the characteristic performer. By Art 20, only the internal law of country referred to, and not its conflict rules, is applied.24 Special rules designed to protect the weaker party are laid down for certain types of contract (contracts for the carriage of passengers, consumer contracts, insurance contracts, and employment contracts) by Arts 5–8. Savings for the public policy or overriding interest of the lex fori are made by Arts 9 and 21. The extent to which the proper law is applicable to, or to some extent displaced in relation to, particular issues is clarified by Arts 10–12 and 18.

The proper law – express choice

Under the Rome I Regulation, as under the traditional English law,25 the proper law of a contract is determined primarily by reference to any express agreement on choice of law concluded by the parties to the contract. Only in the absence of any – or any valid – express choice is reference made, secondarily, to implied choice or closest connection. Thus, Art 3(1) of the Regulation specifies that a contract is governed by the law chosen by the parties, and that the choice may be made expressly by the terms of the contract.26 Since no requirement of writing or other formality is required for an express choice of law, an oral agreement on the applicable law, concluded in the negotiations leading to the conclusion of a substantive contract in writing, will be effective.27

Any express choice of law will usually be made by a clause contained in the contract as concluded, but Art 3(2) permits an express choice to be agreed on after the conclusion of the contract (so as to replace the proper law resulting from a previous express or implied choice, or from the closest connection), although such a subsequent choice will not prejudice the formal validity of the contract, nor adversely affect the rights of third parties, such as guarantors or beneficiaries. It is likely that a subsequent choice will have retroactive effect, unless a contrary intention is indicated.28 It also seems consistent with the policy of the Regulation to accept an express choice agreed on before the contract, so that, for example, a long term distribution agreement could effectively provide that particular contracts of sale subsequently concluded between the same parties pursuant to the agreement should be governed by a specified law, unless the particular contract should otherwise provide.

A very minor restriction on the effect of an express choice is imposed by Art 3(3), which specifies that where all other elements relevant to the situation at the time of the choice are located in a country other than the country whose law has been chosen, the choice of the parties shall not prejudice the application of provisions of the law of that other country which cannot be derogated from by agreement; and Recital 15 indicates that this applies even if the choice of law is

24An exception is made by Art 7 in the case of insurance. Article 20 does not prevent respect for self-limiting rules, whereby the proper law confines the application of certain of its substantive rules to contracts entirely domestic to, or connected in some particular way with, its territory; see Dallah Real Estate v Ministry of Religious Affairs, Pakistan [2010] UKSC 46, and Air Transworld v Bombardier [2012] EWHC 243 (Comm).

25See R v International Trustee [1937] AC 500; Vita Food Products v Unus Shipping [1939] AC 277; Co Tunisienne de Navigation v Co d’Armement Maritime[1971] AC 572; and Amin Rasheed v Kuwait Insurance Co [1984] 1 AC 50.

26In full, Art 3(1) provides: ‘A contract shall be governed by the law chosen by the parties. The choice shall be made expressly or clearly demonstrated 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 to part only of the contract.’ By Art 3(5), the existence and validity of the consent of the parties as to the choice of the applicable law must be determined in accordance with the same provisions (Arts 10, 11 and 13) as apply to their consent to other terms.

27See Oakley v Ultra Vehicle Design Ltd [2005] EWHC 872 (Ch).

28See Mayer and Heuzé, Droit International Privé, 10th edn, 2010, Montchrestien (Mayer and Heuzé), at para 716.

accompanied by a choice of court or tribunal.29 Thus, where parties resident in France negotiate and contract in France for performance exclusively in France, but include a clause providing for English jurisdiction and English law, the English court will have to give effect to all mandatory rules contained in French law; but subject to that proviso the choice of English law will be effective. (It may be doubted whether a case caught by Art 3(3) will arise more often than a solar eclipse visible in Colchester.)

Thus, in Caterpillar Financial Services v SNC Passion,30 Cooke J explained that the terms of Art 3(1) give the parties a freedom to choose the law applicable to the agreement that they are making. Article 3(3) provides an exception to this in the case where the agreement is entirely domestic in content so that the choice of a foreign law is designed to circumvent the mandatory rules of the country that alone is concerned with the transaction. If, however, there are other elements, outside the choice of law and jurisdiction clause, relevant to the situation at the time of concluding the agreement, which are connected with other countries, the agreement is not a domestic agreement of concern only to one country, and Art 3(3) does not apply. Moreover, Art 3(3) refers to elements relevant to the situation, which is wider than elements relevant to the contract, and much wider than elements relevant to the mandatory rules of any one country. Accordingly, he held that Art 3(3) did not make French mandatory rules applicable to a contract of loan between an American lender and a French borrower, whereby finance was provided for the construction of a vessel in Singapore, and which contained a clause choosing English law as the proper law.31

The very limited scope of the exception specified by Art 3(3) reinforces the clear intention of Art 3(1) that otherwise an express choice should be effective. The Regulation requires an express choice to be respected, even if the chosen law has no other connection with the contract, and even if the choice was made for the purpose of avoiding mandatory rules contained in the law of the country that is most closely connected with the contract and which would in the absence of express or implied choice have been the proper law under Art 4. The rationale for freedom to choose an unconnected law is commercial convenience: the rules of the chosen law may be well developed and familiar to the parties, whereas those of all the connected laws may be obscure or a matter for speculation; or it may be convenient to use the same law for associated transactions, such as a chain of sales of the same goods, even though the connection with the other transactions is not immediately apparent from the contract.32 Moreover, it would have been senseless to introduce the French doctrine of evasion of law in a context where the primary choice of law rule is based on intention, and the test of closest connection has only a supplementary role, to provide a solution where no intention is apparent. On the other hand, an expressly chosen law will apply even where its effect is to invalidate the contract.33

29In addition, Art 3(4), a new provision, specifies that where all other elements relevant to the situation at the time of the choice are located in one or more EU member states, the parties’ choice of the law of an external country shall not prejudice the application of provisions of EU law, where appropriate as implemented in the forum state, which cannot be derogated from by agreement.

30[2004] 2 Lloyd’s Rep 99.

31See also Emeraldian v Wellmix Shipping [2010] EWHC 1411 (Comm).

32See Vita Food Products v Unus Shipping [1939] AC 277, where the Privy Council (on appeal from Nova Scotia) upheld an express choice of English law in a bill of lading contract for the carriage of herrings from Newfoundland to New York in a Nova Scotian ship. Lord Wright specifically rejected an argument that, since the transaction allegedly had no connection with English law, the choice could not seriously be taken, and emphasised that connection with English law was not as a matter of principle essential. See also OT Africa Line v Magic Sportswear Corp [2005] 2 Lloyd’s Rep 170 (CA).

33See Fraser v Buckle [1996] 1 IR 1, where the Irish Supreme Court gave effect to an express choice of English law in a contract between English heir locators and an Irish resident, under which the heir locators pursued the client’s claim to an inheritance in New Jersey in return for a share in the proceeds. However, the contract was void for champerty under English, Irish and New Jersey laws.

It is clear from Arts 1, 4 and 22 of the Rome I Regulation, and was accepted by the Court of Appeal in Shamil Bank of Bahrain v Beximco Pharmaceuticals,34 that the proper law, whether chosen by the parties or determined by reference to closest connection, must be the law of a country, in the sense of a territory having its own legal rules on contracts. It cannot be general principles of law recognised by civilised nations, or the International Institute for the Unification of Private Law (UNIDROIT) Principles of International Commercial Contracts,35 or Islamic law (in a generic sense, independently of its operation in any particular country). It must be borne in mind, however, that the Rome I Regulation and the other conflict rules applicable by English courts are not necessarily applicable in arbitrations which have their seat in England, for the Arbitration Act 1996 enables parties to empower an English arbitrator to decide disputes in accordance with non-legal considerations.36

Similarly, it seems clear that parties are limited, in choosing the proper law, to the laws of countries which exist at the time of the choice, but that they cannot limit their choice to the content of a law as it exists at the time of contracting or some other specified date, and must accept subsequent changes in its substantive rules that the chosen law makes applicable to existing contracts, except in so far as such retroactive effects may infringe a stringent public policy of the forum.37 Moreover, since Art 3 refers to a choice by the parties, it seems probable that the parties cannot confer on one of them a unilateral power subsequently to designate the proper law (whether directly or indirectly; for example, by fixing the location of a relevant factor, such as the seat of an arbitration proceeding).38 However, there seems no reason why parties should not be able to subject the identity of the proper law to the resolution of a contingency over which none of the parties has control.39

Perhaps the greatest practical problem in connection with express choice concerns clauses the meaning of which is less than clear. An example of this is Co Tunisienne de Navigation v Co d’Armement Maritime,40 which involved a tonnage contract between a French shipowner and a Tunisian shipper for the carriage of oil between two Tunisian ports. The contract permitted the carrier to use ships owned, controlled or chartered by him, but the contract was expressed on a standard form designed for a voyage charterparty, and contained a clause choosing the law of the flag of the vessel carrying the goods. In the House of Lords, the majority, which included Lord Diplock, relying on a finding that the parties contemplated that the carrier would, at least primarily, use his own ships, which all flew the French flag, managed to construe the choice of law clause as referring to the law of the flag of the vessels owned by the carrier, and thus to French law. The minority, which included Lord Wilberforce, felt unable to interpret or rewrite the clause in this way, and concluded that it was void for uncertainty. It is now clear from the decision of the Court of Appeal in Centrax v Citibank41 that, even

34[2004] 2 Lloyd’s Rep 1 (CA). See also Halpern v Halpern [2007] 2 All ER (Comm) 330 (CA).

35See www.unidroit.org.

36By s 46 of the 1996 Act, an arbitral tribunal seated in England will decide a dispute: (a) in accordance with the internal law chosen by the parties as applicable to the substance of the dispute; or (b) if the parties so agree, in accordance with such other considerations as are agreed by them or determined by the tribunal. If there is no such choice or agreement, the tribunal will apply the law determined by the conflict rules which it considers applicable.

37See R v International Trustee [1937] AC 500, where the House of Lords gave effect to American legislation adopted in 1933, invalidating gold clauses contained in contracts concluded in 1917; Dicey, at para 32-051; and Mayer and Heuzé, at para 708.

38See The Armar [1981] 1 WLR 207 (CA); The Iran Vojdan [1984] 2 Lloyd’s Rep 380; The Stolt Marmaro [1985] 2 Lloyd’s Rep 428 (CA);

The Star Texas [1993] 2 Lloyd’s Rep 445 (CA); Sonatrach Petroleum Corp v Ferrell International Ltd [2002] 1 All ER (Comm) 627; and Dicey, at para 32-054. Cf Du Pont de Nemours v Agnew [1987] 2 Lloyd’s Rep 585 (CA); King v Brandywine Reinsurance Co [2004] Lloyd’s Rep. IR 554, reversed [2005] 1 Lloyd’s Rep 655 (CA); and Dicey, at para 32-055.

39See The Mariannina [1983] 1 Lloyd’s Rep 12 (CA); CGU International Insurance v Szabo [2002] 1 All ER (Comm) 83; and Dicey, at para 32-055.

40[1971] AC 572.

41[1999] 1 All ER (Comm) 557 (CA).

under the Rome I Regulation, the English courts will apply English principles of contractual interpretation in determining the meaning (or lack of any discernible meaning) of an ambiguous choice of law clause. If a choice of law clause is void for uncertainty, probably it is nonetheless effective to eliminate the possibility of an implied choice, so that the test of closest connection under Art 4 will then become operative.

The last sentence of Art 3(1) specifies that ‘By their choice the parties can select the law applicable to the whole or to part only of the contract’. Thus it is, perhaps regrettably, open to the parties to choose different proper laws for different parts of a contract. However, it seems proper to require that the parts should be logically severable, because they relate to distinct transactions.Thus, where a contract provides both for a sale of goods and the supply of technical assistance, severance will be possible between the sale and the assistance. Conversely, severance by reference to issues or terms – for example, as between the validity and effect of exclusion clauses, and all other issues relating to the contract – should not be permitted.42 In any event, there must be a single law which governs issues such as frustration that affect the contract as a whole.43

That severance is usually inadvisable is apparent from the decision of the Court of Appeal in Centrax v Citibank,44 which involved a contract for electronic payment services. The clause read:

This Agreement and all documents, agreements and instruments related to this Agreement shall be governed by and interpreted according to the laws of the state of New York, United States of America, provided that any action or dispute between the parties regarding any Payment Instrument shall be governed by and interpreted according to the laws of the country or state in which the Drawee of such Payment Instrument is located.

The customer sued the bank, complaining that the bank had wrongfully debited the customer’s account in respect of cheques forged by an employee of the customer. The bank was based in New York, but the cheques were drawn on its London branch, and the customer sought to invoke the (English) Unfair Contract Terms Act 1977 so as to invalidate terms of the contract on which the bank was relying in defence. A divided Court of Appeal applied English principles of construction to the choice of law clause, and concluded that where, as in the present action, the dispute raised the interpretation or effect of the contract and went beyond the validity and effect of the payment instrument, the law of New York was to be applied.

Moreover, as the Court of Appeal recognised in Shamil Bank of Bahrain v Beximco Pharmaceuticals,45 it is not open to parties to designate two different laws as governing the whole contract. Thus, where a financing agreement specified that ‘Subject to the principles of Glorious Sharia’a, this agreement shall be governed by and construed in accordance with the law of England’, the reference to Islamic law was construed as merely decorative and therefore ignored.

The proper law – implied choice

In the absence of an express choice, Art 3 of the Rome I Regulation directs the court to consider next whether an implied choice of law by the parties can be discovered. It is sufficient under Art 3(1) that the parties’ choice, though not expressed in the contract, is ‘clearly demonstrated by the terms

42See Case C-133/08: Intercontainer Interfrigo v Balkenende Oosthuizen [2009] ECR I-9687; and Mayer and Heuzé, at para 710.

43See Centrax v Citibank [1999] 1 All ER (Comm) 557 (CA); and Dicey, at paras 32-024 to 32-027.

44[1999] 1 All ER (Comm) 557 (CA).

45[2004] 2 Lloyd’s Rep 1 (CA).

Another factor which may provide a strong indication of an implied choice of law is the use of a standard form for the contract, or the inclusion of standard clauses in the contract. This may indicate an implied choice of the law of the country from which the form originates, or in which the clauses have been devised and are commonly used. On this basis, it is frequently held that an insurance or reinsurance effected on the London market by an English broker with an English underwriter involves an implied choice of English law;52 and the same implication arises where a foreign reinsurer underwrites part of the risk through a London market placement.53

Another factor capable of amounting to a clear indication of an implied choice arises from the connection between several related contracts. Where, as a matter of commercial reality, related contracts need to be governed by the same law if their purpose is to be achieved, an implied choice to that effect may be discovered. This is most obviously the case with regard to a guarantee in the strictest sense, whereby the intention is that the guarantor should assume a secondary obligation identical to the primary obligation of the main debtor. Thus the guarantee obligation will normally be governed by the law which governs the obligation guaranteed.54 Similarly, an agent’s warranty of authority will be governed by the law which governs the proposed principal contract to which it is ancillary.55 Somewhat similarly, all obligations arising from a letter of credit (between the beneficiary and the issuing bank; between the beneficiary and the correspondent bank; and between the two banks) will normally be governed by a single law, that of the country in which the banking establishment through which the letter is payable is situated.56 On the same basis, a counter-undertaking given by one bank may be governed by the law which governs the performance bond given by another bank at the former’s request.57 Similarly, the need for a single law to govern a group insurance policy, under which worldwide cover is provided to a parent company and its subsidiaries, may indicate an implied choice of the law of the country in which both the insurer and the leading policyholder were resident and the contract was negotiated and concluded.58 Again, a commission agreement relating to the sale of a vessel which is in course of construction may be impliedly subjected to the law which had been expressly chosen to govern the ship-building contract between the same parties.59 Similarly, in the context of financial arrangements for the development of a mineral concession, a later agreement may impliedly choose the law which was expressly chosen as governing an earlier agreement to which the later agreement is essentially collateral.60

The relation between connected contracts must not, however, be given a weight beyond the needs of the commercial situation.Thus, a letter of credit or a performance bond will not be affected

52See Tiernan v Magen Insurance [2000] ILPr 517; Tonicstar v American Home Assurance [2004] EWHC 1234; Munchener Ruckverischerungs Gesellschaft v Commonwealth Insurance Co [2004] EWHC 914 (Comm); Tryg Baltica v Boston Compania De Seguros [2004] EWHC 1186; Stonebridge Underwriting v Ontario Municipal Insurance Exchange [2010] EWHC 2279 (Comm); Faraday Reinsurance v Howden [2011] EWHC 2837 (Comm); Ace European v Howden Group [2012] EWHC 2427 (Comm). Cf Travelers Casualty v Sun Life [2006] All ER (D) 26 (Nov).

53See Gard Marine v Glacier Reinsurance [2010] EWCA Civ 1052.

54See Golden Ocean Group v Salgaocar Mining Industries [2012] EWCA Civ 265; Star Reefers v JFC Group [2011] EWHC 339 (Comm); Emeraldian v Wellmix Shipping [2010] EWHC 1411 (Comm); and Bank of Scotland v Butcher [1998] EWCA Civ 1306.

55See Golden Ocean Group v Salgaocar Mining Industries [2012] EWCA Civ 265.

56See Attock Cement v Romanian Bank for Foreign Trade [1989] 1 WLR 1147 (CA); Bank of Baroda v Vysya Bank [1994] 2 Lloyd’s Rep 87; BCCHK v Sonali Bank [1995] 1 Lloyd’s Rep 22; and Marconi Communications v Pt Pan Indonesia Bank [2005] EWCA Civ 422, affirming [2004] 1 Lloyd’s Rep 594. Although this case-law relies on closest connection, under Art 4(3) of the Regulation, to achieve the necessary unity, it is submitted that the use of implied choice under Art 3 would be more appropriate.

57See Wahda Bank v Arab Bank [1996] 1 Lloyd’s Rep 470 (CA).

58See American Motorists Insurance v Cellstar [2003] ILPr 22 (CA).

59See Lurssen v Halle [2010] EWCA Civ 587.

60See Pathfinder Minerals v Veloso [2012] EWHC 2856 (Comm).