties do not make a choice in their contract. Without a choice of law, the law of the contract is the law of the country with which it is most closely connected (Article 4(1)). Article 4(2) goes on to provide a number of presumptions. There is a presumption that the closest connection will be the country where the party who is to effect the performance “which is characteristic of the contract” has, when concluding the contract, his habitual residence or, for a company, where it has its central administration.

Article 4(2) becomes more complex as it goes on to provide,

“However, if the contract is entered into in the course of that party’s trade or profession, that country shall be the country in which the principal place of business is situated or, where under the terms of the contract the performance is to be effected through a place of business other than the principal place of business, the country in which that other place of business is situated.”

And if that is not complicated enough, there is a let-out in Article 4(5) providing that these presumptions can still be disregarded if the circumstances as a whole show that the contract is more closely connected with another country.

Facts

In GDE v Anglia Autoflow [2020] EWHC 105 (Comm), a contract was entered into on 9 April 2009 between a Mr Goffe and Anglia. Anglia manufactured machinery for the poultry processing industry. By the contract, Anglia appointed a company to be incorporated by Goffe as its agent for Canada, USA, Mexico and the Carribbean. That company to be incorporated became GDE, which was incorporated in the US state of Georgia. The dispute related to unpaid commission and damages for repudiatory breach by Anglia. This decision only looked at the choice of law aspects of the contract.

The contract set out the scope of the agency, and then provided that “in the event of serious disputes, both parties agree to subject themselves to the jurisdiction of the English Courts”.

Various questions arose: was there an implied choice of English Law – if the parties had chosen English jurisdiction, could it be implied that they had selected English Law? If not, how did the various presumptions in Article 4 apply – remember, GDE was not incorporated at the time of the contract so it had no “central administration” or “principal place of business” to use the words of Article 4(2). Should you therefore look to Goffe’s place of residence? In fact, Goffe was a UK national who had acquired US citizenship and so had dual nationality but he had a house in Georgia in the USA while also living in Ontario, Canada with his second wife who was Canadian. GDE was, as we have seen, incorporated in Georgia but the address it used was Goffe’s house in Georgia and it had no separate place of business. Goffe conducted his GDE agency business from his laptop, giving his US contact details to American customers and his Canadian contact details when dealing with Canadian customers.

In any case, the agency agreement came to an end in April 2013, and in September of the same year, Goffe moved to Florida and GDE’s details were updated shortly afterwards to reflect that move.

Decision

There is a good deal of litigation on this issue and the Rome Convention requires a court to apply a purposive and international approach, not a literalistic one. The Convention required a court to find the country with the closest connection to the contract, in default of agreement by the parties as to the choice of law in their contract.

Looking at Article 3, there was no presumption that choosing any particular jurisdiction meant that the parties must be taken to have chosen that jurisdiction’s law as the governing law. Article 3 required effectively a positive choice by the parties to be expressed in the contract: it was not legitimate to make an assumption as to what law the parties would have chosen if they had thought about it. The reality is that, if no choice has been expressed “with reasonable certainty” to satisfy Article 3, the inquiry must then turn to the very different tests in Article 4.

The judge therefore decided that the parties had not made an implied choice of English Law, notwithstanding the following factors (among others):

  • the agency agreement was signed in England, was in the English language and used English legal concepts and terminology
  • half the equipment for supply under the agency agreement would be manufactured in England
  • commission would be paid using the price ex works in England

None of this was enough – the parties had made no express choice of law and there was insufficient to show an implied choice either.

Turning to Article 4, the search was for the country with which the contract was most closely connected. This was a question to be determined by reference to the time of the contract. It should be remembered that, at the time of signing the agency agreement, Goffe was employed by a different company and GDE had not been incorporated. That being so, Article 4(2) could not be applied and the court had to go back to Article 4(1) – the closest connection test.

When applying Article 4(1), the hunt was for the closest connection between the country (not necessarily the same as the legal system) and the contract (not necessarily the parties, or either of them). Taking account of all the evidence, the judge decided that the country with the closest connection to the contract was Ontario, Canada. This flowed from the following factors:

  • the parties intended the focus of Goffe’s/GDE’s efforts to be in Eastern Canada
  • Goffe’s main home was Ontario

In the judge’s view, there were no circumstances under Article 4(5) to find for a different country’s law.

So – the English Courts had jurisdiction but would have to apply the law of Ontario. The sting in the tail was that the law of Ontario was such that GDE’s claim was time-barred.

Conclusion

The judge cited vast amounts of authority and academic opinion in the course of her judgment. While interesting, the real lesson to be learned from this case is that boilerplate is not the poor relation of the operative provisions, or indeed of the schedules (or annexes or attachments or whatever). The bottom line is this: if you are negotiating an international agreement, make sure you include a choice of law clause as well as a jurisdiction clause.

As always, this is intended as a general update, so do get professional advice when dealing with a specific contract or dispute.