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Cite as: 2003 SCLR 20, [2002] ScotCS 345

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Caledonia Subsea Ltd v. Micoperi SRL [2002] ScotCS 345 (12 July 2002)

FIRST DIVISION, INNER HOUSE, COURT OF SESSION

Lord President

Lord Cameron of Lochbroom

Lord Marnoch

A2804/01

OPINION OF THE LORD PRESIDENT

RECLAIMING MOTION

in the cause

CALEDONIA SUBSEA LIMITED

Pursuers and Respondents;

against

MICOPERI SRL

Defenders and Reclaimers:

_______

Act: Swanson, Solicitor Advocate; Maclay Murray & Spens (Pursuers and Respondents)

Alt: Howie, Q.C.; Henderson Boyd Jackson (Defenders and Reclaimers)

12 July 2002

[1] In this commercial action the defenders have reclaimed against the interlocutor of the Lord Ordinary dated 23 March 2001 in which he repelled their plea-in-law that they were not subject to the jurisdiction of the Court of Session. It is not in dispute that the success of that plea depended on, inter alia, the proposition that the law applicable to the contract to which this action relates was the law of the Arab Republic of Egypt. The decision of the Lord Ordinary followed upon a preliminary proof before answer on the issue between the parties, which was whether the applicable law was the law of Egypt or, as the pursuers contended, the law of Scotland.

[2] At the outset it convenient to set out a summary of what the Lord Ordinary found to be established on the evidence before him, as set out in the Opinion which he delivered on 9 March 2001. Mr Howie, who appeared for the defenders, made it clear from the outset there was no dispute about any of his findings.

[3] The pursuers are a company incorporated under the Companies Acts, with their registered office and sole place of business in Aberdeen. They entered into a contract for the provision of diving services in 1999. There is a question as to whether the other contracting party was the defenders, who have a principal place of business in Ravenna, or Micoperi Limited Liability Company, established in Texas, United States of America. However, for present purposes it is sufficient to refer to the other contracting party as the defenders.

[4] The diving services were required to assist in regard to the "post-trenching" of a pipeline which had been already laid on the Mediterranean sea bed in connection with the Ha'py Field Development Project. Two pipelines ran from a rig at the Ha'py I gas well, which was some 40 kms north of a headland to the west of Port Said, to a terminal between the headland and Port Said. The operation in which the defenders were engaged included trenching in the vicinity of the pipeline, the object being that it should sink into the trench which would then be back-filled. The trenching was to be done by specialist machinery lowered from a vessel. Diving services were required in order to effect fine adjustments under water to the positioning of that machinery. Divers might also be required for preparatory work to manipulate the smaller diameter pipe which was liable to become detached to some extent from the larger one. The work on which the divers were to be engaged was solely on the deeper stretches of the pipeline, that is from about 80 metres in depth in the vicinity of the rig to about 20 metres in depth closer to the shore. That work was all beyond 6 - 7 kms from the shore. The operations (including diving services) carried out nearer the shore were effected by companies other than the pursuers. The Lord Ordinary states that it may be taken that the operations in the project, including those on which the pursuers were engaged, took place in Egyptian waters and in respect of apparatus forming part of the Egyptian permanent or semi-permanent infrastructure.

[5] The services provided by the pursuers were based on daily rates for the members of a team of divers and related personnel. The rates which were ultimately agreed reflected lower rates than those generally obtaining in the North Sea. The team consisted of a superintendent, two supervisors, two life-support supervisors, two life-support technicians and ten divers, four of whom were saturation divers. The pursuers arranged with a Swiss company for the services of personnel to make up the team and any replacements of its members. The qualifications of the potential members of the team were vetted by the pursuers' management in Aberdeen. Although the members of the team were of different nationalities they were all English speakers, this being an important qualification for safety communications and other reasons. The pursuers in Aberdeen also provided through their project management a documentation package on diving rules, regulations and procedures. Some of it was of general application, and some was customised for the particular project. The pursuers' management took the view that the safety standards which should be applied on the contract should be consistent with those applicable in the North Sea.

[6] The defenders were engaged as subcontractors under a sub-contract with The Petroleum Projects and Technical Consultation Co. ("Petrojet"), an Egyptian company. Petrojet acted under a main contract in which the employer was Gulf of Suez Petroleum Company ("GUPCO"), another Egyptian company, which acted on behalf of various interests under a concession apparently granted by the Egyptian Government. In the main contract there was an express choice of the law of Egypt as the law governing it. This provision was also incorporated into the sub-contract between the defenders and Petrojet. The Lord Ordinary observes that such a contractual provision was unsurprising in the context of the work to be performed in such a geographical location. It was normal, at least where the engaging party was established in that location. The main contract also contained an arbitration clause for settlement of all disputes under the Rules of the Regional Center for International Commercial Arbitration in Cairo. Both contracts were written in the English language, the generally adopted language in the international oil and gas industry. All communications, written and oral, between the pursuers and the defenders were also in that language.

[7] For the purposes of their work the defenders chartered a vessel owned by a Norwegian company and operated by a Norwegian crew, but sailing under a Bahamian flag. The defenders also arranged for the provision on that vessel of saturation diving equipment, including a diving bell, living chamber for the divers in saturation and various control functions. It was arranged between the pursuers and the defenders that a forward party comprising four members of the pursuers' team would join the vessel at Dundee with a view to familiarising themselves with the diving equipment as the vessel sailed to the Mediterranean. It was intended that the remainder of the team would join the vessel at Siracusa in Sicily before it proceeded thence to the Ha'py Field. The vessel was constructed with a "moon pool", through which a diving bell could be lowered into the sea. However, after the vessel arrived at Dundee it became apparent that some physical modifications would be required before the diving equipment could be used safely on that vessel. Moreover, some pipework connections for the diving equipment still required to be made. The defenders arranged for the necessary parts to be delivered to Siracusa for fitting there. In the event there were delays in completing the arrangements to allow operations to commence at the Field. The vessel, having sailed from Dundee early in August 1999, arrived at Siracusa about the middle of that month. It remained in that port until about the end of August, during which time some of the outstanding fitting work was carried out, part of it by members of the pursuers' team who had the appropriate skills, the balance of that team having joined the vessel over the period while it was at Siracusa. The vessel then sailed to Malta to fuel, returned to Siracusa to pick up further equipment and then proceeded to Port Said, from where it ultimately sailed to the Field, arriving there in about the third week of September, when work started.

[8] On board the vessel during the diving operations, in addition to the Norwegian crew and the pursuers' team, were one or two representatives of the defenders. During the post-trenching operations a technical crew of Italian personnel was also on board, some of these being employees of the defenders. A representative of GUPCO and/of Petrojet came on board almost daily. The pursuers had no place of business or representative on the Egyptian mainland. The defenders had two representatives, one responsible for logistic supervision and stationed at Port Said, and the other responsible for project management and stationed at Cairo. The defenders also engaged the services of an Egyptian customs and freight forwarding agent of Port Said. Supplies for the vessel while on station at the Field passed through Port Said, where the vessel could seek refuge in the event of bad weather. Emergency diving gas supplies were stored there for part of the period of the work. Arrangements for the transfer between Cairo Airport and the vessel of replacements for members of the pursuers' team were handled through the defenders' representatives or agent. Such changes in personnel typically occurred every 4-6 weeks. The organisation of replacements was carried out by the pursuers' project manager in Aberdeen. This included travel arrangements as far as Cairo Airport. Travel arrangements for the original team members who joined the vessel at Dundee or at Siracusa were also organised in Aberdeen. On one occasion a diver in the pursuers' team received emergency medical treatment in Egypt. In early December the vessel was briefly in dry dock in Israel for immediate repairs.

[9] During the subsistence of the contractual operations the superintendent (the senior member of the pursuers' team) reported daily from the vessel to the pursuers' management in Aberdeen, usually by e-mail and sometimes by satellite phone. Such reports included matters relating to safety issues. Although decisions on such matters were generally taken on the spot, on one occasion a safety issue required to be referred for decision to the pursuers' management. This occurred when a "through water" acoustic communication system between the vessel and the diving bell broke down. Other interested parties wanted diving operations to continue (to avoid adverse financial consequences), but the pursuers' management in Aberdeen insisted that these operations be discontinued until that system was functioning again. During the currency of the operations communication between the pursuers and the defenders (other than between personnel on the vessel) was by fax between Aberdeen and Ravenna.

[10] The service for which the pursuers were engaged was the provision of a diving team, but in the event certain additional services were also provided. An arrangement was made whereby diving gas supplies (for which the defenders were responsible) were purchased by it from an Aberdeen company through the pursuers. This was essentially an accounting exercise entered into to avoid a commercial problem for the defenders. The pursuers obtained certain other supplies for the defenders in Aberdeen. However, these elements were under separate contractual arrangements from those relating to diving services and were, in any event, of relatively minor importance in relation to the parties' relationship as a whole.

[11] The pursuers' team carried out diving operations under the contract from about mid September 1999 until about the end of that year. By the latter time relations between the parties had broken down. Concerns had arisen by November about due payment to the pursuers. A representative of the pursuers visited Egypt in November and again in December of that year, when he met the defenders' project manager and, separately, personnel from GUPCO. The diving operations were ultimately completed by the pursuers early in 2000 under a separate arrangement not involving the defenders. In so far as payments were made to the pursuers under the present contract (as they were on two occasions) these were made to the pursuers' bank account in Aberdeen which was its only bank account.

[12] The Contracts (Applicable Law) Act 1990 provides by section 2(1) that certain Conventions, including the Rome Convention, which was signed by the United Kingdom on 7 December 1981, shall, with certain exceptions, have the force of law in the United Kingdom. The English language text of the Convention is set out in Schedule 1 to the Act. Section 3(1) of the 1990 Act states:

"Any question as to the meaning or effect of any provision of the Conventions shall, if not referred to the European Court in accordance with the Brussels protocol (which was signed by the United Kingdom on 19 December 1988), be determined in accordance with the principles laid down by, and any relevant decision of, the European Court".

Subsection (2) states:

"Judicial notice shall be taken on any decision of, or expression of opinion by, the European Court on any such question".

However, arrangements for the referring of questions to the European Court have not yet come into force. As a consequence there are as yet no decisions or expressions of opinion by the court.

[13] Subsection (3) of section 3 goes on to state that, without prejudice to any practice of the courts as to the matters which may be considered apart from that subsection, the report on the Rome Convention by Professor Mario Giuliano and Professor Paul Lagarde ("the Report") which is reproduced in the Official Journal of the Communities of 31 October 1980 "may be considered in ascertaining the meaning or effect of any provision of that Convention".

[14] Article 1.1 of the Rome Convention provides that its rules "shall apply to contractual obligations in any situation involving a choice between the laws of different countries". Accordingly, although the Convention is an instrument of the European Union, it does not matter whether one of the laws in question is or is not the law of a country which is a member of the Union.

[15] Article 3 of the Rome Convention confers on parties freedom of choice as to the law which is to govern their contract. It is not in dispute that no such choice was made in the present case.

[16] Article 4 of the Rome Convention provides:

"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. Nevertheless, a severable part of the contract which has a closer connection with another country may by way of exception by governed by the law of that other country.

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.

3. Notwithstanding the provisions of paragraph 2 of this Article, to the extent that the subject matter of the contract is a right in immovable property or a right to use immovable property it shall be presumed that the contract is most closely connected with the country where the immovable property is situated.

...

5. Paragraph 2 shall not apply if the characteristic performance cannot be determined, and the presumptions in paragraphs 2, 3 and 4 shall be disregarded if it appears from the circumstances as a whole that the contract is more closely connected with another country".

Paragraph 4 sets out a presumption dealing with a contract for the carriage of goods, the terms of which do not appear to be of any assistance in regard to the present issue.

[17] At this point I would make a number of general observations about the paragraphs I have quoted, against the background of the present case.

[18] It is plain that the Convention was intended to bring about a substantial change in the way in which courts in a number of countries arrived at a determination as to the law which governed a contract. In Samcrete Egypt Engineers & Contractors S.A.E. v. Land Rover Exports Limited [2001] EWCA Civ 2109, Potter L.J. at para. 39 pointed out that, under the rules of the law applicable prior to the 1990 Act, the task of the court in deciding the "proper law" of the contract was that of inferring a choice by the parties. He stated:

"That task compendiously involved the considerations now required to be looked at separately under Article 3 and 4 of the Convention, the former of which looks to the common (subjective) intention of the parties as to the system of law governing the contract, whereas the latter in the absence of an express or tacit choice of law, looks to localise the contract on the basis of objective considerations connecting the contract to a particular country..."

[19] Para. 1 of Article 4 states the general proposition that "the contract shall be governed by the law of the country with which it is most closely connected...". The Report observed at page 19 that

"the flexibility of the general principle established by paragraph 1 is substantially modified by the presumptions in paragraphs 2, 3 and 4, and by a strictly limited exception in favour of severability at the end of paragraph 1".

[20] As regards para. 2, the Report states (at page 20) that it

"gives specific form and objectivity to the, in itself, too vague concept of 'closest connection'. At the same time it greatly simplifies the problem of determining the law applicable to the contract in default of choice by the parties. The place where the act was done becomes unimportant. There is no longer any need to determine where the contract was concluded, with all the difficulties and the problems of classification that arise in practice. Seeking the place of performance or the different places of performance and classifying them becomes superfluous".

[21] The introduction of a presumption and of concepts such as "the performance which is characteristic of the contract" are striking features of Article 4. There may well be cases in which it is difficult, if not impossible, to determine what is the characteristic performance, one example being the contract of barter. The first part of para. 5 is intended to deal with such a problem. However, in the present case it is not in dispute that the characteristic performance was the provision by the pursuers of diving services.

[22] Para. 2 directs the reader to ascertain the appropriate country, not by reference to where the characteristic performance takes place, but by reference to, put shortly, the characteristic performer's place of business "at the time of the conclusion of the contract". It appears to have been envisaged that there would not be difficulty in identifying that place of business in terms of the paragraph since no provision is made for a situation in which that could not be determined. In the present case there is no doubt that the relevant place of business was in Scotland.

[23] In this connection it may be noted that the Report states, at page 19:

"The submission of the contract, in the absence of a choice by the parties, to the law appropriate to the characteristic performance defines the connecting the factor of the contract from the inside, and not from the outside by elements unrelated to the essence of the obligation such as the nationality of the contracting parties or the place where the contract was concluded. In addition it is possible to relate the concept of characteristic performance to an even more general idea, namely the idea that his performance refers to the function which the legal relationship involved fulfils in the economic and social life of any country. The concept of characteristic performance essentially links the contract to the social and economic environment of which it will form a part".

[24] Para. 5 can be seen to have two distinct purposes. I have already referred to the first. As to the second, as it applies in the present type of case, it states that the presumption in para. 2 "shall be disregarded if it appears from the circumstances as a whole that the contract is more closely connected with another country". As is stated in the Report, para. 1, and hence para. 5, enables account to be taken of factors supervening after the conclusion of the contract. While this point may be relevant to the interpretation of the paragraphs, it does not feature in the present case. There was no suggestion that events after the conclusion of the contract with which the present case is concerned affect the resolution of the issue before us.

[25] It may be noted that para. 5 uses the word "disregarded". In the French text, which is of equal standing, the expression used is "écartées". In the submissions before this court it was not suggested by either party that anything turned on the use of the word "disregarded" rather than "rebutted".

[26] As has been pointed out in a number of recent decisions in England, there are two schools of thought as to the interrelationship of paras. 2 and 5. As Morison J. noted in Definitely Maybe (Touring) Limited v. Marek Lieberberg Konzertagentur GmbH. [2001] 4 All E.R. 283 at para. 9:

"The first is to say that the presumption in par. 2, which is expressly made subject to par. 5, is weak and will more readily be displaced when the place of performance differs from the place of business of the performer. The second, adopts a narrower view of the 'exception' to the presumption in par. 5 and gives firm dominance to the presumption".

[27] The first reference in a reported decision to the idea that the presumption in para. 2 is weak appears in the opinion of Hobhouse L.J. in Credit Lyonnais v. New Hampshire Insurance Co. [1997] 2 Lloyd's Reports 1. While that case was directly concerned with the terms of the Insurance Companies Act 1982, as amended to give effect to the second Council Directive in regard to contracts of insurance, reference was made to the similar language of Article 4 of the Rome Convention. At page 5, after referring the terms of para. 5, he said:

"The presumption is therefore displaced if the Court concludes that it is not appropriate in the circumstances of any given case. This, formally, makes the presumption very weak but it does not detract from the guidance that par. 2 gives as to what is meant by 'the country with which it is most closely connected' and does not detract from the need to look for a geographical connection. This reading of art. 4 is also supported by the commentators".

[28] For the defenders Mr. Howie adopted this approach. He pointed out that para 2. was expressly subject to para. 5. It was accordingly subordinate to it. Para. 2 was intended to provide a clear and definite answer, but it did not obviate the need to consider, where an alternative country was contended for, which was the country with which the contract was more closely connected. It was likely that in many cases it would turn out to be the case that the country with which the contract was more closely connected was the same country as that identified by means of para. 2, but where the closer connection was with the alternative country, it was by the law of the latter that the contract was governed. It followed that the sole practical significance of para. 2 was to provide a "tie-breaker" in the event that there was a "dead heat" between two countries in regard to the issue as to which of them was the country with which the contract was more closely connected. This held true whether the exercise under para. 2 was performed as the first, or as the last, step in the process.

[29] At this point it is convenient to refer to the Lord Ordinary's opinion. He held that the presumption under para. 2 was designed prima facie to localise the contract in the country where the party which was to effect the characteristic performance was established. He rejected the submission that the subordination of the place of characteristic performance to the place of the principal performer's business was because performance would ordinarily take place in the country of such an establishment. At para. [26] he observed:

"The true reason, it seems, is that the social and economic source from which the performance comes (and to which in ordinary course the economic benefit of payment may be expected to return) is in the country of establishment. If the place of performance had been the dominant factor, it would have been easy so to provide".

He went on to state that he was not able to accept that "when para. 5 is seriously invoked, the presumption in para. 2 only has effect when other factors are evenly balanced". He took the view that the presumption was "of material weight" (para. [27]). Later he referred to "the pre-eminent significance of the place of business of the performer" (para. [31]). In para. [32] he quoted a footnote to an article by Professor Lagarde in vol. 22 of the Virginian Journal of International Law (1981) at page 91 as follows:

"The judge's discretion with respect to disregarding the presumption [in para. 2] is comparable to the judge's power in exceptional cases to sever a part of the contract...[under the second sentence of para. 1]".

[30] Mr. Howie criticised the Lord Ordinary for overstating the effect of para. 2. Counsel emphasised that the place of performance was highly important. The centre of gravity of a contract might well be elsewhere than in the country where the place of business of the principal performer was situated. There was no logical basis for according pre-eminence to the performer's central administration or principal place of business. The statement made by Professor Lagarde in the footnote was erroneous. Mr. Howie placed reliance on the decision of Mance J. in The Bank of Baroda v. The Vysya Bank Limited [1994] 2 Lloyd's Reports 87. This case was concerned with a number of arrangements relating to a letter of credit. Mance J. said at page 93:

"In the present case the application of art. 4(2) would lead to an irregular and subjective position where the governing law of a letter of credit would vary according to whether one was looking at the position of the confirming or the issuing bank. It is of great importance to both beneficiaries and banks concerned in the issue and operation of international letters of credit that there should be clarity and simplicity in such matters. Article 4(5) provides the answer. The Rome Convention was not intended to confuse legal relationships or to disrupt normal expectations in the way which is implicit in Vysya's submissions".

[31] The school of thought which was expounded by Mr. Howie may be contrasted with the approach favoured by those who follow the second school of thought. The most striking example of the latter is provided by the decision of the Supreme Court of the Netherlands (the Hoge Raad) in Société Nouvelle des Papeteries de L'Aa S.A. v. B.V. Machine - fabriek B.O.A., 25 September 1992, unreported. That case was concerned with a contract for the purchase by the French plaintiffs of a paper press from the Dutch defendants. The negotiations for the sale took place in France. The offer and the contract were in the French language. The buyers ordered the press from the seller's agent in France. The sellers confirmed the order in French, exchanged further technical details with the buyers, delivered the machine in France and assembled it there. The price was paid in French francs. The presumption under para. 2 clearly pointed to Dutch law as the applicable law. However, this was the only connection with relevance to the place of business of the sellers. According to an article by T.H.D. Struycken in Lloyd's Maritime and Commercial Law Quarterly for 1996 at page 20, the Supreme Court stated a general rule of thumb, as follows:

"The Court of Appeal apparently and rightly proceeded from the view that it follows 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 of section 2 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".

As is pointed out by the writer of the article, the Supreme Court referred to para. 2 as containing "the main rule"; regarded para. 5 as an exception and not merely another expression of para. 1; stated that special circumstances were needed in order to justify its application; stated that the desire to create uniform law required a restrictive application to be given to para. 5 and that the characteristic performance was the predominant connecting factor; and identified a priority of rule, namely that the place of business of the performer under para. 2 prevailed unless it had "no real significance as a connecting factor".

[32] Mrs. Swanson, who appeared as solicitor advocate for the pursuers, expressed a clear reservation about the approach which the Supreme Court had taken in that case. It implied, she said, that it was unnecessary for a court to go beyond the exercise under para. 2. However, the court would always have to go through the comparative exercise which was required by para. 5 where another country was contended for.

[33] Mrs. Swanson provided the court with an unofficial translation of the transcript of the judgment delivered by the Supreme Court, along with the opinion delivered by the Advocat General for its assistance. According to that translation, he expressed the view that the exception in para. 5 came into play if the "assumption" in para. 2 did not achieve the intended goal. The purpose of the exception was the better localisation of the contact. "Consequently a factual geographical contract preponderance with a country other than the country where the characteristic performer has its place of domicile or business provides the grounds of applying the exception rule" (para. 18). He went on to state that para. 5 "should only be applied in clear cases of contact preponderance" (para. 19). In para. 20 he said in regard to cases in which it was applied:

"What it comes down to is that the characteristic performer's place of business, when seen in the context of all the circumstances, has insufficient 'localising power' and, consequently, cannot confirm the assumption in para. 2. It will happen in particular if the characteristic performer's place of domicile or business is 'accidental' because the characteristic performer was not operating from its place of business when the contract was concluded...or because with long-term contracts the characteristic performer's place of work is outside the country where it is based".

[34] Mrs. Swanson's submission was that the correct approach was that (i) the presumption in para. 2 was of material weight; (ii) the factors relied on for discharging it must be substantial; and (iii) certainty was to be preferred over flexibility. She elaborated on this by submitting that para. 2 should be regarded as providing prima facie the country with which the contract was most closely connected. This presumption was given prominence in order to provide certainty and uniformity. The fact that the presumption had to be rebutted did not mean that it was weak. It was strong because it had to be displaced. In all the cases in which the presumption had been rebutted the court had considered the weight which attached to it.

[35] It is clear, in my view, that one of the aims of Article 4 is to provide, by means of use of para. 2, an answer which is certain, provided, of course, that the characteristic performance can be determined. Para. 2 has in itself the advantage of avoiding the need for the court to weigh up considerations which may be conflicting, different in kind and of uncertain strength. At the same time Article 4 preserves the flexibility of approach under para. 5, where it appears from the circumstances as a whole that the contract is more closely connected with a country other than the one which is identified by means of para. 2.

[36] As has been observed in a number of decisions and by commentators, each of the two schools of thought in their extreme forms are open to significant objection.

[37] If the only real significance of para. 2 is that of providing a "tie-breaker", it is difficult to understand why the paragraph was given the prominence which it occupies in the arrangement of Article 4. As has been pointed out, if the contract has a closer connection with the country in which the principal performer has its place of business, the presumption adds nothing. If, on the other hand, the contract has a closer connection with another country, the presumption is in any event displaced. This treatment of the presumption as a tie-breaker is somewhat similar to the way in which the law of the flag was treated as a presumption in the previous law (the Assunzione 1954 P. 150, per Hodson L.J. at pages 193-194).

[38] On the other hand, to treat the presumption in para. 2 as so powerful that it must be applied unless there is no connecting factor with the country which has been identified, appears to run contrary to the language of Article 4 which makes para. 2 "Subject to" (in the French text "Sous réserve du") para. 5 and to deprive the latter of much of its significance.

[39] It appears that thus far the English courts have not reached a definitive view as to the interrelationship of paras. 2 and 5 but have preferred to deal with each case on its circumstances. As we have noted earlier, there is as yet no guidance from the European Court of Justice. Meanwhile Article 18 of the Convention states:

"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".

[40] In Definitely Maybe Morison J. stated at para. 7: "Paragraph 2 must have been inserted to provide a 'normal' rule which is simple to apply". At para. 15 he stated that he accepted that it was for the defendant to show that the presumption should be disregarded by establishing factors which pointed to another country. In Samcrete Egypt Engineers & Contractors Potter L.J. expressed the view at para. 39 that in the localisation of the contract with a particular country precedence was given to the residence of the party performing the characteristic obligation, unless the circumstances as a whole demonstrated a closer connection to another country. He went on to state at para. 41:

"While a straight reading of the words of Article 4 renders the presumption 'formally very weak' (per Hobhouse L.J. in the Credit Lyonnais case at p. 5), unless Article 4(2) is regarded as a rule of thumb which requires a preponderance of contrary connecting factors to be established before that presumption can be disregarded, the intention of the Convention is likely to be subverted".

Dicey & Morris The Conflict of Laws 13th edition states at para. 32-123:

"It is suggested that it would be inconsistent with the scheme and purpose of Article 4 for the presumptions to have no role except where other factors are evenly balanced, and that for the presumptions to be displaced it must be shown (which probably means clearly) that the contract has a closer connection with some other country".

[41] These statements, with which I agree, appear to go a significant distance towards resolving the problems created by extremes of interpretation of the relationship of para. 2 and para. 5 of Article 4. In my view Article 4 intended to accord a special significance to the place of business of the principal performer as the indicator of the country with which the contract had the closest connection. I am not disposed to agree with the view that this was because in most cases the contract was likely to be performed in that country; or with the view suggested by Dicey & Morris at para. 32-124 that the presumption may most easily be rebutted in those cases where the place of performance differs from the place of business of the party whose performance is characteristic of the contract, a statement approved by Mance J. at page 93 in The Bank of Baroda v. The Vysya Bank Ltd. If the framers of Article 4 had intended to attach such significance to the place of performance they could have readily indicated that, but they did not do so. Indeed when the place of performance is such an obvious candidate as the test, the fact that it is not mentioned suggests a movement away from it. Furthermore, it is important to bear in mind the significance of the social and economic factors which are mentioned in the Report. No doubt the place where the contract is performed is of relevance, either directly or indirectly, but it may be only one of a number of factors to be assessed in the exercise under para. 5. In the result I consider that the presumption under para. 2 should not be "disregarded" unless the outcome of the comparative exercise referred to in para. 5 - which, unlike para. 2, may involve difficulty and uncertainty - demonstrates a clear preponderance of factors in favour of another country. For these reasons I reject the argument which was presented by Mr. Howie and prefer an approach which is substantially the same as that adopted by the Lord Ordinary.

[42] I now turn to consider para. 5 in the circumstances of the present case.

[43] Mr. Howie presented his submissions under four heads. First, he directed attention to the fact that the pursuers' contract was to be performed, and was performed, in Egypt. The day-to-day operations were under their superintendent who was on the spot. It was only on one occasion that reference had required to be made to the pursuers' management in Aberdeen for their decision. While the pursuers had arranged the transporting of personnel from Aberdeen, transport in Egypt had been arranged through an Egyptian Customs and Freight forwarding agent. The supplies for the vessel came from Egypt. It was in that country that both parties had to perform. Thus a number of socio-economic considerations pointed to the importance of the place of performance. Secondly, the preparations which had been made by the pursuers were directed to the performance of work in Egypt. The objective was an important factor. Thirdly, the contract had been priced on the basis of the market in which the work was to be performed. Fourthly, Mr. Howie attached importance to the contractual matrix, in respect of the relationship between the pursuers' contract to the subcontract between the defenders and Petrojet, and in turn the main contract. The application of Egyptian law to the latter contracts supported the connection between the pursuers' contract and the law of Egypt. He drew attention to a passage in the article by Professor Lagarde to which we have already referred in which he gave as an example of the disregarding of the presumption the following: "a subcontract, for example, might be governed by the same law governing the principal contract between the contractor and the employer, rather than by the law of the country in which the subcontractor has his place of business" (pages 97-98).

[44] I am not persuaded that the Lord Ordinary reached a wrong conclusion in deciding that the presumption in favour of the law of Scotland did not fall to be disregarded. While the country in which the contract was performed was Egypt there were a number of respects in which there were distinct connections with Scotland both prior to the conclusion of the contract and during its currency. The present case was not one in which a product was dispatched from the country in which the producer had its place of business. The pursuers' project management in Aberdeen were not only involved over a period leading up to the commencement of work in Egypt but also retained ultimate control in regard to what happened on site. The site superintendent regularly reported to the pursuers' management in Aberdeen. While the pursuers' contract did have certain economic consequences in Egypt in the form of the employment of Egyptians, the pursuers were concerned with only one aspect of the work in connection with which the need for such employment was generated. It is, of course, true that there was a relationship between the pursuers' contract and the defenders' subcontract into which the law of Egypt was imported. However, this is only one of a number of circumstances which fall to be considered. The payment and receipt of money in connection with the pursuers' contract plainly had economic consequences in Scotland. Taking all these considerations together I am satisfied that the Lord Ordinary came to the correct conclusion in deciding that the presumption in favour of the law of Scotland had not been rebutted.

[45] In these circumstances I move your Lordships to refuse the reclaiming motion.

FIRST DIVISION, INNER HOUSE, COURT OF SESSION

Lord President

Lord Cameron of Lochbroom

Lord Marnoch

A2804/01

OPINION OF LORD CAMERON OF LOCHBROOM

RECLAIMING MOTION

in the cause

CALEDONIA SUBSEA LIMITED

Pursuers and Respondents;

against

MICOPERI SRL

Defenders and Reclaimers:

_______

Act: Swanson, Solicitor Advocate; Maclay Murray & Spens (Pursuers and Respondents)

Alt: Howie, Q.C.; Henderson Boyd Jackson (Defenders and Reclaimers)

12 July 2002

[1] Your Lordship in the chair has set out the fact together with the relevant provisions of the Contracts (Applicable Law) Act 1990 ("the 1990 Act) and those of the Rome Convention. I agree with your Lordship that this reclaiming motion be refused.

[2] However out of deference to the submissions made before us in an area of law in which a signal change of approach has been brought about by the provisions of section 2(1) of the 1990 Act, I have endeavoured in what follows to set out the reasons why I consider that the Lord Ordinary did not err in law in his approach to the facts and that his determination was correct both in law and in fact.

[3] The defenders and reclaimers do not dispute that the issue is one which falls to be determined within the context of Article 4 of the Rome Convention. That is to say, they do not seek to suggest that the contract is governed by a law chosen by the parties within the context of Article 3, either as a choice which was express or, in particular, one which could be "demonstrated with reasonable certainty by the terms of the contract or the circumstances of the case"(my emphasis). It follows that the circumstances of the present case cannot demonstrate with reasonable certainty any intention of the parties that a particular law has been chosen by them as the applicable law of the contract. At the same time I also draw attention to the provisions of Article 10, which applies to the law applicable to a contract by virtue of both Articles 3 and 4, and in particular to paragraph 2 which states that in relation to the manner of performance and the steps to be taken in the event of defective performance regard shall be had "to the law of the country in which performance takes place". Thus this Article seems to me to underline the premise of Article 4 that looking for the law of the country in which performance takes place is not the primary aim in any determination of what is to be the applicable law.

[4] The position adopted by counsel for the reclaimers appeared to be based upon the propositions that the presumption in paragraph 2 of Article 4 was subordinated to the combination of the rules in paragraph 1 and 5, that the presumption was only a weak one and that it came into play only where the circumstances of the case were in the judgment of the court equally balanced as between one law and another. That is to say, the presumption was to be used in effect as a tie-breaker. In my opinion, these propositions do not fit with the provisions of Article 4 itself. There is no doubt that the rules in paragraphs 1 and 5 will be the only relevant rules when the court is unable to determine "the characteristic performance" of the contract which it is considering. But that is not the present case. The Lord Ordinary has found in paragraph 19 of his Opinion that the performance which was characteristic of the contract "was the provision of diving services". He has also found that the pursuers and respondents were the party who were to effect that performance. In the face of those two findings against the background that the parties must be held not to have chosen any particular law as applicable, the presumption must become immediately relevant to the determination of the issue of what is the applicable law. The importance of the presumption is, in my opinion, reflected in the passages from the report on the Rome Convention by Professor Mario Giuliano and Professor Paul Lagarde ("the Report") set out in para. [23] of the Lord Ordinary's Opinion, and in particular in their observation that Article 4(2) gives specific form and objectivity to the, in itself, too vague concept of "closest connection". I would only add to the passages cited by the Lord Ordinary that at pp.20-21 of the Report where the authors say:

"Identifying the characteristic performance of a contract obviously presents no difficulty in the case of unilateral contracts. By contrast, in bilateral (reciprocal) contracts whereby the parties undertake mutual reciprocal performance, the counter-performance by one of the parties in a modern economy usually takes the form of money. This is not, of course, the characteristic performance of the contract. It is the performance for which the payment is due........which usually constitutes the centre of gravity and the socio-economic function of the contractual transaction.

As for the geographical location of the characteristic performance, it is quite natural that the country in which the party liable for the performance is habitually resident or has his central administration (of a body corporate or unincorporate) or his place of business, according to whether the performance in question is in the course of his trade or profession or not, should prevail over the country of performance where, of course, the latter is a country other than that of habitual residence, central administration or the place of business. In the solution adopted by the Group the position is that only the place of habitual residence or of the central administration or of the place of business of the party providing the essential performance is decisive in locating the contract."

[5] This last passage seems to me to emphasise the points which the Lord Ordinary makes in paras. 26 and 27 of his Opinion, both as to the subordinate role of the place of performance as a circumstance in fixing the applicable law and also as to the weight to be attached to the presumption. Moreover, it appears to me that the strength of the presumption lies in the assumption that in the normal case it comes into play when both the characteristic performance and the party "who is to effect the (characteristic) performance" can be identified, that is to say, at the moment when the contract is concluded and is thus entered into by parties. One would expect that at that moment the parties would have a relatively clear idea of the way in which the contract would proceed, including the place or places at which performance will take place. No doubt, as the authors of the Report point out at p.20, "in order to determine the country with which the contract is most closely connected, it is also possible to take account of factors which supervened after the conclusion of the contract"(my emphasis). But this passage suggests to me that what is there in mind are factors which did not exist and could not reasonably have existed in the contemplation of parties at the time that the contract was concluded but which affected the essence of the obligation originally undertaken by the party who was to effect the characteristic performance. Such factors would constitute those 'conflits mobiles' which are referred to by the authors of the Report at p.21, ones which, leaving to one side changes in the habitual residence or the principal business of the party providing the characteristic performance, would operate to change the connecting factor determined at the time of the conclusion of the contract.

[6] In the present case it is not suggested for the defenders and reclaimers that, apart from payments to be made in accordance with the rates agreed between the parties, any further counter performance was demanded of them in terms of the contract. In my opinion, the approach adopted by the Lord Ordinary to the construction and application of the Rome Convention set out in paras. [22] to [27] is entirely correct. He underlined the necessity to shed the traditional approach adopted in British courts immediately prior to the 1990 Act and to have in mind that the Convention was designed to establish uniform rules in the field of private international law. He noted under reference to a passage in Dicey and Morris - The Conflict of Laws para 32-112 - that it appears that the concept of "characteristic performance" draws heavily on Swiss law and practice. That passage also goes on to note that subsequently the concept was adopted in academic writing and in case-law in the Netherlands. Reference was made by both counsel for the reclaimers and the solicitor advocate for the respondents to the decision of the highest Dutch court, the Hoge Raad, in Societe Nouvelle des Papeteries de l'Aa v. Machinefabriek BOA, a passage of which is cited by your Lordship in the chair. Of interest is that the Dutch Supreme Court, the Hoge Raad, considered that both from the wording and the structure of Article 4, as well as from the uniformity in the application of the law which has been intended with the Convention, Article 4(5) constituted an exception to the main rule of Article 4(2) and was 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. That statement of how the presumption is to be regarded seems to me to be entirely consistent with the intention that so far as possible the Convention should be uniformly interpreted and with the approach to be taken to the presumption. It will determine the applicable law of the contract unless it can be demonstrated by reference to the factors existing at the time of the conclusion of the contract or subsequently by reference to supervening factors that the habitual residence or principal place of business of the party effecting the characteristic performance has no real significance as a connecting factor. I find support for this view in the translation of the decision of the Dutch Supreme Court provided by the respondents to which is appended the opinion of Advocate General Strikwerda. In para. 12 of that opinion, he observes that the common Dutch private international law is almost exactly equivalent to the rule in paras. 2 and 5 of article 4 of the Rome Convention. What is stated in paras. 15 and following and, in particular, the discussion in paras.17 to 20 of the effect of the presumption appears to me to provide a valuable commentary on the kind of exceptional circumstances which will deprive the characteristic performer's place of business of that "localising power" which is the essence of a presumption having the "character of main rule".

[7] Some emphasis was placed in the submissions for the reclaimers on decisions in particular cases. Your Lordship in the chair has made reference to certain passages from them and I do not take time in repeating them. But it is clear from these cases that where a challenge is made, it is for the party other than the party "who is to effect the characteristic performance", to satisfy the court that "the circumstances as a whole" demonstrate that the applicable law is the law of a location other than that of the party "who is to effect the characteristic performance". In particular cases, the place of performance of a contract may doubtless be regarded as a powerful factor, though I would point out that in Ferguson Shipbuilders Ltd. v. Voith Hydro the observations of Lord Penrose in relation to the importance of that factor in relation to Article 4 were obiter since he decided the case on the facts under reference to Article 3 of the Convention.

[8] In the present case, the Lord Ordinary sets out in paras. [4] and [5] of his Opinion what was done by the pursuers and respondents in Aberdeen to provide the team to carry out the diving services and the manner in which and the basis upon which the rates for those services was agreed upon. In the following paragraphs, in particular paras. [8] to [14], he sets out how the diving services were provided during the course of the contract. In para. [29] the Lord Ordinary considered the circumstances as a whole. It was not suggested that he had in any material way misdirected himself generally as to the facts, though some criticism was directed to a statement there about a detail in relation to an issue over diving without through water communication. Suffice it to say that while that issue may have arisen on only one occasion, that did not detract from the Lord Ordinary's overall conclusion that activities critically linked to the diving operations were localised in Aberdeen, as indeed had been the preparations by way of recruitment of the team and subsequent replacement of members of the team. In para. [29] the Lord Ordinary clearly set out reasons why the connection with the pursuers and respondents' only place of business at Aberdeen was a continuing and important factor in the characteristic performance of the contract. On the facts found by the Lord Ordinary, it was fully open to him to reach the conclusion, as he did, that the individual circumstances founded on by the defenders did not make this an exceptional case such that these circumstances served to displace the presumption. From my own reading of all the relevant facts, I would have had no difficulty in being satisfied that in relation to the characteristic performance of the contract, that is to say the provision of diving services, "the centre of gravity and the socio-economic function of the contractual transaction" remained throughout closely connected with that place of business and that there were no sufficient grounds to deviate from the applicable law in terms of the presumption and hold it to be the law of Egypt.

FIRST DIVISION, INNER HOUSE, COURT OF SESSION

Lord President

Lord Cameron of Lochbroom

Lord Marnoch

A2804/01

OPINION OF LORD MARNOCH

RECLAIMING MOTION

in the cause

CALEDONIA SUB-SEA LIMITED

Pursuers and Respondents;

against

MICOPERISRL

Defenders and Reclaimers:

_______

Act: Swanson, Solicitor Advocate; Maclay Murray & Spens (Pursuers and Respondents)

Alt: Howie, Q.C.; Henderson Boyd Jackson (Defenders and Reclaimers)

12 July 2002

[1] I am grateful to your Lordship in the chair for setting out so clearly the circumstances of this dispute, the submissions made to this court, and the present state of authority so far as relevant to the matter in issue. In the result, I respectfully agree that this reclaiming motion should be disposed of in the manner which your Lordship proposes. To do that it is unnecessary to hold further than that, before para. 2 of Article 4 of the Rome Convention is "disregarded", there must, as your Lordship has said, be "a clear preponderance of factors in favour of another country". However, since the matter is not without importance, I think it right to add that I, for my part, would, if necessary, have applied an even more stringent test.

[2] In the first place, it seems to me that the whole structure of Article 4 and its underlying objective of promoting clarity and certainty in the law presuppose that it is only in the exceptional case that resort need be had to para. 5. More often, as it seems to me, the answer will be found by "stopping at" para. 2 - to adopt the language of Mance J. in Bank of Baroda v. The Vysya Bank Limited [1994] 2 Lloyd's Reports 87. In practical terms this means that the para. 2 presumption will provide the prima facie answer to a choice of law problem and that the onus will be on those who seek to disregard it to justify doing so - Bank of Baroda cit. sup. at p. 93; Definitely Maybe (Touring) Limited v. Marek Lieberberg Konzertagentur GmbH [2001] 2 Lloyd's Reports. 455 per Morison J. at p. 458.

[3] As to the circumstances which will justify a departure from the para. 2 presumption I attach significance to the use of the word "disregard" where it appears in Article 4(5). It seems to me that that word is inimical to the idea of conducting a balancing exercise in relation to the applicability or otherwise of the presumption. In short, this presumption is not one to be rebutted or overcome but rather one which either applies or falls to be disregarded in its entirety. This, I think, is the reasoning of Hobhouse L.J. in Crédit Lyonnaise v. New Hampshire Insurance Co. [1997] 2 Lloyd's Reports. 1 at pps 5-6. Where, however, I must most respectfully take issue with him is in his conclusion that the presumption in question is accordingly a "very weak" one. On the contrary, it seems to me that it must be strong, indeed determinative, unless it is appropriate - as I would have it, in the very special circumstances of the case - simply to disregard it.

[4] For all the foregoing reasons I find myself - at least as at present advised - in complete sympathy with the approach of the Supreme Court of the Netherlands in Socéité Nouvelle des Papeteries de l'Aa S. A. v B. V. Machinefabriek B.O.A. 25 September 1992, unreported. According to that approach the para. 2 presumption

"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."

In deciding whether the place of business of the performing party does or does not have real significance as a connecting factor it will, of course, be necessary to look broadly at the general circumstances surrounding the contract. However, it should not, in my opinion, be necessary to embark on a detailed comparative exercise which, as your Lordship has said, could involve difficulty and uncertainty and which, if one were to embark on it, would be strongly reminiscent of the sort of enquiry required to ascertain, under the former law, the "proper law" of the contract. It follows, as I see it, that it is only by adopting the Dutch approach that real and practical effect can be given to the objective of Article 4 referred to above, namely that of clarifying and simplifying the law.