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Theory of proper law of contract

  2.  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 evidence.  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.
  3.  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 Germany.  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 dispute.
  4. 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.
  5.  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.”
  6.  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.
  7.  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.  CLOSE 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. 4. The parties place of residence and business.
  8.  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 implication.  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‘.
  9.  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 loci concratcus. 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 gathered.”
  10.  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 that  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 ascertained.
  11.  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 SC 590.)  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.
  12.  Parties can select different systems of law for different parts of a contract, that is, 1. one to govern their right and obligation, 2. another to govern any arbitration that may arise between them, and 3. the third for procedure for such arbitration.'
  13.  The Indian courts have based their presumptions in determining the proper law of contract on the following grounds:  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 place.  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.
  14.  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.
  15.  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.
  16.  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 substantially associated.  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.
  17.  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.'
  18.  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, Or  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.”