UK: "Rome Revisited" - Further Thoughts on Choice of Law

Last Updated: 29 September 2010
Article by Elliot Woodruff and Carl Walker

F R Lurssen Werft GmbH & Co KG v. Warren E Halle [2010] EWCA Civ 587

The English Courts have recently considered the question of the applicable law and jurisdiction under a contract where no express choice of law and jurisdiction is stated. Of particular interest is the Court's analysis of the role of the Rome Convention in assessing the law by which a contract will be governed and the conclusion reached both at first instance and subsequently by the Court of Appeal that the provisions of related contracts may be taken into consideration when considering whether the parties have impliedly made a choice of law.

Facts

The Claimant was a German shipbuilding company and the Defendant was an American citizen. The parties entered into two separate Vessel Construction Contracts ("The VCC's") for the construction of motor yachts, both containing clauses providing that the governing law would be English law and that any disputes would be resolved under the rules of the London Maritime Arbitrators Association ("LMAA"). Around three years after execution of the VCC's, the parties entered into a Commission Agreement, which provided that if either of the vessels were purchased by a client introduced by the Claimant then the Claimant would be entitled to a commission of 5% of the sale price. Unlike the VCC's, the Commission Agreement was silent as to the applicable law and jurisdiction.

One of the yachts was sold to a buyer introduced by the Claimant and the parties entered into an agreement to terminate the VCC in respect of that vessel without any further liability on either party. The termination agreement was also stated to be subject to English law. The Defendants failed to pay the 5% commission that the Claimants claimed was due and commenced proceedings. The case came before the Commercial Court following an application by the Defendants challenging the jurisdiction of the English Court to hear the dispute. There were three main issues for consideration:

  1. Whether the Commission Agreement was governed by English law;
  2. Whether there was a serious issue to be tried; and
  3. Whether England was the forum conveniens

The Court had little difficulty in deciding that there was a serious issue to be tried and that England was clearly the most convenient jurisdiction for the determination of the dispute. More interesting was the Court's consideration of the governing law.

1.The Governing Law

In considering whether English law governs the Commission Agreement, the relevant statute is The Contracts (Applicable Law) Act 1990, which gave effect to the Rome Convention on the Law Applicable to Contractual Obligations ("the Rome Convention"). Article 3.1 of the Rome Convention provides as follows:

"A contract shall be governed by the law chosen by the parties. The choice must be expressed 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 the contract".

In the absence of a choice of law under Article 3, the law governing a contract is determined in accordance with Article 4 of the Rome Convention, which provides that the contract shall be governed by the law of the country with which it is most closely connected. On the facts of this case, it was accepted by the Claimants that, in the absence of a choice under Article 3, it would be difficult to argue that the Commission Agreement was most closely connected with England and Wales.

The question therefore was whether the Court was satisfied that the Claimant had much the better of the argument that the parties had demonstrated a choice of English law as the governing law of the contract with reasonable certainty.

The Judge concluded that a choice of English law had been clearly demonstrated. The parties had, by the VCC's, made a clear and express choice of English law and that choice was not simply an incident of the choice of arbitration to settle disputes. He considered that the VCC's were plainly closely related to the Commission Agreement, that they entirely governed the parties' prior commercial relationship and that their performance formed the factual background to the relationship created by the Commission Agreement.

Having reached this conclusion, the Judge went on to consider one further point which, in his view, reinforced the impression that there was a clear implicit choice of English law, namely that in the Termination Agreement the parties expressly chose English law as the governing law. This is an interesting comment, as it is well established that the consideration of subsequent conduct to construe an earlier transaction runs counter to principles of English law. However, the Judge took the view that it is legitimate to consider the terms of a later contract between the parties as part of "the circumstances of the case" for the purposes of Article 3.1 of the Rome Convention.

The Court of Appeal

The Defendant appealed on one particular issue, namely whether the Judge at first instance was correct in finding that the Claimants had much the better of the argument that the Commission Agreement was impliedly governed by English law. However, the Court of Appeal sided firmly with the Judge at first instance, with Aikens LJ going so far as to say, "I would therefore conclude that Lurssen Werft not only had much the better of the argument, but that the court is impelled to conclude that there has been a clear implied choice of English law for the Commission Contract".

2.Was England the Forum Conveniens?

The Judge at first instance first referred to what he described as the well established principles to be applied when considering issues of jurisdiction, namely:

  1. A Claimant must show that England is clearly the most suitable forum for the trial of the issues taking into account the convenience of the parties and the interests of justice;
  2. Where the only basis relied on by a Claimant to establish jurisdiction is that the claim is made in respect of a contract governed by English law, particular caution will be required and the burden on the Claimant of showing good reasons justifying service out of the jurisdiction is a particularly heavy one;
  3. Although different expressions have been used to characterise the nature of the jurisdiction, it is clearly recognised that it is an exceptional course to require a foreigner to litigate in the English court purely on the basis that English law is the governing law of the contract, although he noted that it may be a less exceptional course where there has been a choice of law under the Rome Convention;
  4. The fact that English law is the governing law may or may not be of importance, depending on the circumstances of the case and the relevant issues.

Having considered these principles, the Judge concluded that the English Court was very clearly the most convenient court for the determination of the issues arising under a contract clearly governed by English law. He considered that the factual issues in dispute, and thus the need to call upon witness evidence, were confined to one particular aspect of the case. The legal issues were also very likely to be determined in accordance with English law and it was likely that the dispute would involve the application of principles of English law which are not entirely straightforward.

Accordingly, the Judge held that it would plainly be sensible for this issue to be determined by a court which is experienced in dealing with such issues. Other factors that weighed in favour of the English Courts were that the parties had always communicated in English and so the need for translation would not be significant and that the parties had both been content for disputes under their other contracts to be determined by arbitration in London under the LMAA rules. It followed, in the Judge's view, that England was thus a place where they must be taken to have foreseen that disputes might be determined. The decision on this issue was not appealed.

Conclusions

Lurssen Werft v Halle demonstrates clearly that the courts may infer that the parties intended for their contract to be governed by the law of a certain country if that law governs a related contract in the course of commercial dealings between the parties.

It is also interesting that the Judge at first instance held that it is legitimate for the Court to look at the subsequent conduct of the parties when construing the contract under which the dispute arose. Whilst the Court of Appeal was able to find that there had been a clear implied choice of law without considering this question, if followed, this would represent something of a departure from the general position under English law that subsequent conduct cannot be taken into account when construing a contract.

It is also worth noting that the new EC Regulation 593/2008 (Rome I) is now in force and has been applicable to all contracts concluded after 17 December 2009 in all EC member States except Denmark. The new Convention amends the test for inferring the parties' intention as to choice of law so that the choice must now "be made expressly or clearly demonstrated by the terms of the contract or the circumstances of the case". It remains to be seen whether this change in wording will see a more stringent approach by the Courts in deciding whether a choice of law can be implied.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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