Mo Zhang, Party Autonomy and Beyond: an International Perspective of Contractual Choice of Law

• Citation: Vol. 20 No. 2
• Publication year: 2006

PARTY AUTONOMY AND BEYOND: AN INTERNATIONAL PERSPECTIVE OF CONTRACTUAL CHOICE OF LAW

Mo Zhang^*

INTRODUCTION

Party autonomy is a choice of law doctrine that permits parties to choose the law of a particular country or sovereignty to govern their contract that involves two or more jurisdictions.¹On its face, it seems evident that the freedom of the parties ought to be recognized when determining applicable law to which the parties are willing to be subject through either a choice of law clause in the contract or the parties' preference.²But in fact, since it was introduced in the sixteenth century,³the doctrine has been the center of debate among the conflict of laws scholars and applied variously in different jurisdictions.⁴

There is a two-fold question that goes to the heart of party autonomy. On the one hand, the question is whether the parties may choose the law that would determine the legal consequences of their contractual activities. The answer to this question not only impacts the freedom of the parties to choose governing law,⁵but also affects the applicable law by which the parties would be bound. On the other hand, the question has to do with whether the law chosen by the parties would be enforced in a certain jurisdiction. It is obvious that the enforceability of a choice of law clause eventually decides the ultimate fate of the parties' autonomy with regard to the law applicable to the contract.

In general, when confronted with a choice of law clause, a court may treat it in different ways: the court may accept the clause and apply the law selected, set aside the clause and make a judicial determination of law instead, or deem the clause as an element in the consideration of applicable law.⁶

Given its emphasis on the intention of the parties to contract for the applicable law, party autonomy is especially favored by many practitioners in international business transactions. They believe that allowing the contractual parties to determine the law that applies to the disposal of their rights and obligations will help achieve efficiency, certainty, predictability, and protection of the parties' expectations-the conflict of laws values that have particular importance in today's global economy.⁷Scholars, however, seem to have difficulty in reaching a consensus on the substance of party autonomy. They frequently question the theoretical underpinnings of the party autonomy doctrine as well as the practicability of its application.⁸In addition, the analytical complexity employed in judicial practice makes the application of the party autonomy doctrine far from uniform.

Choice of law could become an issue either in a case involving two "sovereign" states inside a single country or in a case affecting two different countries. In the former case, choice of law is designed to cope with interstate conflicts, while in the latter case it involves the international conflicts.⁹

Perhaps for this reason, the conflict of laws in many countries is labeled as private international law (or international private law), and its primary function is to "regulate" civil disputes that have elements related to a foreign country.

In the United States, choice of law is basically a domestic concern, and it usually deals with the question of what law should be applied to a multi-state problem.¹⁰Therefore, as a general pattern, choice of law issues in the United

States are examined and discussed in light of resolving interstate legal conflicts and promoting interstate relations under the framework of a federal constitution.¹¹Simply put, interstate conflicts are regarded as "a chief concern of the Constitution."¹²Thus, although the choice of law rules developed in the United States are said to be equally applicable to international cases with certain exceptions,¹³the focus of choice of law literature and practice is clearly on interstate rather than international matters.¹⁴

It has been argued that "[i]nternational concerns often influence domestic conflicts law in the United States, particularly in the area of contractual conflicts."¹⁵But unfortunately, such influence seems to be limited in several ways. First, international concerns rarely surmount the localism embedded in the interest-oriented character of the modern U.S. conflict of laws.¹⁶Second, the constitutionality claim may either seriously discount the international concerns or make such concerns irrelevant.¹⁷Third, the individualism of the state in the realm of choice of law may fence off the uniform application in the United States of any choice of law rule commonly accepted internationally.¹⁸

A recent development in U.S. choice of law that may reflect the influence of "international concerns" is the revisions to section 1-105 of the Uniform Commercial Code (U.C.C.), which is now U.C.C. section 1-301. The main thrust of the U.C.C. section 1-301 revision is the removal of the "reasonable relation" requirement in U.C.C. section 1-305 in regard to the choice of law by the parties.¹⁹Under U.C.C. section 1-301 (c)(1) and (2), except for when one of the parties to a transaction is a consumer, an agreement by parties to a domestic or international transaction that any or all of their rights and obligations are to be determined by the law of a certain state or country (a choice of law clause) is effective, regardless of whether the transaction bears a relation to the State or country designated.²⁰

Obviously, U.C.C. section 1-301 tries to provide the parties with greater autonomy to designate a jurisdiction whose law will govern than that previously provided in U.C.C. section 1-105,²¹though such greater autonomy is limited to non-consumer transactions.²²The advocates of the revision believe that since commerce occurs in a "global village,"²³parties should be allowed to "select the law of an unconnected state," not just those states that are related to their transaction.²⁴However, the liberal view of U.C.C. section 1-301 on party autonomy has been opposed on two grounds by those in favor of a narrower reading of the U.C.C. provision. This opposition is motivated either by a position in favor of restrictive party autonomy²⁵or due to a strong inclination towards the interest of the states involved.²⁶Further, some critics have argued that there is good reason to worry that U.C.C. section 1-301 is in fact "unconstitutional."²⁷

What seems indisputable is that the principle of party autonomy is accepted in the United States as pertaining to contractual choice of law. But acceptance takes a unique form. Specifically, the acceptance of party autonomy in the United States is intertwined so closely with the far-reaching interest and policy analysis of its domestic nature that matters concerning party autonomy, to a great extent, are viewed and dealt with in a parochial, rather than an internationally-oriented, manner. Thus it is not difficult to understand why, in U.S. conflict of laws theory, the idea of contractual choice of law has always been something of a "stepchild."²⁸

This Article attempts to address party autonomy and its application from the aspect of international conflicts. It discusses why party autonomy is both popular and controversial in the area of conflict of laws; whether party autonomy would indeed help achieve conflict of laws values-namely efficiency, certainty, predictability, and the protection of the parties' expectations;-and how the freedom of the parties and governmental interests should be balanced in the choice of law.

It is a misconception that the acceptance of party autonomy is premised or dependent on judicial analysis of the important legislative policies of interested foreign jurisdictions. As a choice of law rule, party autonomy already embodies the interest of relevant states or countries, and therefore no additional judicial analysis of such interest is needed for the enforceability of a choice of law clause, particularly in the area of international conflicts.

Part I examines the fundamental concept of party autonomy and its development. The coverage of party autonomy has been extended from the validity of contract to the rights and obligations of the parties to the contract, and from choice of law to choice of forum. Part II analyzes how party autonomy is being applied in the United States and suggests that the party autonomy rule has been "messed up" through the analysis of state interests and policies, which in many cases has diminished the value of the party autonomy doctrine. Part III discusses international application of party autonomy as a general rule in contractual choice of law. With reference to the provisions of international treaties and conventions, this Article emphasizes the pragmatic or practical importance of choice of law clauses in international transactions and the necessity of party autonomy.

Part IV presents an argument premised on the freedom of contract: party autonomy deserves full respect and need not have a relation base. A choice of law clause should not be rendered invalid unless application of the law so chosen would result in a violation of public policy or mandatory rules of the forum. A court is not in the position to evaluate the interest of another state or country in the determination of the enforceability of the choice of law clause because, at least in international settings, it may be inappropriate for a forum to judge the legislative interest of a foreign country. The Article concludes that an internationally-oriented and rule-based party autonomy approach will help achieve conflict of laws values, and that U.C.C. section 1-301, though not perfect, is indeed moving U.S. law in the right direction.

I. PARTY AUTONOMY: AN OLD CONCEPT WITH EVOLVING SUBSTANCES

As noted, party autonomy as a choice of law doctrine is not new. The doctrine is said to originate from the writings of Charles Dumoulin (1500-

1566), a French scholar of the sixteenth century who was acclaimed as "the father of party autonomy."²⁹It was...