Bar Talk

Contracts usually contain a governing law clause and then the position on which law applies is clear. But sometimes, either intentionally or through omission, the governing law clause is omitted. What happens, then, if the contract is litigated?
The English courts have formerly applied detailed rules to determine the governing law. In 1990, the Contracts (Applicable Law) Act gave effect to the Rome Convention, the purpose of which was to unify the approach the courts of contracting states would take when determining governing law in the absence of an express clause. But a recent first instance decision has suggested that the act does not change the common law position. The Court of Appeal must now decide whether the Rome Convention does in fact simplify questions of governing law.
The relevant parts of the Rome Convention are Articles 4(2) and 4(5). Article 4(2) states that a contract is presumed to be governed by the law of the residence of the party whose performance characterises the contract; Article 4(5), however, states that where the contract is more closely connected with another country, the presumption in Article 4(2) does not apply.
In this case, a contract existed between an English company (A) and a foreign company (Z) for the supply of goods by A to Z. The contract contained an English governing law clause. To allow Z to trade with A on credit, Z's parent company B (which is from the same country as Z) gave a guarantee to A. There was no governing law or jurisdiction clause in the guarantee. Z owed A money, so A sued B in England under the guarantee.
B claimed that the guarantee was governed by foreign law on the basis of Article 4(2). The residence of B as the party guaranteeing under a contract of guarantee was critical. England would therefore not be a convenient forum in which to resolve the dispute, mainly because foreign law would apply, but also because of problems such as the location of witnesses. B argued, however, that the foreign law being the governing law was the decisive factor.
A said that Article 4(5) prevailed. The guarantee was more closely connected with England, in particular because it was ancillary to a contract that was clearly governed by English law, rebutting the Article 4(2) presumption.
The court at first instance agreed with A – ie English law was the governing law. The court said that Article 4(2) was a fallback, to be applied only if a close connection under Article 4(5) could not be found.
B is now appealing because it claims that Article 4(2) is a strong presumption that can be rebutted only by very special circumstances, which were not present here.
If B wins in the Court of Appeal and foreign law is held to apply, not only is that significant in this case (A would have to sue Z first as primary debtor), but there will be far-reaching consequences for the effect of the Rome Convention on all cases where governing law is not clear. Article 4(5) would then only ever apply in very special circumstances and the Court of Appeal will almost certainly have to give some indication as to what those circumstances may be.
If the judgment at first instance is upheld, it is arguable that Article 4(2) will rarely, if ever, be invoked – a court will nearly always find a contract closely connected with a country, possibly different from Article 4(2). 'Closest connection' is a continuation of previous law. There will be no uniformity of interpretation, however, as intended by the Rome Convention under Article 4(2), and therefore no certainty; the discretion available under Article 4(5) would allow uncertainty and inconsistent application.
Obviously, then, an express governing law clause should always be included in any contract. Failure to do so in the past might not have mattered so much because the Rome Convention would assist – now, it is no longer safe to make that assumption.