England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
(Mr Justice McCombe)

		Royal Courts of Justice Strand London WC2
		28th June 2002

1. LORD JUSTICE WARD: I will ask Lord Justice Clarke to give the first judgment.

LORD JUSTICE CLARKE:

Introduction

2. This is an appeal by the claimants from a decision of Mr Justice McCombe made on 5th December 2001 in which he held that a contract between the second claimant and the respondent is governed by the law of Texas. The claimants appeal by permission of the judge and invite this court to hold that the contract was governed by English law.

The Claim

3. The claimants are Iranian corporations ultimately owned by the Government of Iran. The first and second claimants were companies involved in the management and extraction of oil resources from oilfields in Iranian territorial waters in the Southern Gulf. The third claimant was the parent company of the second claimant ("IOOC") and was responsible for the management of the oil resources of Iran. The defendant ("IRI") is a Delaware corporation with its principal place of business in Houston, Texas. It at all relevant times had an office in the United Kingdom.
4. It is common ground that the contract which has given rise to the issues in this action was concluded by IRI's acceptance, by a letter dated 8th November 1994, of a purchase order No. FPP-00058-LA dated 18th September 1994.
5. Under the contract IRI agreed to supply and ship on board a vessel in Houston for carriage to Bandar Abbas various parts and equipment required for the refurbishment or repair of an oil rig in the Persian Gulf belonging to the claimants and to send engineers to oversee the installation of those parts and equipment on the rig. In return, the claimants agreed to pay (and in the event did pay) the total sum of US$1,127,388.21 to IRI. I shall return to the terms of the contract in a moment, but it was expressly agreed that the materials were supplied on a CFR (cost and freight) basis and that the sum of US$1,127,388.21 included a sum of US$139,864 for IRI engineers to oversee its installation on the rig. As I understand it, a CFR contract is the same as what used to be called a C&F contract.
6. After the materials had been shipped under the contract at Houston, President Clinton issued "Executive Order 12959" dated 8th May 1995, which IRI says had the effect of prohibiting it from further dealing with Iranian companies and, in particular, from sending its engineers to the oil rig to oversee the installation of the materials. In any event, IRI refused to send its engineers to do the work, with the result that the claimants had to engage others to do it. In this action the claimants seek the return of the sum of US$139,864 and damages for breach of contract in respect of the extra cost of having the work done and loss of production in the meantime. The cost of having the work done by others is said by the claimants to have been about US$1.3 million. Their total claim, including loss of production, amounts to some US$75 million.

The Preliminary Issue

7. It is common ground that the English courts have jurisdiction to entertain this action, the resolution of which may depend upon the law governing the contract. The question what law governs the contract was ordered to be tried as a preliminary issue. Before the judge each party alleged that the parties had chosen the governing law. The claimants said that they had chosen the law of Iran, whereas IRI said that they had chosen the law of Texas. Thus the claimants said that the effect of Article 3 of the Rome Convention on the Law Applicable to Contractual Obligations, opened for signature in Rome on 19th June 1980 and signed by the United Kingdom on 7th December 1981 ("the Rome Convention"), was that the contract is governed by the law of Iran. IRI, by contrast, said that the effect of Article 3 was that the contract is governed by the law of Texas. The judge, however, held that the parties had not chosen any law to govern the contract and rejected both cases.
8. It was, and remains, common ground that if the law applicable to the contract was not chosen in accordance with Article 3 the question of which law governs the contract is to be determined by Article 4 of the Rome Convention. The claimants submitted before the judge that under Article 4 the contract was governed by English law or, alternatively, by the law of Iran, whereas IRI submitted that it was governed by the law of Texas. The judge held that on the facts the contract was governed by the law of Texas under Article 4.2 and that there was nothing in the circumstances to show that the contract was more closely connected with any other country for the purposes of Article 4.5.

The Appeal

9. Neither party challenges the judge's conclusion under Article 3, but the claimants say that the judge should have held that the contract is governed by English law because of the effect of Article 4.2. IRI says that the judge was right to hold that the application of Article 4.2 leads to the conclusion that the contract is governed by the law of Texas. Each party has an alternative case. The claimants' alternative case is that if the judge was right under Article 4.2, he should have held that the effect of Article 4.5 was that the governing law was the law of Iran. IRI's alternative case is that if the judge was wrong under Article 4.2, he should nevertheless have held that the effect of Article 4.5 was that the governing law is the law of Texas.

The Rome Convention

10. Section 2(1) of the Contracts (Applicable Law) Act 1990 ("the Act") provides that:

"... the Conventions shall have the force of law in the United Kingdom."

11. By section 1 of the Act it is provided that the term "Conventions" in the Act refers to a series of international conventions, including the Rome Convention. As the judge observed, certain provisions of the Rome Convention were excluded from the incorporation of its terms into English law, but these are not relevant for present purposes. Section 3(3) of the Act provides:

"Without prejudice to any practice of the courts as to the matters which may be considered apart from this subsection -

(a)the report on the Rome Convention by Professor Mario Giuliano and Professor Paul Lagarde which is reproduced in the Official Journal of the Communities of 31st October 1980 may be considered in ascertaining the meaning or effect of any provision of that Convention; ..."

12. The material provisions of the Rome Convention which are set out in schedule 1 to the Act are the following:

"Article 1

Scope of the Convention

1. The rules of this Convention shall apply to contractual obligations in any situation involving a choice between the laws of different countries. ...

Article 3

Freedom of choice

1. 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. ...

Article 4

Applicable law in the absence of choice

1. To the extent that the law applicable to the contract has not been chosen in accordance with Article 3, the contract shall be governed by the law of the country with which it is most closely connected. ...

2. Subject to the provisions of paragraph 5 of this Article, it shall 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 conclusion of the contract, his habitual residence, or, in the case of a body corporate or unincorporate, its central administration. However, 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 principal place of business is situated or, where under the terms of the contract the performance is to be effected through a place of business other than the principal place of business, the country in which that other place of business is situated. ...

5. Paragraph 2 shall not apply if the characteristic performance cannot be determined, and the presumptions in paragraph ... 2 ... shall be disregarded if it appears from the circumstances as a whole that the contract is more closely connected with another country."

13. The Rome Convention was entered into between member states of the European Union to harmonise the methods of determining the law applicable to contractual obligations between the member states. Although, unlike the Brussels Convention 1968, which was enacted in the Civil Jurisdiction and Judgments Act 1982, it was not specifically entered into pursuant to Article 220 of the EEC Treaty, the Rome Convention has been described as the "natural sequel to the Convention on Jurisdiction and Enforcement of Judgments": see Giuliano/Lagarde, para A4-04. The fundamental principle of interpretation is stated in Article 18 of the Convention as follows:

"In the interpretation and application of the preceding uniform rules, regard shall be had to their international character and to the desirability of achieving uniformity in their interpretation and application."

14. In Samcrete Egypt v Land Rover Exports Ltd [2001] EWCA Civ 2019, Potter LJ (with whom Thorpe LJ agreed) quoted Article 18 in para 24 of his judgment and observed, in para 25, that it was suggested at para 32-078 (p.1223) of the 13th edition of Dicey & Morris on the Conflict of Laws:

"... that the question of interpretation should be looked at from a broad Convention-based approach, not constrained by national rules of construction."

15. He expressed his agreement and, in para 26, approved my own view expressed in Egon Oldendorff v Libera Corp [1996] 1 Lloyd's Rep 380 at 387, where I said:

"It is indeed appropriate to adopt a purposive approach and not to construe the Convention in a narrow literal way."

16. Although those views were expressed in the context of Article 3, they seem to me to apply equally to Article 4: see also to the same effect Plender & Wilderspin on the European Contracts Convention (2001) at para 2-01. I should perhaps stress that in applying Article 4 an English court should not be influenced by the old common law approach to the proper law of the contract because the nature of the enquiry under Article 4 is fundamentally different: see e.g. Credit Lyonnais v New Hampshire Insurance Co [1997] 2 Lloyd's Rep 1.
17. There has been some discussion among commentators and, indeed, in the cases as to the way in which Article 4.5 should be applied where the country referred to in Article 4.2 has been identified. I shall return to that question so far as necessary in a moment, but it seems to me to be appropriate first to consider the application of Article 4.2 to the facts of this case.

Article 4.2

18. In order to identify the relevant country it is necessary to identify first "the party who is to effect the performance which is characteristic of the contract".
19. There is no dispute as to the answer to that question on the facts of this case. There were only two parties to the contract: one or more of the claimants (probably the second claimant, IOOC) on the one hand and IRI on the other. No one suggests, or could suggest, that it was IOOC or, indeed, either of the other claimants who was to "effect the performance which is characteristic of the contract". The obligation of the claimants was in essence to pay for goods and services provided by IRI and, as Professor Giuliano and Professor Lagarde observed in para A4-34 of their report, payment of money "is not, of course, the characteristic performance of the contract". It follows that IRI is the party who was to effect the performance which was characteristic of the contract.
20. It is common ground that the first sentence of Article 4.2 has no application because the contract was entered into "in the course of IRI's trade or profession". It is also common ground that IRI's principal place of business was Texas. It follows that the effect of Article 4.2 is to presume that the contract was most closely connected with Texas unless "under the terms of the contract the performance is to be effected through a place of business other than the principal place of business".
21. The claimants say that under the terms of the contract the performance was to be effected through IRI's place of business in England, namely its UK office, which was in Sevenoaks at the time.
22. It is common ground that the expression "the performance" in the second sentence of Article 4.2 has the same meaning as the expression "the performance which is characteristic of the contract" in the first sentence and, indeed, as the expression "characteristic performance" in Article 4.5. It is also common ground, first, that IRI's Sevenoaks office was a "place of business" within the meaning of Article 4.2 and, secondly, that if under the terms of the contract the performance was to be effected through the Sevenoaks office, the effect of Article 4.2 is to presume that the contract is most clearly connected with England. In that event the contract will be governed by English law unless Article 4.2 is to be disregarded under Article 4.5.
23. It follows that the essential question under Article 4.2 is whether under the terms of the contract the characteristic performance was to be effected through the Sevenoaks office. I therefore turn to that question. The judge held that the answer was no. The claimants say that he was wrong so to hold.

The Contract

24. It seems to me that in order to resolve this issue it is important to identify the terms of the contract. However, it is not in my judgment appropriate to look only at the purchase order and its acceptance. As in the case of any contract, it is important to view its terms against it surrounding circumstances or factual matrix. In this case the background to the contract is, I think, of particular importance because the contractual documents did not come out of the blue. On the contrary, they can be traced back to 1990.
25. The rig, known as R-4, was built in 1968 by a company called Ideco, whose business was later taken over by IRI. The rig was substantially damaged during the Iran/Iraq war and needed repair and refurbishment before it could be put back in working order. The first contact between the parties relating to the rig arose in 1990 in the course of another wholly separate contract for the supply by IRI of six "workover rigs" at a price in excess of US$10 million. The judge held that that contract was concluded through IRI's UK office, which was then in Knightsbridge. I shall return in a moment to the reasons why the UK office was used for that purpose in relation both to that contract and to this.
26. On 15th May 1990 IOOC sent Mr Simon White a telex asking for IRI's assistance. At the time Mr White was the technical services manager in the UK and was based at IRI's UK office, which was in Sevenoaks. It was throughout a small office comprising Mr White and his secretary, with one or, at times, two engineers. As the judge held, that office had charge of servicing IRI's clients in the Middle East, Europe and Asia. The telex of 15th May included the following:

"IOOC is planning to refurbish one of its platform rigs located in one of its oil fields in the Persian Gulf. In the recent meetings with IRI representatives ... in Tehran the subject was discussed and it was agreed that a visit would be arranged for IRI specialist to visit the rig who would cooperate with IOOC drilling department in order to find the fastest way to repair and refurbish the rig equipments. Please revert your comments and advise convenient time for this visit. For your information, the rig is built by Ideco, purchased by Iminoco and installed by McDermott in 1968."

27. Mr White accordingly visited the rig and on 27th July 1990 he sent IOOC his "inspection report and recommendations on the refurbishment of your R-4 platform". The report was dated 25th July and it described the purpose of the inspection and report as being "to evaluate whether the drilling equipment on this platform could be put back into operation after suffering damage during the war". The report continued:

"Most of the damage was in the accommodation area, which was completely destroyed. The derrick and drilling equipment were not, however, damaged."

28. The report then set out in detail Mr White's views with regard to the drilling equipment rather than to ancillary works and equipment on the platform. He expressed his summary in this way:

"I feel that it would certainly be possible to put this equipment back into operation and the following is a list of what would be required. In view of the extent of the work involved, however, and the cost of parts required, it may be more practical to replace some or all of the components with new equipment. IRI will, therefore, offer both options for your consideration."

29. Subsequently, in October 1990, Mr White sent the claimants a quotation on behalf of IRI for the replacement/repair for total prices of US$1,159,446 for new equipment and US$621,955 for repaired equipment. The judge held that by February 1991 IRI was in the course of preparing a supplementary quotation for the replacement/repair of ancillary equipment on the platform and on 22nd March 1991 that revised quotation was sent under cover of a letter of that date from Mr White of the Sevenoaks office. The revised quotation was based on the repair option as opposed to the replacement option of the October 1990 quotation and gave prices under two further alternative options.
30. At some stage IOOC sent Mr White a sample contract, but by telex of 12th September 1991 Mr White, on behalf of "IRI International - UK", rejected the terms proposed on the grounds that they conflicted with IRI's quotation. The telex included the following:

"The contract sent to us appears to be for the construction of a platform whereas we are proposing only to repair/refurbish the drilling equipment."

31. However, the telex expressed continued interest, and a meeting took place in November 1991 in Tehran attended by Mr White on behalf of IRI.
32. On 3rd January 1992 Mr White wrote to IOOC. The letter was (as in the case of most, if not all, of the letters written by him) on "IRI International" notepaper. It had the Sevenoaks address at the top and made no reference to IRI's activities in America. It was signed "IRI International - UK, Simon C White, Technical Services Manager". It included the following:

"We are pleased to offer our revised quotation, ref. IRI/R-4, for the refurbishment of the drilling equipment and ancillaries on your Rashadat R-4 platform.

Our offer is presented in two forms. The first, in black folders, is for parts and equipment only, with labour shown separately. The second, in grey folders, is for parts and equipment with the cost of labour included.

As requested, our offer has been itemised to show individual parts required for the overhaul of the major drilling equipment. For ancillary vendor equipment, we have shown pricing of components and complete systems."

33. Both the grey and the black quotations began in the same way as follows:

"We are pleased to present our quotation IRI/R-4 for the repair of Iranian Offshore Oil Company Platform Rig R-4. This quotation is presented to address areas in need of repair as noted by IRI International Technical Services Manager, Simon White, during his visit to the platform in 1990. Any areas not addressed in this quotation have not been considered as in need of repair at this date. IRI International does not undertake responsibility for the operational readiness of any equipment not specifically mentioned in this quotation."

34. As the covering letter explained, the only difference between the two quotations was that the black quotation showed labour and transportation separately. Thus the grey quotation was divided into three parts. They were:

"Part A:Ideco/IRI Drilling Equipment and Tools necessary for accomplishment of repairs.

Part B:Ancillary Equipment.

Part C:Shipping Charges."

35. As I understand it, it is common ground that the ancillary equipment was ancillary to the drilling equipment in Part A and, whereas Part A related to IRI's own materials, Part B related to materials which IRI would obtain from others.
36. The quotation was in the total sum of US$1,119,506.12 and was expressed to be C&F Bandar Abbas. By contrast, the black quotation showed the total as the same, namely US$1,119,506.12, and the equivalent of Parts A and B in somewhat lower figures, but contained a separate item in respect of labour and transportation in the sum of US$139,864. The labour and transportation part of the black quotation was in these terms:

"Provide two (2) highly trained IRI Service Engineers for a period of sixty (60) days each, for refurbishing the Ideco/IRI and installation of ancillary equipment on board Iranian Offshore Oil Company Rig R-4. The daily charge for a Service Engineer is $650.00 inclusive of travel days.

Total IRI Service Engineer Charges (120 man days) $78,000.00

Provide one (1) highly trained EPSI Electrical Technician for a period of thirty (30) days for the installation of the equipment offered in this quotation. The daily charge for an Electrical Technician is $855.00 per day inclusive of travel days.

Total EPSI Electrical technician Charges (30 man days) $25,650.00

NOTE: Customer will be billed for actual Service Engineer and Electrical Technician work/travel days.

Airfare for Service Engineers and Electrical Technician. We anticipate requiring six (6) round trip airline tickets.

Total Airfare $36,214.00."

37. In both documents the quotations for the materials were expressed to be FOB Houston ex works, although in the grey quotation it is common ground that the items were increased to include the work to be carried out by IRI personnel on the rig. In both quotations the shipping charges were separately stated because the quotations were each stated to be C&F Bandar Abbas. Each quotation concluded as follows:

"Terms ........... 360 Day USANCE Letter of Credit

Delivery ......... 180 Days After Receipt of Letter of Credit

Completion of Works......... 180 Days After Arrival of Goods at Platform"

38. IOOC did not immediately accept either of those quotations. The judge did not make detailed findings as to what happened during 1992, 1993 and early 1994. However, it appears that IOOC decided to accept the grey quotation but that no agreement was made for some considerable time because of difficulties in agreeing the terms of the letter of credit.
39. Eventually agreement was reached in principle and IOOC prepared a purchase order, ref FPP-00058-LA, dated 18th september 1994, which expressly referred to IRI's quotation dated 3rd January 1992. This is an important document because it essentially represents the contract between the parties. On the purchase order the supplier's name and address were said to be IRI International at the Sevenoaks office. It set out each item in detail, but accepted the grey quotation, with a slight variation of the price to US$1,127,388.21 to reflect an additional item. Parts A and B thus included the labour charges. In the column marked "Supplier's delivery date" it was stated "6 MONTHS AFTER RECEIPT OF L/C". The order also expressed the contract to be CFR Bandar Abbas, although the final destination in Iran was stated to be Lavan Island, where of course the rig was situated. In the box marked "Method of payment" there appears "SIGHT L/C"; and in the box marked "Shipment to be arranged by" there appears "IRI INTERNATIONAL UK, SEE ALSO NOTE 1". The ocean freight was described as from Houston, Texas, USA to Bandar Abbas.
40. At the end there were four notes as follows:

"NOTE 1

Please deliver the goods by sea to Bandar Abbas, marking the consignment with above order number and shipping marks. Freight charges to be prepaid by you and respective bill of lading also be included in the set of documents that you present for the payment.

NOTE 2

One complete set of non-negotiable shipping documents to be directly mailed to Iranian Offshore Oil Co ... for the attention of Procurement Department. ...

NOTE 3

Insurance will be covered by us locally.

NOTE 4

Confirm receipt of this official purchase order by return telex.

*PAYMENT WILL BE EFFECTED OUT OF A SIGHT L/C ISSUED BY BANK SADERAT IRAN, LONDON BRANCH, THROUGH KALA-TEHRAN."

41. I shall return to the significance of some of those terms in a moment.
42. On 8th November 1994 Mr White, using the same notepaper as before and signing himself as before, wrote:

"We hereby acknowledge receipt of and thank you for your valued purchase order which we are pleased to accept. We enclose herewith a signed copy of your purchase order as confirmation.

We confirm we will proceed with delivery as per the terms of the purchase order.

Yours sincerely,

IRI INTERNATIONAL - UK"

43. A signed copy of the purchase order was returned to IOOC. It is common ground that it was in the same terms as the document from which I have quoted.
44. There is in the appeal bundle an internal IRI fax dated 24th November 1994 on IRI International Corporation, Pampa, Texas, paper in these terms:

"The letter of credit is cleared for the $1,200,000 repair of the R-4 platform in Iran. The price of the labour is in the parts cost. Please check on the parts order and make arrangements to send our service personnel to do the work. I would suggest we send the Englishmen rather than an American, even though it is offshore. Give me a report on how we will handle this."

45. That fax refers to a letter of credit. An unamended letter of credit was issued by Bank Saderat Iran in London on 12th October 1994 in the sum of US$1,127,388.21. It named as beneficiary "IRI International" at the Sevenoaks address. The letter of credit was expressed to be available by negotiation of "your draft at sight" accompanied by the following documents:

"1.Signed commercial invoice in 1 original plus 4 signed copies.

2.Full set clean on board ocean bills of lading (3 originals plus 3 non-negotiable copies) marked freight prepaid consigned to order of Kala Naft Co, Tehran.

3.Certificate of origin issued by Chamber of Commerce in 1 original plus 3 copies showing goods originated in USA.

4.Packing list in 3 copies."

46. Shipment was originally stated on the letter of credit to be from the UK, but on 22nd November 1994 the bank issued an amendment which stated "Shipment from Houston Texas USA instead of UK".
47. In January 1995 Mr White went out to Iran to visit the rig, as did Mr Gerald Doyle from the United States, who is an electrical engineer. Mr White reported on 28th January 1995 expressing concern about the condition of the rig, but recognised that IRI was committed to the work.
48. On 28th March 1995 a bill of lading was issued naming IRI International at the Sevenoaks address as shipper and evidencing loading of the contract materials at Houston for carriage to Bandar Abbas. It is, I think, common ground that the document had been prepared by a forwarding agent. On the same day a certificate of origin was signed naming the shipper/exporter as IRI International, again at the Sevenoaks address.
49. The documents were sent to IRI-UK and duly presented to the bank. I note that on 6th April 1995 Mr White's secretary sent a fax on Sevenoaks notepaper to IRI in Pampa, which included the following:

"John Alabaster requested a letter on our Sevenoaks headed paper as we are the L/C beneficiaries, authorising payment to you and this I have sent him by fax, copy attached."

50. It is, I think, plain that the "we" in that fax is a reference to IRI-UK, as opposed to IRI Pampa or IRI Houston. The documents suggest that the bank paid under the letter of credit on or before 10th April, presumably in accordance with the authority referred to in the fax which I have just quoted. IRI was thus paid for both the goods and the services, but no IRI personnel went to carry out the work, apparently because of President Clinton's order dated 8th May 1995 to which I referred earlier.
51. Before considering whether under the terms of the contract IRI's characteristic performance was to be effected through the London office, I should advert to the reason why the London office was used and the relationship (if any) between the claimants and IRI's operations in America.
52. The judge made the following findings of fact, which are not challenged in this appeal.
53. By order of the Prime Minister of Iran issued in July 1983 it was Iranian Government policy to prohibit the purchase by Iranian entities of goods from the USA except in special circumstances with the written permission of the relevant Minister.
54. The judge said this with regard to the relationship between the claimants and IRI:

"9. ... Mr Ali Kalhor, the commercial manager, head of commercial affairs and head of procurement and materials within IOOC, gave evidence before me as did Mr Fattah Bayatani, who was head of IOOC's purchasing department (within the commercial department) from 1981 to 1999, reporting to Mr Kalhor.

10. Mr Kalhor told me that the Prime Minister's Order did not prevent acquisition of US origin goods, provided that these were acquired from non-US suppliers. Mr Kalhor said that he regarded the defendant's UK branch office as a company outside the United states for the purposes of compliance with the Prime Minister's Order.

11. It seems to me clear, however, that in all material dealings, the claimants were well aware that the defendant was a United States Corporation and that its UK office was merely a branch. The defendant's general manager, Mr Simon White, told me, and I accept, that the claimants channelled their communications through the UK office because they did not want to write to the United States. The office was, as far as the claimants were concerned, a relaying station between Tehran and Houston. To my mind this is graphically illustrated by the fact that day to day communications were sent by Mr Kalhor to Mr White at Sevenoaks. However, whenever there was a serious sticking point in communications and a quick reaction was wanted, Mr Kalhor dealt with the defendant's Houston office direct; the examples in the bundles are clear ...

18. The defendant wished the meeting [in November 1991 in Tehran] to be attended by Mr Barnhardt who, at all material times, was its international service manager. It is clear that IOOC knew that Mr Barnhardt was a US national and that his attendance in Tehran was not possible because of his inability to obtain a visa. An alternative venue for the meeting was suggested by the defendant, because, as they stated in the telex, Mr Barnhardt was from their point of view, `one of the key personnel involved'. This is another feature pointing to the claimants' obvious awareness of where the centre of commercial activity lay in the defendant's organisation, namely in Texas."

55. As I see it, the judge accepted that the arrangements made between the parties were expressly put in place to comply with Iranian Government policy which prohibited the purchase by Iranian entities of goods from the USA.
56. There was some debate during the course of the argument as to whether the claimants could only have entered into this contract with IRI if a non-US party was named (or apparently named) as supplier. Mr Tugendhat submits that the judge made no finding to that effect and, indeed, points to the fact that the judge rejected important parts of the claimants' evidence. Thus he rejected the evidence that the claimants thought that IRI-UK was a separate legal entity from the defendant, IRI International Corporation.
57. We have not seen evidence that goes so far as to lead to the conclusion that the parties could not, or would not, have entered into the contract unless a non-US entity was shown (or apparently shown) as the supplier. Indeed, the judge expressly held that the claimants were aware that it was IRI personnel in America who made the commercial decisions and in effect called the shots. All, or almost all, communications to the Sevenoaks office were passed on to Texas, although it is fair to say that Mr White played his part in relation to technical matters other than price. The judge made it clear that from time to time there was direct contact between the claimants and IRI personnel in Texas. Moreover, although Mr White for the most part used IRI Sevenoaks notepaper and signed himself Technical Services Manager for IRI International UK, he did not always do so.
58. Nevertheless, the documents to which I have referred show that where contractual documentation was concerned Mr White used IRI Sevenoaks notepaper which contains no reference to IRI in America and for the most part signed himself as just stated. There is no suggestion that that was done by mistake. On the contrary, to my mind it was done deliberately and in order to accommodate the claimants' concerns, whether real or imagined, which derived from the 1983 decree. As the judge found, it was what the claimants chose in order to keep up the cosmetic appearance in Iran that they were not dealing directly with a United States Corporation. That is so even though on the judge's findings the claimants knew that IRI-UK was not a separate legal entity. On IRI's side there is evidence that one of the reasons that IRI had a UK office was that the claimants did not wish to be seen to be dealing with an American company. In any event it is, I think, plain from the contractual documents to which I have referred that, no doubt for what seemed good commercial reasons, IRI was willing to keep up the appearances which the claimants wanted, with the result that the contractual documentation was produced in the form in which it was. I shall return to this point in a moment.
59. In order to answer the crucial question, namely whether under the terms of the contract IRI's characteristic performance was to be effected through the London office, it is necessary first to identify the nature of the characteristic performance and then to consider whether it was to be effected through the London office.

Characteristic Performance

60. The facts which I have set out in what is probably inordinate detail to my mind show that IRI's performance obligations may be summarised in this way. The contract was in part a CFR contract for the sale of goods and in part a contract for services. It is common ground that a CFR (or C&F) contract has the same characteristics as a CIF contract, save for those relating to insurance. Those characteristics are well known. They were concisely stated by Lord Atkinson in Johnson v Taylor Bros [1920] AC 144 at 155 as follows:

"The authorities I shall presently cite establish clearly, I think, that when a vendor and purchaser of goods situated as they were in this case enter into a cif contract, such as that entered into in the present case, the vendor in the absence of any special provision to the contrary is bound by his contract to do six things. First, to make out an invoice of the goods sold. Second, to ship at the port of shipment goods of the description contained in the contract. Third, to procure a contract of affreightment under which the goods will be delivered at the destination contemplated by the contract. Fourth, to arrange for an insurance upon the terms current in the trade which will be available for the benefit of the buyer. Fifthly, with all reasonable despatch to send forward and tender to the buyer these shipping documents, namely, the invoice, bill of lading and policy of assurance, delivery of which to the buyer is symbolical of delivery of the goods purchased, placing the same at the buyer's risk and entitling the seller to payment of their price."

61. Of those six (or, more accurately, five) things, only the fourth has no application to a C&F contract. Thus it was IRI's obligation to make out an invoice, to ship the goods at Houston, to procure a contract for carriage of the goods to Bandar Abbas and to tender the documents to the buyer. In the instant case the obligation to tender the documents to the buyer was replaced by an obligation to tender them to the confirming bank under the letter of credit. Because this contract was more complicated and included an obligation to perform services on the rig, IRI undertook those further obligations, which were of considerable importance since, as many of the documents made clear, the whole object of the contract was to repair/refurbish the rig in order to put it back in action. Since, as I indicated earlier, it is common ground that "the performance" in the first part of the second sentence of Article 4.2 means "the performance which is characteristic of the contract" (which I assume for present purposes to be correct), the question is, what was the performance characteristic of the contract or the characteristic performance which was to be carried out by IRI.
62. The judge answered that question by reference to the decision of this court in Print Concept GmbH v GEW (EC) Ltd [2001] EWCA Civ 352. That case raised a different question from that which arises here because the question there was which of the parties to the contract was to "effect the performance which is characteristic of the contract" within the meaning of the first sentence of Article 4.2. Longmore LJ (with whom Tuckey LJ and Sir Christopher Slade agreed) asked himself (as the judge, David Steel J had done) what the real substance of the arrangement between the parties was, or what the "real meat" of the arrangement was, as Forsyth & Moser had suggested in their article in (1996) 45 ICLQ 190. The judge applied that test here and concluded that the answer was the supply and delivery of goods in America under the CFR contract. He said: "44. ... Virtually all the elements identified by Lord Atkinson in Johnson v Taylor (ante) fell for performance in America. The assistance to be provided by the defendant's technicians on the platform (arrival on which, incidentally, on the evidence, did not require an Iranian entry visa) amounted to no more than was required of the supplier of the goods in the Print Concept case, in which I note it was said that `... sale and purchase contracts ... would almost inevitably under Rome Convention principles be governed by the law of the vendor.'"
63. There is, I think, scope for argument as to whether, given the fact that the whole purpose of the contract was the repair or refurbishment of the rig, that is correct. However, I recognise that that is a legitimate view and that it is common ground that "performance" in the second sentence of Article 4.2 is the same as "characteristic performance" in the first sentence. I therefore proceed on the basis that it is correct.

Effected through a place of business

64. The question is whether under the terms of the contract that performance was to be effected through the Sevenoaks office. There is scope for argument as to what is meant by that expression, especially since, as I understand it, the seven equally authentic texts do not all speak with the same voice, especially when translated into English. That perhaps shows, as Lord Justice Carnwath observed in the course of the argument, that the draftsman was trying to express a concept which does not depend upon the approach of the grammarian, whether he or she be French, German, Italian, English or otherwise.
65. Mr Tugendhat submits that the question is whether under the terms of the contract the relevant performance is, as a matter of contractual obligation, to be effected through the place of business (here the Sevenoaks office). I doubt whether the expression "to be effected" should be so narrowly construed, but it is not necessary to determine that question in order to decide the issues which arise in this appeal.
66. Mr Tugendhat submits that there is nothing in the terms of the contract which require the Sevenoaks office to perform the contract in the sense described above. He submits that in order so to hold it would be necessary to hold that the contract required the Sevenoaks office to load the ship or at least to take physical steps to do so. For my part I would not accept that submission. It appears to me that the contract as set out in the purchase order of 18th September 1994 which was signed by both parties required IRI's place of business in the United Kingdom, namely the Sevenoaks office or IRI-UK for short, to effect the characteristic performance identified above.
67. This can be seen by considering the terms of the agreed purchase order here, both generally and in the context of the relevant characteristics of a C&F contract identified by Lord Atkinson.
68. As to the first of those characteristics, the invoice, as I understand it, was treated as the quotation or pro forma invoice dated 3rd January 1992. That quotation was sent under cover of a letter signed by Mr White expressed to be on behalf of IRI-UK.
69. The second characteristic was the obligation to ship the goods into Houston, which the judge described as part of the characteristic performance. It is true that in one sense the goods were physically delivered by IRI in Houston. The question is, however, whether under the terms of the contract that performance was to be effected through the Sevenoaks office. To my mind it was. The purchase order expressly provided that shipment was to be arranged by IRI International UK, which was a plain reference to the Sevenoaks office or, put another way, to IRI's place of business in the United Kingdom. Mr Tugendhat submits that that was no more than window dressing. However, for my part I would not accept that submission. On the contrary, it seems to me that under the terms of the contract the shipment was to be arranged by the Sevenoaks office. It follows that what the judge held to be the performance characteristics of the contract, namely the supply and delivery of the goods in America, was to be effected by the Sevenoaks office. It was for that reason that the bill of lading named IRI at the Sevenoaks address as the shipper. That was to comply with the obligation in the contract that shipment was to be arranged by IRI International UK. Like the judge, Mr Tugendhat stresses the importance of IRI's obligation to deliver the goods to the vessel in Houston. To my mind the purchase order makes it clear that under the terms of the contract that was to be arranged (or, in other words, effected) by the Sevenoaks branch.
70. Much the same is true of the other key characteristics of a C&F (or CIF) contract identified by Lord Atkinson.
71. The third characteristic is the obligation to procure a contract of carriage. For the reasons already given, it was the role of IRI-UK to arrange the shipment and thus to arrange the contract of carriage. This IRI did by procuring the issue of the bill of lading through the forwarding agents with IRI-UK named as shipper.
72. The fourth characteristic was to tender the documents to the buyer. Here that characteristic was to tender the documents to the bank in order to obtain payment under the letter of credit. Here again under the terms of the contract it was for IRI-UK to tender the documents. IRI at the Sevenoaks address (or, in other words, IRI-UK) was named as the beneficiary under the letter of credit. The documents were accordingly sent to IRI-UK for the Sevenoaks office to tender them to the bank to obtain payment from the bank. As the fax signed by Mr White's secretary which I quoted above shows, it was recognised that, although not a legal entity, IRI-UK was the beneficiary and that an appropriate form of authorisation was required to persuade the bank to pay the monies to IRI - as in fact happened. As I see it, IRI-UK was simply shorthand for the Sevenoaks office, IRI's place of business in England.
73. In conclusion, this seems to me to be a most unusual case, but I have reached the clear conclusion that under the terms of the contract (which were freely agreed by both parties, no doubt for good commercial reasons) the characteristic performance was to be effected through IRI's place of business in England.
74. It follows that I have reached a different conclusion from the judge on this point, which may well have been addressed with markedly less vigour before him than before us. The judge ultimately expressed his conclusion in this way:

"45. In my view, the defendant is right to say that this characteristic performance was not by the terms of the contract to be effected through the defendant's UK office. The provision in one box of the purchase order for shipment to be arranged by IRI UK and the giving of IRI's branch office address does not mean that an office which was essentially a conduit of communication for internal cosmetic reasons in Iran is to be elevated into `the place of business' through which characteristic performance was to be effected. Thus I find that, under the presumption of Article 4(2) of the Convention the contract would be presumed to be most closely connected with Texas."

75. For my part I do not share that view. I do not think that it is fair to say that the Sevenoaks office was no more than a conduit of communication. It certainly played such a role in part, but as I see it the contractual documents were carefully prepared and agreed in order to show the English place of business as the supplier and shipper without any express reference to IRI in America. That was not by chance but by agreement. It may have been for the claimants' internal cosmetic reasons in Iran, as the judge said, but those reasons no doubt originated in the Iranian order of 1983 and, whether cosmetic or otherwise, were regarded by both parties as sufficient reason to be reflected in the contract.
76. For the reasons I have given I would hold that the parties agreed that the characteristic performance of the contract, notably (as the judge held) by delivery of the goods to the ship in Houston, was to be effected by IRI's place of business in England. It follows that I would allow the appeal on this aspect of the case and hold that the effect of Article 4.2 as applied to the facts of this case is that it is to be presumed that the contract is more closely connected with England and that by the combined effect of Articles 4.1 and 4.2 the contract is governed by English law unless that presumption is to be disregarded under Article 4.5.

Article 4.5

77. It is convenient to repeat the terms of Article 4.5, which provides:

"Paragraph 2 shall not apply if the characteristic performance cannot be determined, and the presumptions in paragraph ... 2 ... shall be disregarded if it appears from the circumstances as a whole that the contract is more closely connected with another country."

78. There is considerable scope for debate as to the correct approach to the interpretation of Article 4.5. That debate has focused upon the weight to be given to the presumption in Article 4.2. For example, in Credit Lyonnais v New Hampshire Insurance Co [1997] 2 Lloyd's Rep 1 at 5, Hobhouse LJ (with whom Mummery and Evans LJJ agreed) observed that Article 4.5:

"... formally makes the presumption very weak, but it does not detract from the guidance that paragraph 2 gives as to what is meant by `the country with which it is most clearly connected' and does not detract from the need to look for a geographical connection. This reading of Article 4 is also supported by the commentators."

79. In Definitely Maybe (Touring) Ltd v Marek Lieberberg Konzertagentur GmbH [2001] 2 All ER (Comm) 1, Morison J expressed the competing approaches in this way, in para 7:

"The real issue between the parties centres on the relationship between these two paragraphs of art 4. Whilst para 2 looks to the location of the principal performer, para 5 looks more widely to a connection between the contract and a country. If there is a divergence between the location of the principal performer and the place of substantial or characteristic performance, what then? On the one hand, were the presumption to be displaced whenever such divergence existed, the presumption would be of little weight or value. Paragraph 2 must have been inserted to provide a `normal' rule which is simple to apply. Giving wide effect to para 5 will render the presumption of no value and represent a return to the English common law test of ascertaining the proper law, which places much less weight on the location of the performer and much more on the place of performance, and the presumed intention of the parties."

80. Morison J did not attempt to resolve that issue in that case. The issue has, however, been resolved for us by the Samcrete Egypt case to which I referred earlier. There Potter LJ observed, in para 41, that:

"To date, the high point of the jurisprudence justifying the decisive application of the presumption in all but the most exceptional of cases is Societé Nouvelle des Papétieries de l'Aa in which the court stated:

`... it follows both from the wording and the structure of art 4, as well as from the uniformity in the application of the law which has been intended with the Convention, that this exception to the main rule has to be applied restrictively, to the effect that the main rule should be disregarded only if, in the special circumstances of the case, the place of business of the party who is to effect the characteristic performance has no real significance as a connecting factor.'"

81. Potter LJ then referred to some of the commentaries, including Dicey & Morris at para 32-124. It is not, however, necessary for us to consider the various conflicting views further because both parties agreed that the correct approach for us to adopt is to be found in para 45 of Potter LJ's judgment, which is in these terms:

"In the case of a guarantee, as it seems to me, in the absence of an express or inferred choice of law under Article 3, the Article 4(2) presumption falls to be applied in a situation where the obligation of payment is the characteristic obligation of the contract, and indeed its principal concern. It should therefore only be disregarded in circumstances which clearly demonstrate the existence of connecting factors justifying the disregarding of the presumption in Article 4(2)."

82. Although Potter LJ refers there to the case of a guarantee, no doubt because the court was dealing with such a case, it is common ground that the test that we should apply is whether the circumstances as a whole clearly demonstrate the existence of connecting factors with another country which justify the disregarding of the presumption in Article 4.2.
83. The claimants' case before us is not the same as their case before the judge. There has been some debate as to what their case before judge was but, whatever it was, as I understand it their case now is as follows. Given our conclusion that, subject to Article 4.5, the effect of Article 4.2 is that English law is the governing law, they do not say that it appears from the circumstances as a whole that the contract is more closely connected with Iran. Mr Mercer told us that the reason for adopting that stance is that they cannot satisfy the test in Samcrete Egypt.
84. The position of IRI is the same so far as the law of Iran is concerned. It does not say that Article 4.5 has the effect of displacing the law of England in favour of the law of Iran. It follows that it is not necessary for us to consider the law of Iran as a possible governing law.
85. IRI, however, submits that the presumption that the contract is most closely connected with England under Article 4.2 is displaced by Article 4.5 in favour of the law of Texas. Thus Mr Tugendhat submits that, when the circumstances are considered as a whole, they clearly demonstrate that the contract is more closely connected with Texas than England.
86. The judge did not have to consider this particular question because he reached a different conclusion under Article 4.2 in favour of Texas. He simply said this:

"46. Further, I do not see that there is anything to suggest that the circumstances show that the contract was more closely connected with any other country, for the purposes of Article 4(5). While the ultimate purpose of the contract was the refurbishment of the rig the services to be provided by the defendant's technicians were no more than subsidiary and no more than those envisaged on the part of the suppliers in the Print Concept case. I do not see that the obligation to provide services rendered the contract's closest connection other than that arrived at by an application of Article 4(2). Of the other features identified in this context, in paragraph 80 of the claimants' helpful closing submissions, I do not consider that the pre-contract features identified in sub-paragraphs (a) (b) and (c) are relevant to this issue and the features specified in the remaining sub-paragraphs are merely subsidiary to the `meat of the contract', which I have endeavoured to identify."

87. The conclusion which IRI invites us to reach under Article 4.5 strikes me as somewhat curious. The effect of the decision we have reached is that under the terms of the contract IRI's characteristic performance was by agreement to be effected through IRI's place of business in England. That seems to me itself to be a powerful factor on the facts of this case against the conclusion that the circumstances as a whole show that the contract is more closely connected with Texas.
88. I recognise, of course, that the materials were physically shipped in Houston and that they were obtained from various parts of the United States, including IRI's own premises in Texas. It is also right to say that, of the total contract price, by far the greater part comprised the value of the goods.
89. On the other hand, Mr White, from the London and later the Sevenoaks office, played an important part in the technical aspects of the contract. It was his visit to the rig in 1990 which led to the quotation. He was responsible for identifying the materials and work required. Moreover, unsurprisingly, it was he who visited the rig in January 1995, albeit with the electrical engineer from America, to evaluate what was involved in the execution of the contract. It is true that under the contract IRI could have sent personnel from anywhere, including Texas. However, given that the whole purpose of the contract was to refurbish a rig in Iranian waters and that the technical requirements were identified by Mr White from the United Kingdom office, and given the role to be played by the United Kingdom office under the contract (at least formally) in order to comply with the claimants' concerns to avoid the appearance of buying goods direct from America, for my part I do not think that it can fairly be concluded that it clearly appears from the circumstances as a whole that the contract is more closely associated with Texas than with England.
90. We were referred to cases in which Article 4.5 has been applied, notably the Samcrete Egypt case, the Definitely Maybe case and the Bank of Baroda v Vysya Bank [1994] 2 Lloyd's Rep 87, but each case depends upon its own merits.
91. On the facts of this most unusual case, the contract had connections with Iran, Texas and England. Different factors connected it with each. For the reasons which I have given and in all the circumstances of the case, I would not hold that the presumption in favour of England under Article 4.5 was displaced in favour of Texas by Article 4.5.

Conclusion

92. In conclusion, I would allow the appeal and declare that the contract is governed by English law.
93. LORD JUSTICE CARNWATH: I agree.
94. For understandable reasons of practical politics the transaction was structured as one to be performed by the UK branch. That was the underlying logic of the contract. I see no reason to apply a different logic in evaluating the terms of the contract for the purposes of Article 4.2. I have nothing to add on Article 4.5. I agree that the appeal should be allowed.
95. LORD JUSTICE WARD: I agree with both judgments.
Order: appeal allowed; appellants to have their costs of the appeal and 40% of their costs below; costs payable forthwith but without prejudice to right to apply to the judge for a stay of execution; permission to appeal to the House of Lords refused.