Party Autonomy (Grade A3) PDF

Preview

Summary

party autonomy principle...

Description

LS401Q, LX401Q (2020-21): Private International Law of Commercial Law

Introduction Based on the principle of party autonomy, the parties are given a limited power to determine the extent of the jurisdiction of state courts and the scope of application of state law.1 In choice of law agreements, the  freedom of contract allows the parties to a contract to select the applicable law and identify the system of law2 in order to resolve any dispute between them. This essay will consider party autonomy in light of the Rome I Regulation (hereinafter: Rome I),3 which is used as ‘one of the cornerstones of the system of conflict of law’4 for selecting the applicable law to contracts.5 It will also examine the Hague Principles on Choice of Law in International Contracts6 (hereinafter: Hague Principles)  which are used as the soft law instrument to influence the international  practice in parties’ autonomy of choosing their applicable law to the contracts.7 On the one hand, the relevant legal instruments mentioned above provide the parties with a wide discretion in selecting their choice of law, while on the other hand, this essay acknowledges that party autonomy is not unfettered.8 The relevant restrictions of parties’ contractual freedom in this writing will be evaluated in terms of the issue raised in express or implied choices of law, the parties’ discretion in selecting non-state norms, the role of dépeçage and the legal restrictions of mandatory rules and public policy.

1

Alex Mills, ‘Conceptualising Party Autonomy in Private International Law’, p.3. Trevor  C. Hartley International Commercial Litigation, (3rd Ed), Cambridge University Press, 2020 Hartley,  Chapter 23, (1). 3 Regulation (EC) No. 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I) (2008) O.J. (L 177/6) 1 (EC), hereinafter: Rome I. 4 Rome I, Recital (11) 5 Franco Ferrari, Diego P. Fernández Arroyo, ‘Private International Law: Contemporary Challenges and Continuing Relevance’, (Edward Elgar Publishing 2019), p.73. 6 Hague Principles on Choice of Law In International Commercial Contracts (approved on 19 March 2015), hereinafter: the Hague Principles. 7 Mills (at 1), p.1. 8 Symeonides, Symeon C, "The scope and limits of party autonomy in international contracts: a comparative analysis" [2019] ELECD 2902; in Ferrari, Franco; Fernandez Arroyo, P. Diego (eds), "Private International Law" (Edward Elgar Publishing, 2019) 101, p.2. 2

Subjective v Objective Choice of Law As a matter of principle, party autonomy in choice of law in contract is generally well accepted.9 However in practice, an issue arises whether an implied choice of law is permissible or whether an express choice of law is required between the parties’ agreement. Under Article 4 of the Hague Principles, the parties’ choice or any modification must ‘be made expressly or appear clearly from the provisions of the contract or the circumstances.’10  The Hague Principles thus provide for both express and implied choice of law agreements, which widens the scope of application in choice of law agreements. However, the commentary to the Hague Principles provides a caveat as it requires that there is a ‘real intention of both parties that a certain law shall be applicable’ and that a ‘presumed intention imputed to the parties does not suffice.’11  Similarly, Article 3 of Rome I also identifies an implicit choice of law that is ‘clearly demonstrated’ by the contract terms or circumstances of the case.12  In this view, party autonomy remains limited because implied choices of law that were not ‘clearly’ made under Rome I a nd the Hague  Principles were meant to be excluded from the parties’ choice of law.13 The narrow scope of choice of law taken in Article 3 of Rome I can be argued conflicts with the Recital 11 of Rome I, which provides that ‘the parties freedom to choose the applicable law should be one of the cornerstones of the system of choice of law rules in contractual obligations.’14 Recital 11 of Rome I thus implies a wider approach to the scope of choice of law application. Mills argues that if party autonomy is treated as ‘one of the cornerstones of the system,’ then any genuine agreement whether implied or express should be given effect.15  This view nevertheless renders a more obscure interpretation of Article 3 of  Rome I, because it remains unclear what scope of application party autonomy should be given.16  clearly points out One the other hand, the case of Amin Rasheed Shipping Corp v. Kuwait Insurance Co, 17 that the contracts must be ‘made with reference to some system of private law which defines the obligations assumed by the parties.’18  This allows the parties to more readily facilitate their intended

 hich e xclude unclear transaction.19 This position falls in line with Rome I and the Hague Principles, w 9 Alex Mills, Party Autonomy in Private International Law, (Cambridge University Press 2018), ‘Choice of Law in Contract’ 7.2.1. 10 Hague Principles, Article 4. 11 Commentary to the Hague Principles on Choice of Law in International Commercial Contracts 2015, [4.6]. 12 Rome I (at 1), Article 3. 13 Ibid at 9. 14 Ibid at 4. 15 Mills (at 9). 16 Ibid. 17 [1984] AC 50 (U.K.). 18 Ibid, Lord Diplock at [67]. 19 Marta Pertegas, Brooke Adele Marshall, ‘Party Autonomy and Its Limits: Convergence Through the New Hague Principles on Choice of Law in International Commercial Contracts.’, Brook. J.INT’L L, Vol.39:3, p.984.

choices of law and narrow party autonomy. In contrast to other legal jurisdictions, the US position in the  however, the courts Restatement (Second) on the Conflict of Laws allows a valid implied choice of law,20 are required to narrowly construe the implied choice rule in order to avoid allowing hypothetical choices of law.21  Further restrictive jurisdictions such as in China limit party choice to an express choice of law22  in order to honor the parties’ real intent and legitimate expectation in their agreements.23  Mills further critiques that as a practical implication, there may be ‘twin dangers in determining this boundary’24 between the subjective and objective choice of law rule. If party autonomy gives the chosen law by the parties an overly wide scope of application, there is a danger that the court will identify the imputed agreement instead of the actual agreements. However, if the choice of law rules are construed too narrowly, then there is a danger that parties’ autonomy will become frustrated and real agreements may not be given effect.25  Limiting the implied choice of law in which the choice appears clearly26  may be necessary to provide greater scope of legal certainty and predictability. In this way, lessening the likelihood of disputes as to whether there has been a choice of law27  may provide a merit in narrowing the scope of application of the parties’ choice of law agreements. Non-State Body of Law The scope of parties’ freedom to select their own law depends on the content in the conflict of law rule.28  Party autonomy is generally applied as a limited choice between the laws of the states but not typically extended to non-state legal norms.29  It can be argued, however, that the scope of choice of law clauses has been widened by allowing courts to apply non-state norms of law. In particular, the Hague Principles have taken a ‘more controversial view’30  on the notion of party autonomy since the parties to a contract are further given the option to choose a non-state body of law. Pursuant to Article 3 of the Hague  which do not derive from legitimate Principles, parties are allowed to choose the ‘rules of law,’31 20

Restatement, (Second) of Conflict of Laws (1971) § 187(2) cmt. a (1971), [hereinafter Restatement]. Restatement, at 63-64. 22 Law on the Application of Law to Foreign-Related Civil Relations of the People’s Republic of China (Promulgated by the Standing Comm. Nat’l People’s Cong., Oct. 28, 2010), arts 2-3. 23 Yuku Nishitani, ‘Party Autonomy in Contemporary Private International Law - The Hague Principles on Choice of Law and East Asia’ in Japanese Yearbook of International Law, Vol. 59 (2016) pp.300-344, p.27. 24 Mills (at 9), 7.2 ‘The Effectiveness and Limits of Choice of Law.’ 25 Ibid. 26 Ibid (at 11), [4.1]. 27 Ibid. 28 Jane Y Williams, ‘Party Autonomy and the Selection of Non-State Norms in International Commercial Contracts’, p.8. 29 Mills (at 9), 10.1 ‘Choice of Non-State Law’. 30 Brooke Marshall, ‘The Hague Choice of Law Principles, CISG, PICC: A Hard Look at a Choice of Soft Law’, American Journal of Comparative Law Vol.66. P.178. 31 Hague Principles, Article 3. 21

legislative power of the state to govern their contract as lex contractus.32   The parties may choose non-state rules such as the United Nations Convention on Contracts for the International Sale of Goods (hereinafter CISG),33 which provides an international convention of substantive uniform rules in formation of international sales contracts. Alternatively, the parties may select the UNIDROIT principles of International Commercial Contracts (PICC),34  as a non-binding set of substantive rules, which regulate the general contractual aspects of international commercial contracts.35  Marshall warns that the framework of PICC and CISG was developed against the traditional private international law rules, which are different from the Hague Principles. As a result, applying PICC and CISG through the Hague Principles may give rise to normative ambiguities.36  If the parties select PICC as the governing rules of law, the Hague Principles have no normative precedence over PICC unless the Hague Principles are adopted as the private international law of the forum. On the other hand, if both PICC and the Hague Principles share the same normative power as soft law instruments, it remains unclear which instrument prevails in application over the other.37  A choice of CISG through the Hague Principles raises the same issues as PICC in terms of the normative concerns. Furthermore, the parameters on party autonomy in Article 3 of the Hague Principle in selecting non-state bodies of laws are unclear. For instance, the ‘rules of law’ chosen by the parties must have garnered general recognition beyond a national level and cannot merely refer to a set of rules within the contract itself.38  This would imply that party autonomy cannot on its own be justified in accepting the application of non-state norms. Mills argues that the requirement of acceptance on an international level is ‘opaque’ as it becomes unclear whether this condition requires a broader public acceptance.39  By contrast, Rome I adopts a middle ground position, which does not expressly allow parties to choose a non-state body of laws but allows the parties to incorporate the non-state norms as contractual terms into the contract. A proposal provision was made for Rome I to “choose as the applicable law the principles and rules of the substantive law of contract recognized internationally or in the Community.”40  However, 32

Nishitani (at 23), p. 30. United Nations Convention on Contracts for the International Sale of Goods, Apr. 11, 1980, 1489 U.N.T.S. 3 [hereinafter CISG]; 34 Int’L InSt. for the Unification of Private Law (Unidroit), Unidroit Principles of International Commercial Contracts (2016) [hereinafter PICC]. 35 Marshall (at 30). p.180. 36 Ibid, p.181. 37 Ibid, p190. 38 Ibid (at 11), [3.4]. 39 Mills (at 29). 40 Art. 3 (2) of the European Commission Proposal (Proposal for a Regulation of the European Parliament and the Council on the law applicable to contractual obligations (Rome I), 15.12.2005, COM (2005) 650 final, 2005/0261 (COD)).

33

the proposal was not incorporated in the finalised instrument and instead Recital 13 of Rome I allows parties to incorporate non-state law or an international convention.41  While this provision limits the parties’ freedom to select a transnational law as the governing law, the Recital still enables parties to incorporate a standard of non-state terms and conditions into their contract.42  In other jurisdictions, the US for instance adopts a similar position to Rome I a nd allows the parties to incorporate into their contract by reference the non-state norms of their choice.43  This position acknowledges that contracts are incapable of existing in a legal vacuum and unless the contracts were made by reference to some system of private law, the agreements are devoid of all legal effect.44  Case law further shows that there is an issue in identifying the non-state norms selected by the parties to the contract. In Ostroznik Savo v La Faraona soc coop a rl,45   the I talian court found the parties’ intention to apply the ‘laws and regulations’ of the International Chamber of Commerce of Paris, France, is ‘too vague and imprecise’ to identify specific rules of the contractual relationship.46  As a result, the court refused to incorporate either the UNIDROIT principles or the CISG into the sales contract. This judgement clearly limits the parties’ autonomy in selecting their choice of governing law, which appears

  the court relied on the restricted to restrict the scope of law application. Similarly in Halpern v Halpern,47 choice of state norms contained in Article 3(1) of the Rome Convention48   a nd refused to apply a religious law, which the court found was neither ‘expressly or by implication as the applicable law of the agreement.’49 It appears that the courts have strived to give effect to the parties’ intentions in non-state law when interpreting the parties’ choice of applicable law. However, party autonomy remains limited as case law shows that the choice of law rules require the designation of the law of a state. For instance, in Shamil Bank of Bahrain EC v Beximco Pharmaceuticals Ltd50   t he reference in the parties’ agreement to “principles of the Glorious Shari’a” did not identify any specific aspects of Shari’a law which the parties had intended to incorporate into the contract. As a result, the parties’ choice of non-state law is often

41

Rome I, Recital 13. Williams (at 28), p.12 43 Restatement, section 187 (1). 44 Ibid (at 17), Lord Diplock at 65. 45 Tribunale di Padova, Sez Este, 11 January 2005. 46 Italy 11 January 2005 District Court Padova (Ostroznik Savo v. La Faraona soc. coop. a.r.l.) [translation available], available at: http://cisgw3.law.pace.edu/cases/050111i3.html. 47 [2007] EWCA Civ 291, [2007]  2 Lloyd’s Rep 56 48 Convention on the Law Applicable to Contractual Obligation opened for signature in Rome on 19 June 1980, [1980] OJ L 266/1, hereinafter: Rome Convention, Article 3(1). 49 Ibid at ( 47), Lord Justice Waller para 29. 50 [2004] EWCA Civ 19. 42

deemed ineffective.51  In this respect, it is more advisable for parties to select state law in order to benefit from higher legal certainty and predictability of the contractual terms. Party autonomy should still remain flexible and wide enough to provide the parties with certainty into their relationship and for the court to rely on the contractual terms of non-state laws that were incorporated into the parties’ contract. Dépeçage A further question arises in terms of the parties being allowed to choose different laws that govern different parts of the contract, also known as dépeçage.52  Rome I states that the parties are allowed to choose the law to be applied to the whole or one or more parts of the contract.53  However, Rome I does not expressly provide a role for dépeçage to the same extent as under the Rome Convention Article 4(1).54  The CJEU in the case Intercontainer55  set a high standard in affirming that splitting the applicable law expressly provided in Article 4 Rome Convention should be done in exceptional circumstances. The fact that Article 4 of Rome I does not explicitly mention the role of dépeçage leans closer to the view that dépeçage has no place in Rome I.56  The Hague Principles Article 2(2)57  may provide a more flexible stance towards dépeçage since the provision more clearly reserves the parties the option to use the process of selecting different laws to give the greatest scope of party autonomy.58  It may be argued that splitting the applicable law, makes it easier and practical for the parties to reach an agreement. On the other hand, the choice of law must be ‘logically consistent’59  because otherwise dépeçage may create undesirable results.60  The commentary of Hague Principles warns against the risk of inconsistency in determining parties’ rights and obligations.61  A particular issue with the Hague Principles is that Article 2(2) imposes no limitation on the use of dépeçage because there is no law that controls the way the parties divide their contract. This means that the parties are able to influence the type of law governing their contract and the substance of the law.62  Furthermore, the parties are picking and choosing 51

Mills (at 29). Pertegas and Marshall (at 19), p.994. 53 Rome I, Article 3(1) 54 Rome  Convention, Article  4(1). 55 C-133/08 Intercontainer Interfrigo SC (ICF) v Balkenende Oosthuizen [2009] ECR I-9687, [43]. 56 Chukwuma Samuel Adesina Okoli and Gabriel Omoshemime Arishe, ‘The Operation of the Escape Clauses in the Rome Convention, Rome I Regulation and Rome II Regulation', Journal of Private International Law, Vol.8 No.3, p.530 57 Hague Principles, Article 2(2). 58 Pertegas and Marshall (at 19), p.994. 59 James Fawcett & Janeen M. Carruthers, Cheshire, North and Fawcett: Private International Law (14th ed.Oxford University Press 2008), p.691. 60 Marshall (at 30). p.216. 61 Ibid (at 11), [2.6]. 62 Marshall (at 30), p.216. 52

their choice of law to reach a result that cannot be squared with the interests of the related states.63  This is particularly challenging when parties select a non-state body of laws. If the parties choose the rules of law under PICC, and the use of ‘horizontal dépeçage’ has the effect of excluding PICC’s mandatory norms, the Hague Principles facilitate a result which was not intended by the PICC.64  This is an issue since Article 1.5 of the PICC r equires mandatory provisions to be of such importance in the system that the parties should not be permitted to exclude or to derogate from them.65  In this respect, it is advisable that party autonomy is limited to the extent that parties are able to proceed with caution if they choose to use the principle of dépeçage. It is advisable that the parties’ chosen law should expressly articulate the hierarchy which they intend to use between the chosen law and the gap-filling66 law to avoid an inconsistent result in the rules of law. It can therefore be argued that to preserve the highest degree of legal certainty and predictability, it is better to opt for choosing one law as it will remain challenging to forecast every dispute in more complex transactions. Legal Policy Restrictions: Mandatory and Public Policy Although party autonomy is generally widely accepted, the choice of law and what the parties agreed to may in circumstances nevertheless be overridden by the law. The system of mandatory rules and public policy act as limitations to the parties’ choice of law. The freedom of parties to select their applicable law should not extend to the point of allowing parties to evade their legal policies which the law otherwise overrides.67 In this respect, restrictions to party autonomy should be constrained to allow the law to balance the parties’ interests with wider collective public policy objectives, such as political, social, economic and cultural.68  In applying mandatory rules, choice of foreign law is not invalidated but focuses on overriding its effects and the consequences of party autonomy.69  The Hague Principles recognise the application of overriding mandatory provisions in Article 11.70  Rome I further aims to distinguish between simple mandatory rules, which present the domestic rules that cannot be derogated from by agreement,71  a...