England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM QUEEN'S BENCH DIVISION
LONDON MERCANTILE COURT
HHJ Mackie QC (Sitting as a Judge of the Queen's Bench Division)
2011 Folio 104

		Royal Courts of Justice Strand, London, WC2A 2LL
		22 April 2013

Lord Toulson:

1. This appeal concerns the proper law of a commercial agency agreement. The agreement was made between the parties in about 1994 or 1995 and was terminated by the defendant in 2009. Under the Contracts (Applicable Law) Act 1990 the question of its proper law is governed by the Rome Convention ("the Convention"). The Convention has been superseded by the Rome 1 Regulation, but it continues to apply to contracts made after 1991 and before 17 December 2009.
2. His Honour Judge Mackie QC determined on the trial of a preliminary issue that the proper law of the contract is Spanish law. He rejected the claimant's argument that under article 3 of the Convention the parties had made an implied choice of English law. Under the heading "Freedom of choice", Article 3.1 provides:

"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. By their choice the parties can select the law applicable to the whole or a part only of the contract."

3. The same provision appears in article 3.1 of the Rome 1 Regulation, except that the phrase "demonstrated with reasonable certainty" has been replaced by "clearly demonstrated". As is explained in Dicey, Morris and Collins' The Conflict of Laws, 15^th ed (2012), chapter 32, footnote 217, the change of language was not intended to involve a change of meaning but was simply intended to bring the English and German text into line with the French text of the Convention.
4. The judge accepted that if the parties had made a choice of law it would have been English law; but he held that a choice of English law had not been demonstrated "with reasonable certainty … by the circumstances of the case", so as to satisfy the requirements of article 3 as expounded in the Giuliano-Lagarde report to which I refer below.
5. The judge therefore applied article 4, which lays down the following general principle:

"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."

Article 4 also sets out subsidiary rules for applying the general principle.

6. The claimant appeals against the judge's decision in relation to article 3. If his argument on that point fails, there is no appeal against the judge's decision that Spanish law was to be applied under article 4.

Facts

7. The claimant is a citizen of the Irish Republic. Some time between about 1992 and 1994 he was employed as a salesman by a company then known as Extec Screens and Crushers Limited ("Extec"). Extec was incorporated in the UK to manufacture screening and crushing machinery. When the claimant joined the company, it was small but was aiming to expand into European markets. It had started as a relatively unsophisticated family enterprise, whose roots were in Ireland, and its HR procedures were still quite informal. The judge found that there was no evidence that the claimant's original employment contract was in writing. He accepted that the contract was likely to have been governed by English law although there was probably no such express term. It appeared from the evidence that at the beginning of the claimant's employment it was not certain in which country or countries he would be working. After completing his training he was sent to Extec's distributor in Germany as an employed salesman, but that arrangement did not work out well. He was then sent to work in Spain, where the company was developing a market through the salesmanship of a former director, Mr Colin Burns, who had set up his own business as a sales agent for the company in France, Italy and Spain. Thereafter Spain was the claimant's main but not exclusive area of operation.
8. In about 1994 or 1995 the claimant's contractual relationship with Extec was changed from that of an employee to a sales agent. There was no formal agency agreement, but he was paid commission on sales and his expenses were reimbursed.
9. As Extec expanded, the share ownership changed. In 2006 the company attempted to rationalise its agency network, offering contracts of employment to its existing agents. Those contracts were expressly governed by English law. In 2007 Extec was acquired by Sandvik AB, a worldwide company based in Sweden. It later changed its name to Sandvik Mining and Construction Mobile Crushers and Screens Limited.
10. The claimant, like other agents, was offered a contract of employment containing an English law clause, but protracted negotiations did not lead to an agreement.
11. On 15 May 2008 the defendant wrote formally to the claimant giving notice of termination of his agency with effect from 1 June 2009, but expressing the hope that in the interim a mutually satisfactory employment contract could be negotiated. That hope was not fulfilled and the parties' contractual relationship ended on 1 June 2009.
12. The claim in these proceedings is for compensation for termination of the claimant's agency pursuant to the Commercial Agents (Council Directive) Regulations 1993. For reasons which are unnecessary to explore, the claimant's claim will be worth more if his contract was governed by English law than if it was governed by Spanish law. That issue was therefore ordered to be determined as a preliminary issue. The claimant's case was that the agency agreement was impliedly governed by English law. The defendant's case was that the claimant could not clearly demonstrate that there had been an implicit choice of law and that the matter was therefore governed by article 4.

The Giuliano-Lagarde Report

13. Section 3(3)(a) of the 1990 Act provides that the report on the Convention of Professor Mario Giuliano and Professor Paul Lagarde (Official Journal of the European Communities, 31 October 1980) may be considered in ascertaining the meaning or effect of any provision of the Convention, without prejudice to any other matters which may be considered by the court.
14. In its commentary on article 3, the Giuliano-Lagarde report states:

"1. The rule stated in article 3(1) under which the contract is governed by the law chosen by the parties simply reaffirms a rule currently embodied in the private international law of all the Member States of the Community and of most other countries.

…

3. The parties' choice must be expressed or be demonstrated with reasonable certainty by the terms of the contract or the circumstances of the case. This interpretation, which emerges from the second sentence of article 3(1) has an important consequence.

The choice of law by the parties will often be expressed but the Convention recognises the possibility that the Court may, in the light of the facts, find that the parties have made a real choice of law although this is not expressly stated in the contract. For example, the contract may be in a standard form which is known to be governed by a particular system of law even though there is no express statement to this effect, such as a Lloyd's policy of marine insurance. In other cases a previous course of dealing between the parties under contracts containing an express choice of law may leave the court in no doubt that the contract in question is to be governed by the law previously chosen where the choice of law clause has been omitted in circumstances which do not indicate a deliberate change of policy by the parties. In some cases the choice of a particular forum may show in no uncertain manner that the parties intend the contract to be governed by the law of that forum, but this must always be subject to the other terms of the contract and all the circumstances of the case. Similarly references in a contract to specific Articles of the French Civil Code may leave the court in no doubt that the parties have deliberately chosen French law, although there is no expressly stated choice of law. Other matters may impel the court to the conclusion that a real choice of law has been made might include an express choice of law in related transactions between the same parties, or the choice of a place where disputes are to be settled by arbitration in circumstances indicating that the arbitrators should apply the law of that place.

This Article does not permit the court to infer a choice of law that the parties might have made where they had no clear intention of making a choice. Such a situation is governed by Article 4."

Judge Mackie's reasoning

15. The judge described the claimant's recollection of the inception of the agency as vague. This was hardly surprising since the agency began in 1994 or 1995 and the trial was not until 2012. The judge said that the claimant's accounts of where and how he lived in Spain were improbable, undocumented and changed in the course of his evidence. His claims about the extent to which he spent time in markets other than Spain were largely unsupported by the records of sales. The judge accepted the defendant's evidence that throughout the period of the agency the claimant lived and worked in Spain and the vast majority of his sales were made in Spain. He would make periodic visits to England with customers or dealers, and in later years he covered other territories to a limited degree, but Spain continued to be his base and main territory.
16. There was evidence from the defendant that "in general terms Extec would seek to have its contracts governed by English law". The judge added that experience and common sense indicated that most English companies appointing agents would seek to do the same. Those were the judge's reasons for accepting that, if the parties had made a choice of law, it would have been English law. Having accepted the claimant's argument to that extent, the judge continued:

"But none of this points to a choice being made. Given the casual and informal circumstances in which the agency took effect it is very unlikely that choice of law was considered, let alone discussed. The court is concerned not with common law perceptions of implied choice but with the Rome Convention. Article 3(1) requires that the choice of the parties be "demonstrated with reasonable certainty by the terms of the contract or the circumstances of the case". The Report, before giving some examples, refers to implied choice in the context of "the possibility that the court may, in the light of all the facts, find that the parties have made a real choice of law although this is not expressly stated in the contract"."

17. The judge accepted that, in applying the Convention, evidence coming into existence after the date of the contract is admissible in order to throw light on the parties' intention at the time of the contract, but he did not consider that evidence of the negotiations with the defendant's new managers and owners in 2006 cast light on the parties' intentions in 1994 and 1995. He said:

"Extec was under new management and it would be unsurprising for a new approach to be taken. The issue being considered was an employment contract, although the practical role of the individuals concerned would remain much the same, not an agency agreement. As I have already said, there is no doubt that if agency agreements had been entered into or renewed in 2006 the parties would have sought to make them subject to English law. But that is not what happened 12 years earlier. The agency agreement was informal and unwritten, no consideration having been given to the applicable law. In this case, as the Report puts it, the parties "had no clear intention of making a choice" and so the situation is governed by Article 4."

Submissions

18. Mr Randolph QC submitted that the judge erred in his approach in two principal respects: the judge was wrong to require evidence of actual consideration and discussion of the choice of law in order to be able to conclude that there had been an implicit choice; and he was wrong to reject the English law approach to the finding of an implied term. Mr Randolph further argued that the judge's acceptance that the original contract of employment was probably governed by English law ought to have led him to conclude that there had been an implicit choice of English law to govern the agency contract in the absence of any evidence that the parties intended a different law to apply to their new arrangement.
19. Mr Parker submitted the judge's approach could not be faulted. The law contained in the Convention is materially different from English common law. Under the Convention, article 4 provides the default rules which are to be applied in the absence of a positive choice of law by the parties. Article 3 is intended to give effect to the principle of party autonomy. It applies only where it is clearly demonstrated that the parties have made a positive choice of law, whether expressly or by the nature of the circumstances. In the present case the evidence about the formation of the agency was vague and fell far short of clearly evincing a positive choice of English law. The situation would arguably have been different if there had been a positive choice that English law should apply to the employment contract, but the judge made no such finding. If English law applied to the employment contract, as the judge considered that it probably did, this would have been under the default rules rather than by operation of a positive choice of the parties.

Discussion

20. The gradual development of the common law is traced in Dicey, Morris and Collins' The Conflict of Laws at paragraphs 32 – 004 to 32 - 008. On the principle of party autonomy, from the nineteenth century the rule was developed that a contract was governed by the law which the parties intended to apply, or which they must be presumed to have intended from the circumstances.
21. In R v International Trustee for the Protection of Bond Holders Aktiengesellschaft [1937] AC 500, 529 Lord Atkin said:

"The legal principles which are to guide an English court on the question of the proper law of a contract are now well settled. It is the law which the parties intended to apply. Their intention will be ascertained by the intention expressed in the contract if any, which will be conclusive. If no intention be expressed the intention will be presumed by the court from the terms of the contract and the relevant surrounding circumstances."

22. Although in some cases, where the parties have not made an express choice of law, the language which they have used and/or the circumstances of the contract may leave no room for doubt that they must have intended a particular law to apply, in other cases the position may be less clear. In such cases the courts came to adopt the test that the contract was governed by the system of law with which the transaction had its closest and most real connection.
23. As Dicey, Morris and Collins observe, at paragraph 32 – 007, the line between the search for the parties' inferred intention and the search for the system of law with which the contract had its closest and most real connection was a fine one and was frequently blurred.
24. In Amin Rasheed Corporation v Kuwait Insurance Co [1984] AC 50, page 61, Lord Diplock quoted Lord Atkins's words in International Trustee, cited above, and continued:

"There is no conflict between this and Lord Simonds' pithy definition of the "proper law" of the contract to be found in Bonython v Commonwealth of Australia [1951] AC 201, 219 which is so often quoted, i.e., "the system of law by reference to which the contract was made or that with which the transaction has its closest and most real connection". … If it is apparent from the terms of the contract itself that the parties intended it to be interpreted by reference to a particular system of law, their intention will prevail and the latter question as to the system of law with which, in the view of the court, the transaction to which the contract relates would, but for such intention of the parties have had the closest and most real connection, does not arise. "

25. On that analysis the first question was whether the contract contained an express choice of law. If not, the second question was whether a choice could be inferred from the language and circumstances of the contract. If not, the final question was which system of law was most closely connected with the contract.
26. However, as Dicey, Morris and Collins say, the same result could often be reached by the second or the third test, which were frequently elided. This was because the tests of "inferred intention" and "close connection" merged into each other. In reality, the test of inferred intention was often an objective test designed not so much to elicit an intention as to impute an intention which had not been formed.
27. Amin Rasheed provides an illustration. The case concerned an insurance contract. Lord Diplock held that, although the policy contained no express provision choosing English law as the proper law of the contract, its provisions taken as a whole "by necessary implication point ineluctably to the conclusion that the intention of the parties was that their mutual rights and obligations under it should be determined in accordance with the English law of marine insurance". On the other hand, Lord Wilberforce held that, weighing all the relevant factors, English law was the system with which the policy had the closest and most real connection.
28. Under the Convention, article 4 applies "the closest connection" test as the default rule where there has been no choice of law by the parties. Article 3 gives primacy to the parties' autonomy where a clear choice of law has been demonstrated by the terms or circumstances of the contract. So the distinction which had become blurred at common law becomes critical under the Convention. Dicey, Morris and Collins observe at paragraph 32 – 060:

"The [Giuliano-Lagarde] Report draws the same distinction as the common law did between the test of inferred intention, and of closest connection. It has already been seen that in England the distinction was blurred. The tests of inferred intention and close connection merged into each other, and before the objective close connection test became fully established the test of inferred intention was in truth an objective test designed not to elicit actual intention but to impute an intention which had not been formed. There will be the same difficulty in distinguishing between inferred intention to choose the applicable law under [article 3] and the test of closest connection under [article 4]."

29. In view of the potential difficulty in drawing a line between inferring an unexpressed intention and imputing an intention, the requirement of article 3 that the choice must be demonstrated with reasonable certainty is significant. The party asserting that there has been a choice of law has the burden of establishing it with reasonable certainty.
30. It would be a mistake to attempt to apply article 3 through the prism of the preceding common law. Article 18 of the Convention requires the court to have regard to its international character and to the desirability of achieving uniformity in its interpretation and application. This point has been emphasised more than once: see, in particular, Samcrete Egypt v Land Rover Exports Limited [2001] EWCA Civ 2019, [2002] CLC 53 at [24] to [27], and Iran Continental Shelf Oil Co v IRI International Corp [2002] EWCA Civ 1024, [2004] 2 CLC 696, at [13].
31. The test whether an implied choice of law has been established is objective. Evidence of the unspoken thoughts of either party would be inadmissible.
32. Logically there may be a certain artificiality in attributing to the parties a tacit choice in circumstances which do not suggest that they gave actual thought to the matter, as Redfern and Hunter comment in their book on International Arbitration, 5^th ed (2009) at paragraph 3.206. However, one can see the justice of inferring a choice of law in circumstances where it would not reasonably have occurred to the parties to suppose that a different law might apply. It would lack practical sense to require that they should have contemplated that which would not reasonably have occurred to them.
33. The objective nature of the test means that the party asserting an implied choice of law has to satisfy the court to the required standard that, on an objective view, the parties must have taken it without saying that their contract should be governed by that law – or, in Lord Diplock's formulation, that the contract taken as a whole points ineluctably to the conclusion that the parties intended it to be governed by that law. He does not have to prove that there was in fact a subjective conscious choice (for, as I have said, evidence of subjective intention would be inadmissible), but he does have to satisfy the court that the only reasonable conclusion to be drawn from the circumstances is that the parties should be taken to have intended the putative law to apply.
34. Was the judge right to conclude that the claimant had not established an implied choice of English law as a matter of reasonable certainty? In my judgment he was. The evidence about the making of the agency agreement was vague. At the time when it was made the claimant was living in Spain and Spain was to be the centre of his activities. On the sparse material before the judge, I do not see that the claimant established with reasonable certainty that it went without saying that the contract was intended to be governed by English law. The judge was right in holding that it was not enough to establish that if a choice of law had been made, it would in all probability have been English law. The judge accepted that such a choice would have been in accordance with the defendant's general wish for its contracts to be governed by English law, but the claimant had to show that the nature and circumstances of the agency contract demonstrated an implied choice of English law, and the judge rightly recognised that there was a distinction between those matters.
35. The claimant's strongest point was the judge's finding that his previous contract of employment was probably governed by English law. If there had been an express agreement to that effect, there would have been force in the argument that the same law should be presumed to have been intended to apply to the agency contract in the absence of anything being said to the contrary. However, the judge found it unlikely that the parties had expressly agreed that the employment contract should be governed by English law. The contract of agency created a different legal relationship in different factual circumstances. The judge was in my view correct in regarding the fact that the employment contract had been governed by English law, being the law most closely connected with the contract, as insufficient to establish with reasonable certainty that there was an implied agreement that the same law should apply to a contract of a different nature made in new circumstances.
36. For those reasons I would dismiss the appeal.

Lord Justice Leveson:

37. I agree.

Lord Justice Lloyd:

38. I also agree.