CHAPTER 5 DISPUTE RESOLUTION IN INTERNATIONAL AGREEMENTS
| Jurisdiction | United States |
(Feb 1991)
DISPUTE RESOLUTION IN INTERNATIONAL AGREEMENTS
Herbert Smith
London, England
Justice Story, as long ago as 1834, spoke in this way of the conflict of laws:
"The difficulty of treating such a subject in a manner suited to its importance and interest can scarecely be exaggerated. The materials are loose and scattered, and are to be gathered from many sources, not only uninviting, but absolutely repulsive, to the mere student of the common law".1
More than 150 years later it has become the everyday experience of all commercial people involved in work of an international character (in business, law, banking, industry and energy) that there is hardly a transaction which does not involve some question of the conflict of laws or private international law, although in many cases (perhaps the majority of cases) they do not realise it. The theme of this paper is the ways in which business people can in their contracts minimise the uncertainties in this area, so that if a dispute should arise they can receive reliable advice as to what court or tribunal will hear the case and what law will be applied.
In the international context of mineral resources development, the principal problems arise out of the fact that the contractual relations will frequently be between a sovereign state (or a state-owned entity) on the one hand, and a multinational corporation (or its local subsidiary) on the other. For the reasons to be developed below, arbitration is the most common formal mechanism for dispute settlement. The substantive problems which may need to be addressed include: the consequences of nationalisation; the consequences of unilateral legislative alteration of contractual terms; and the potential conflict between the State's wish to accommodate fundamental changes in circumstances, and the private party's
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wish to uphold the sanctity of contract.
I. The distinction between choice of law and choice of forum
Choice of law seeks to answer the following question: when a case comes before a court or an arbitral tribunal, whether it is in New York or London or Paris, what system of law will be applied to determine the rights of the parties? Choice of forum involves the question: what tribunal will hear the dispute, will it be a New York court, an English court, or a French court, or an arbitral tribunal in New York, London, Paris, or Geneva?
Sometimes these questions are closely linked. For example, under English law, where a contract is governed by English law the English court may assume jurisdiction to hear disputes arising under it.2 In one case the English Court of Appeal held that it could take jurisdiction under this rule because a charterparty was governed by English law, since it was English law with which it was most closely connected. In coming to this conclusion it was influenced by the fact that an important clause would have been invalid under Dutch law, the only other law which seriously competed. As a result the English court took jurisdiction. If it had come to the opposite conclusion, the Dutch court would have had jurisdiction and the relevant clause would have been held to be invalid.3 Secondly, where a contract contains no choice of law but provides for arbitration in a particular place, it may be possible to infer that the law in that place was intended to govern the contract.4
Thirdly, an express choice by the parties of the jurisdiction in which disputes are to be resolved may have a vital effect on the choice of the applicable law. This was so in the famous case in 1972 in the United States Supreme Court: M/S
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Bremen v. Zapata Offshore Co.5 The litigation arose out of a casualty which occurred on the high seas in the Gulf of Mexico when the oil rig Chaparral was being towed by the tug Bremen on route from Louisiana to Italy. The tug was owned by a German company and the rig was owned by a Delaware corporation with its principal place of business in Texas. Although the German owners of the tug normally stipulated in their towage contracts for German jurisdiction and German law, in this case the parties negotiated a compromise whereby English jurisdiction was agreed upon: "Any dispute arising must be treated before the London Court of Justice". There was a very important provision in the contract that the tug owners were not to be responsible for defaults or errors in navigation and that any damage caused to the Chaparral was to be for the account of the rig owners.
After the casualty had occurred, the tug, on the instructions of the rig owners, made for Tampa, Florida, with the rig in tow. On arrival the tug was arrested by a U.S. marshal following the institution of proceedings for damages by the rig owners. The tug owners and the rig owners each blamed the other for the disaster — the tug owners alleged that the rig was not seaworthy and the rig owners alleged that the tug was unseaworthy and had been negligently navigated.
There was a very important reason why the rig owners wished the litigation to be in Florida. For the exemption from liability contained in the contract would be given effect in England, if the litigation had been in England and the contract was governed by English or German law. But it would not be given effect in the United States because there was a very strong policy against the exemption of the tug owners from liability for negligence: Dixilyn Drilling Corp. v. Crescent Towing and Salvage Co.6 The lower courts, by a majority, refused to stay the Florida proceedings on the application of the German tug owner because of the strong public policy in protecting the U.S. rig owners against their own act in signing away their rights to sue.
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The case is mentioned at ths point, not to indicate the effect which will be given to jurisdiction clauses, which will be dealt with below, but to emphasize the importance of the distinction between choice of law and choice of forum. There was no express choice of law in that case, and it is possible that the United States court would have regarded the contract as having been governed by the law of some state of the United States, despite the provison for the jurisdiction of the English courts. There is little doubt (particularly at that time) that the English court would have regarded to contract as having been governed by English law, and would have given effect to the exemption clause. This, therefore, was a case where the distinction between choice of law and choice of jurisdiction was not an academic one, and where there was a close connection between the jurisdiction in which the case would be heard and the law which would ultimately be applied to determine the dispute on the merits.
II. Choice of Law
No properly regulated international contract lacks a clause indicating what law is to apply if the parties are in dispute. If such a clause is lacking, the reason is generally, not that the parties or their advisers have been incompetent and failed to advert to the question, but that they have been unable to agree. Thus, in a development contract with a foreign state, it can be extremely unwise to agree to apply the law of that state to the contract. The problem will be not that the state may not have an advanced system of law (and sometimes it will not) but that if the law of that state applies to the contract, then the state can subsequently change its law and alter the obligations of the parties, and even destroy the rights of the foreign party altogether. In some of these cases the solution which the parties have adopted is to choose no law — no doubt each party hoping that if it came to a
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dispute the court or tribunal would apply the law of that party.
Absence of express choice of law
Where no law has been chosen, the courts of most countries apply, in varying formulations, the law which is thought to have the most substantial connection with the contract. Thus, the Restatement Second, Conflict of Laws, Section 188, provides that the rights and duties of the parties with respect to an issue in contract are determined by the local law of the state which, as to that issue, has the most significant relationship to the transaction and the parties, and the Restatement includes among the contacts to be taken into account: (a) the place of contracting; (b) the place of negotiation of the contract; (c) the place of performance; (d) the location of the subject matter of the contract; and (e) the domicile, residence, nationality, place of incorporation and place of business of the parties. In England the test has been for 40 years the system of law with which the contract has its closest and most real connection.7
From early in 1991 it is likely that most of the members of the European Economic Community, including the United Kingdom, and therefore the English courts, will apply the Rome Convention of 19808 on the law applicable to contractual obligations. This will apply to all cases with a foreign element in the countries which accede to it, so that a dispute in an English court between an Australian company and a New York corporation will be subject to its rules. It provides (Article 4) that to the extent that the law applicable to the contract has not been expressly chosen, the contract shall be governed by the law of the country with which it is most closely connected. It is to be presumed that the contract is most closely connected with the country where the party who is to effect the performance which is characteristic of the contract has, at the time of the conclusion of the contract, his habitual residence, or, in the case of a body corporate or
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unincorporate, its central administration. If the contract is entered into in the course of that party's trade or profession, that country shall be the country in which the...
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