Joining the dots of the dotted line

Contracting parties that don’t take advice on which law governs their agreement are asking for trouble

Contracting parties have long had the freedom to choose which country’s laws will govern their relationship. However, in a case in the Court of Appeal (CoA) last month it was made clear that a party seeking to rely on a purely implicit choice of law must overcome a substantial evidential hurdle.

In the absence of an express or implicit choice, a contract will be governed by the laws of the country with which it is most closely connected, and this may or may not be what the parties would have chosen.

By not taking local advice on choice of law at the outset, and making this choice expressly, parties are taking a significant financial risk that surely even those with the greatest appetite would wish to avoid.

The case in question was Lawlor v Sandvik Mining and Construction Mobile Crushers and Screens Ltd. The claimant salesman was the defendant’s commercial agent and in 2006 the defendant terminated the agency agreement.

The defendant accepted in principle the claimant’s entitlement to compensation. However, the court was asked to decide whether the agreement was governed by Spanish or English law. This was a key consideration because under English law damages were said to be around €1.5m (£1.3m), whereas

under Spanish law compensation are capped at an amount the defendant assessed to be under €300,000.

There had been no express choice, but the claimant tried to assert that English law had been chosen implicitly.

At first instance HHJ Mackie QC found, as a matter of fact, that if the parties had made a choice it would have been English law. However, the judge also found that it was unlikely choice of law was considered at any point, let alone discussed.

The judge therefore held that Spanish law applied because a choice of English law had not been demonstrated with “reasonable certainty” by the circumstances of the case. The applicable law was thus Spanish, it being the law of the country with which the contract was most closely connected.

The CoA upheld this decision. The fact that the parties would have chosen English law or even that a previous employment contract between them was probably governed by English law was not sufficient, and an implicit choice could not be imputed to the parties on that basis.

It is now more important than ever for parties entering into high-value international contracts to take advice from lawyers across all relevant jurisdictions, to analyse the merits of adopting each system of law and then to ensure that an express agreement on this is reached and recorded.

If they do not do this, parties leave themselves vulnerable to having the decision determined for them.

In the absence of concrete evidence for an implicit choice the contract may be governed by a system of law about which the parties know little and/or has unforeseen legal consequences one party might wish to avoid.