It is of great importance for the parties to know what law governs
the contract that they have made, because the law (for example, of
sale and agency) differs from country to country.
Even where it is clear that the applicable Law is that of another
county, the contents of that law still have to be proved to the judge
in the ordinary way by expert witnesses or some other admissible
It is often very difficult to decide whether a particular contract is to
be governed by the law of one country Or that of another. For
example, a contract to work for a French employer in France may be
made in England; IS FRENCH OR ENGLISH LAW TO APPLY?
If the contract states clearly that one or ether of the conflicting
systems is to prevail, this will be prima fide evidence that the law
mentioned is to govern the contract; but if no such clause is
included, the Court will endeavour to ascertain the intention of the
parties, and effect will be given to that intention as far as possible.
The law intended by the parties is often referred to
as The proper law of the contract'.
This must not be confused with the expression
'forum', which refers to the place where jurisdiction
would be exercised in a particular case. For example,
where a Japanese person is sued in England on a
contract made in Italy which provides that German
law would apply, the forum/place is England,
whereas the applicable/proper law would be that of
In very simple words, in the circumstances of this
example, an English Court will hear the case, and
will apply German law to resolve the contract
CONTRACTS (APPLICABLE LAW) ACT 1990
Contracts (Applicable Law) Act 1990 is the legislation
covering questions of 'applicable law' to govern a
contract or 'proper law' in U.K.
The Act has brought into force the 1980 Rome
Convention on the Law Applicable to Contractual
Obligations, and came into force in April 1991.
The Rome Convention applies to contractual
obligations in any situation involving a choice
between the laws of different countries. Therefore, it
applies to any contract with an international flavour
not just those which have an E.C. connection.
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.‘
Thus, it is clear from the above quoted Article 3(1)
that “where the intention of the parties is clearly
expressed generally no difficulty will arise,
But where no definite expression of intention is
made, it is necessary to presume intention from
the attendant circumstances.”
There are a number of important exclusions to the
application of the Convention:
1)Certain obligations arising under bills of exchange,
cheques and other negotiable instruments;
2)Arbitration agreements and agreements on the
choice of Court, i.e. jurisdiction clauses;
3)It does not cover trusts, matrimonial matters and
questions on capacity.
4)It does not apply to contracts of insurance which
cover risks situated in the territories of member
states of the E.C.(European Community), although it
does apply to contracts of re-insurance.
If no law has been expressly or impliedly chosen by the
parties, Article 4(1) provides that
“The contract shall be governed by the law of the country with
which it is most closely connected'.
THE LAW INTENDED BY THE PARTIES
The parties may choose any law that they wish, even if the
contract has no connection with it.
However, this choice must be exercised for a bona fide purpose
and not merely to avoid statutory control. For instance, the
mandatory provisions of the Unfair Contract Terms Act 1977
cannot be contracted out of by the parties.
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.
4. The parties place of residence and business.
There is no statute on the subject of choice of law in contracts in India.
Indian courts follow and apply the Common law rules relating to the
proper law of a contract.‘
The Privy Council in State Aided Bank of Travancore Ltd v. Dhrit
Ram (AIR 1943 PC 6) had held that a contract is governed by the
choice of law chosen by the parties, either expressly or by
The Supreme Court in Dhanrajmal Govindram v. Shamji Kalidas &
Co.. AIR 1961 SC 1285 has also so held.
It has been observed in British Indian Steam Navigation Co. Ltd v.
Shanmughamavilas Cashew Industries (1990) 3 SCC 481 by the
Supreme Court that the law so chosen must, however, have some
connection with the contract,' but there was no such qualification made
in a later decision [National Thermal Power Corporation v. Singer Company
1992 (3) SCC 551](in which the Court cited with approval Vita foods Inc.
v. Unus Shipping Co. Ltd,) and stated that 'the choice must be accepted
if it was bona fide and not opposed to public policy‘.
The term 'proper law' was clearly defined in Indian
General Investment Trust v. Raja of Kholikote as:
1. “the proper law of contract means the law which
the court is to apply in determining the obligation
under the contract'.
2. In deciding these matters, there are no rigid or
arbitrary criteria such as lex loci solutionis or lex
3. The matter 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
In the question of selecting the proper law, the Supreme Court in Modi
Entertainment Network v. WSG Cricket Pvt. Ltd (AIR 2003 SC 1177) held
it is permissible for the parties to insert a clause providing for the
exclusive jurisdiction of a neutral court, meaning the court of a country
that had no connection to the parties to the contract.‘
A neutral court can legitimately be chosen by the parties to a contract to
resolve any dispute that may arise between them. There can be no
objection to their choosing a neutral system of law to govern their rights
and obligations under the contract, so that the choice of a law that has
no connection with a contract ought to be upheld as being a valid choice.
This view is supported by section 28(1)(b)(i) of the Arbitration and
Conciliation Act. 1996. This provision applies to ‘international
commercial arbitrations. that is, to arbitrations’ between persons, one of
whom is a foreign individual or entity.
Under that clause, the arbitrators are to decide the dispute in accordance
with the law designated by the parties.
This provision embodies legislative approval to the principle of com-
plete party autonomy in the choice of proper law and the principle can be
applied in all cases in which the proper law of a contract has to be
If no choice had been made by the parties, the law
to be applied is the law with which the contract has
the most real and substantial connection.‘(Delhi
(Cloth & General Mills Co. v. Harnam Singh, AIR 1955
In the case of absence of a choice made by the
parties, the courts have taken into consideration the
place where the contract was made or was
performed State Aided Bank of Travancore Ltd v.
Dhrit Ram (AIR 1943 PC 6), the place of the court
chosen by the parties to resolve the dispute, and the
place chosen by the parties where any arbitration
between them was to take place (Shreejee Traco India
Pvt. Ltd. v. Paperline International Corporation Inc.
(2003) 9 SCC 79) and applied the law of such place.
Parties can select different systems of law
for different parts of a contract, that is,
1. one to govern their right and
2. another to govern any arbitration that
may arise between them, and
3. the third for procedure for such
The Indian courts have based their presumptions in
determining the proper law of contract on the
Lex Lori Contractus: Where no express mention is
made about the proper law of the contract, the
presumption is in favour of the law of the place
where the contract is made.
This presumption is definitely stronger when- the
contract is made and is to be performed in the same
It was held in the case Shankar v. Manilal that the
general rule is that: all rights and obligations arising
out of a contract are to be governed by the proper
law of the contract and the law of the contract is the
law of the country where contract is made.
Lex Loci Solutionis: If a contract is made in one
country, but to be wholly performed in another
country, in the absence of other circumstances, the
contract is presumed to be intended by the parties to
be governed by Lex Loci Solutionis.
Shah Kunwarji Tulsidas v. Bombay Steam Navigation Co.
AIR 1955 NUC (Sau.) 54 In this case. the contract that
was void according to the laws of India where the
contract was made, was held to be valid according to
Saurashtra law, where it was to be performed.
Lex fori: It is generally presumed that the parties
contracted with reference to the law that would best
effectuate the purpose of the agreement. If there is
any doubt about the Intention of the parties, the
Indian court has been of the view that Lex fori
depending on the circumstances of the case, can be
applied as the proper law of the contract.‘ (Nicholas
.Schinas v. Nimazie AIR 1952 Cal. 1150.)
The above-mentioned presumptions in respect to the
proper law of contract have not found favour with
the English author, Cheshire. He has mentioned that
on an objective view of the matter, every term of the
contract, every detail affecting its formation and
performance, and every fact that points to its natural
seat, is relevant.
Cheshire's views have found reflection in the current
practices of English private international law, and the
presumptions mentioned earlier are no longer
considered for determining the Intention of parties in
respect of proper law of contract. The Indian courts have
followed the same view.
In Delhi Cloth and General Mills Co. v. Harnam Singh, Bose
.J. defined the proper law of contract as the law of the
country in which the contract is located. Its location is
indicated by what is called the grouping elements as
reflected in its formation and its terms. The country in
which its elements are most densely grouped will
represent its natural seat or centre of gravity, that is, the
country with which the contract is in fact most
He opined that an objective test should be applied in
ascertaining the proper law of contract, that is, the law of
the country in which its elements of contract were
factually most closely connected.
The proper law intended as a whole to govern the
contract must be administered us `a living and changing
body of law, and effect must be given to any changes
occurring in it before the performance'
The same view for applying the objective test in
determining the intention of parties was applied in
another case, Rabindra Nath Mitra v. Life Insurance
Corporation of India.' It was held in this case that: in
determining the proper law of contract the court must
take into consideration matters such as the domicile, the
residence of the parties, the national character of
corporation and the place where its principal place of
business is situated, the place where the contract is to be
performed, the fact that a certain stipulation is valid
under one law and invalid under another, the nature of
the subject matter or its situation & and any other fact
which serves to localize the contract.'
The Supreme Court reiterated the doctrine of
proper law in Thermal Power Corporation v. Singer
Company.' The court summarized the current legal
position as follows:
“proper law is thus the law which the parties have
expressly or impliedly chosen,
which is imputed to them by reason of closest and
most intimate connection with the contract.
It must, however be clarified that the expression
proper law refers to the substantive principles of the
domestic law of the chosen system and not its
conflict of law rules. The law of contract is not
affected by the doctrine of renovoi.”