UNIVERSITY OF PETROLEUM & ENERGY STUDIES

SCHOOL OF LAW

B.A. LL.B. (HONS.) SEMESTER VIII

Limitations in parties’ choice of law in international contracts

Submitted to University of Petroleum and Energy Studies, Dehradun

SUPERVISED BY-
DR. RAMDHASS PERUMAL
(ASSISTANT PROFESSOR)

SUBMITTED BY-
VISHESH SINGH RAIKWAR- R450219113 500076222 ( criminal law batch 1)
UJJWAL MAURYA- R450219106 500076627 ( criminal law batch 1)

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 Limitations in parties’ choice of law in international contracts

ABSTRACT
A contract is the foundation of all trade, whether it be domestic or international. The Indian
Contract Act, of 1872 (ICA) is the controlling and fundamental legislation in India for the
regulation of all types of contracts, however, it is important to recognize that business
contracts between people, institutions, businesses, etc. have expanded beyond the ICA's
original scope. The legal system of a single nation cannot adequately govern and manage the
effects of international contracts when they cross national boundaries.

As a result, when parties to a contract are from different nations, at least two separate legal
systems affect the transaction, and the principles of private international law are put into use.
The formulation and administration of contracts in India are thus governed by several
international conventions, including the United Nations Convention on Contracts for the
International Sale of Goods (CISG) and the provisions of International Arbitration.

In this paper, the researcher will first examine the difficulties in selecting a law in the context
of an international business transaction, and then we take a quick look at the customs in India
about the rules governing the selection of a law.

Foreign parties may be involved in a contract dispute. As a result, one of the contracting
parties breaks the agreement, and a lawsuit is filed in an Indian court. In such a situation, it is
a common rule that any international contract with one or more foreign elements has a
controlling law, typically referred to as the "proper law of the contract."

So, the appropriate contract law assists in resolving disputes in a case. This paper will
illustrate upon proper legislation of the nation with which the contract has the closest
connection may be chosen by the parties.  The law of a single nation could not be sufficient
to cover every component of the contract, since it might not cover certain aspects of the
contract. As a result, some portions of the contract may be governed by the laws of one
nation, while other aspects may be governed by the laws of another country. So, it may
become difficult for the courts and the forum to apply the law properly. This paper will
explain the dire need for common law as researchers fail to identify standard laws.

KEYWORD: Contracting parties, controlling, formulation, proper law

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Contents
Introduction...........................................................................................................................................4
Background...........................................................................................................................................4
Mandatory Rules of Law.......................................................................................................................4
Contract and conflicts of law.................................................................................................................5
Choice of the proper law.......................................................................................................................6
Restrictions on the power to choose the proper law...............................................................................7
Conflict of Laws and Indian Jurisprudence...........................................................................................9
Conclusion...........................................................................................................................................10

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Introduction

A contract is the foundation of local and international trade. The Indian Contract Act, of 1872
(ICA) is India's controlling and fundamental legislation for regulating all types of contracts;
yet, one must also recognize that business contracts between individuals, institutions,
businesses, and so on have developed beyond the ICA borders. When contracts cross national
boundaries, a single country's legal system becomes unable to govern and manage the
ramifications of international transactions.

When parties to a contract are from different nations, at least two legal systems intervene in
the transaction, and the principles and standards of private international law apply. As a
result, several international conventions, such as the United Nations Convention on Contracts
for the International Sale of Goods (CISG) or International Arbitration provisions, play a role
in the development and governance of contracts in India. In this essay, we will look at the
issues of choosing a law in the context of an international business transaction, followed by a
quick look at the practices prevalent in India regarding the rules controlling legal choices.

Choice of law clauses is a common feature of international commercial contracts. Such

Background

Parties in international contracts have the flexibility to select the law that will govern the
agreement. This is known as the concept of party autonomy, and it is recognized in many
legal systems worldwide. However, the exercise of party autonomy is subject to specific
constraints that might originate from a variety of sources, including required norms of law,
public policy, and the forum court's choice of law rules. These restrictions can have an impact
on the contract's legality, enforceability, and interpretation, as well as the parties rights and
responsibilities.

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Mandatory Rules of Law

The existence of required norms of law is one of the key constraints on the parties' choice of
law in international transactions. Mandatory rules are legal regulations that must be followed
regardless of the parties' choice of law. They are often designed to safeguard the public
interest, such as consumer protection, environmental protection, and labor standards. Product
safety, minimum wage, and anti-discrimination legislation are examples of necessary rules.

The inclusion of necessary regulations can have an impact on the contract's legality and
enforceability, as well as the parties rights and responsibilities. The contract may be
considered unlawful or unenforceable if the selected legislation does not recognize or
breaches mandatory norms. Similarly, if the selected legislation does not give the same level
of protection as the necessary standards, the parties may face legal consequences.

Public Policy

Another constraint on international contract parties' choice of law is public policy. Public
policy refers to the core ideals and principles of the forum court's legal system, which cannot
be ignored even if the parties choose different legislation. Human rights, anti-corruption, and
anti-trust legislation are all examples of public policy.

The implementation of public policy can have an impact on contract interpretation and
enforcement. If the selected legislation is adverse to the forum court's public policy, the
contract may be deemed void or unenforceable. Furthermore, based on the selected law,
public policy may be utilized to withhold recognition and enforcement of a foreign judgment.

Contract and conflicts of law

When the parties to a contract live in separate countries, many issues arise, such as which law
one or both parties should follow, or in which nation the claim is justifiable and in what
manner. A set of laws or standards that govern which legal system or jurisdiction may apply
in a contract dispute between parties is known as a conflict of laws or private international
laws. These criteria are often applied when there is a 'foreign' aspect to a case. As a result,

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these laws and norms strive to resolve differences across national laws. The conflict of laws
can be seen at several levels, including whether the court or forum has the power to decide
the case presented before it, whether the court or forum has jurisdiction, and which country's
law must be applied by the court or forum to decide the case. Finally, whether the courts can
recognize and enforce a judgment from a foreign forum or the court within its jurisdiction.

As previously said, foreign aspects may occur in a contract dispute, such as in a scenario
where an Indian merchant entered into a contract with its French counterpart and agreed that
the items would be delivered and paid for in the United Kingdom. As a result, one of the
contractual parties breaks the contract, and in an action brought in an Indian court, the
question arises as to which country's law the Court should consider in considering the matter,
because the laws of India, France, and the United Kingdom may differ in some parts. In such
a situation, a basic premise is that every international contract (a transaction with one or more
foreign parts) has a controlling law, sometimes referred to as the "proper law of the contract."

Thus, the right contract law aids in resolving concerns in a case. The parties have the
authority to select the applicable law of the nation with which the contract has the most direct
link. However, because the concept of legitimate law is unclear, this may not completely
answer the issue1. It is conceivable that the law of a single nation will not be sufficient to
cover the entirety of the contract since it will not cover some components of the contract. As
a result, some portions of the contract may be subject to one country's law, while others may
be subject to another country's law. As a result, the implementation of the correct law may
become problematic for the courts and the forum.

Choice of the proper law

In the past, there has been a disagreement on whether the place of contracting or the place of
performance should be used to establish which law should be applied to the problem.
However, the liberty of the parties in this regard has been recognized many times under
Indian and English private international law, which implies the parties are deemed to pick
any law that might govern their contract. In the absence of domestic codification on the

1
CONFLICT OF LAWS AS TO CONTRACTS by V. G. Ramachandran, visited on 15 April 23’.

Https://www.jstor.org/stable/43950071?Read-now=1&seq=10#page_scan_tab_contents

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subject, the Indian judiciary relies on the traditional common law position as enunciated in
Vita Food Product Inc v Unus Shipping Co.Ltd, wherein the Privy Council held that the
parties were free to choose any governing law, regardless of its connection with the contract,
provided that the choice was bona fide, legal, and not contrary to public policy. Thus, in
Indian private international law, the proper law of the contract is established by justice,
equity, and moral conscience.

It has also been noticed that such a choice of contract law might be either stated or inferred.
In a conflict scenario, the decision may be called express if the contract explicitly provides
the specific governing law. As a result, parties from various nations are preferably necessary
to offer the provision for adequate law. However, this may not always be possible.

When the contract, on the other hand, does not contain any such explicit provision for the
proper law of contract, the principle laid down by Lord Simonds in the case of Bonython v.
Commonwealth of Australia is applied, which states that the proper law of the contract is the
system of law with which the contract was made or with which the transaction has its closest
and most real connection. The notion that the contract was established with a reference to a
certain system of the law expresses the parties' indicated decision as the applicable law
governing the transaction2. The most notable example of an implied choice is the parties'
selection of a governing forum, in which the contract included a stipulation requiring the
courts of a certain nation to have jurisdiction. Arbitration clauses in international business
contracts that specify the site for arbitration may provide for the selection of the proper law.

The legislation that validates

Similar to the concept of the implied choice of the proper law of the contract, if a contract or
a specific provision in the contract is valid under one country's law but invalid under another
country's law, the court may infer the tacit choice of validating law on the basis that the
parties intended their contract to be valid from the start and not void. For example, in re
Missouri S.S. Co., there was an exemption provision in a contract that was defective under
Massachusetts law but legal under English law. since a result, it was determined that English
law was the applicable law since the parties must have meant for their contract and the

2
The Hague judgments project: assessing its plausible benefits for the development of the Indian private
international law, visited on 15 April 23’.
https://www.tandfonline.com/doi/abs/10.1080/03050718.2019.1621761.

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exemption provision in question to be legal. As a result, unless anything contradictory occurs
in the contract, the court will evaluate the relevant law in the legislation that validates, rather
than invalidates, the contract.

Restrictions on the power to choose the proper law

The power to select the appropriate law at the outset of the contract is advantageous for
several reasons. First, it gives the parties a sense of certainty regarding the applicable law.
Second, under domestic systems of law, the parties are generally free to select the terms of
their agreement, and the right to select the applicable law seems to follow naturally and
logically as an extension of that freedom. The ability of parties to select the appropriate law
is, however, subject to some restrictions, including the following:

1. Domestic law requirements that must be followed regardless of any contrary agreements
between the parties are known as mandatory domestic law requirements. For example,
the laws that declare contracts unlawful due to public policy, etc. This means that if
parties are given complete freedom to choose the governing law, there will be
opportunities to circumvent the laws of the nation with which the contract has the
strongest ties and which may be intended to safeguard the public interest or the interests
of a specific group, such as consumers or employees 3. Furthermore, the court in the Vita
Foods case determined that the only requirement for the parties' choice of the controlling
law is that it be done so with good faith and by the law.
2. The law of the nation most closely related to the contract in some circumstances, where
the choice of proper law cannot be inferred either expressly or implicitly from the
contract, the law of the nation most closely connected to the deal is declared the proper
law. The court takes into account several variables in this case, including the location of
the contract's formation and performance, the parties' links to their respective nations, the
location of any immovable property that is the contract's subject matter, etc. It can be
challenging to pinpoint the precise nature of the intimate connection, though.
3. Convenience and business efficiency: The court assesses the contract's convenience and
business efficiency when the parties' interests are highlighted in the agreement. When
determining these links, the court considers several variables with varied degrees of

3
Damages for breach of contracts Emerging judicial trends, visited on 14 April 23’.
https://shodhganga.inflibnet.ac.in/handle/10603/76575

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 importance. For instance, the location of the contract's formation or its performance may
not be as crucial as the location of the parties' homes or places of business. Additionally,
the law of the nation to which the party belongs will typically be the correct law
regarding the parties' interests. However, it is still difficult to determine which party's
legislation should be favored in an international contract setting.

Conflict of Laws and Indian Jurisprudence

The majority of Indian private international law is determined by court rulings in specific
situations. The English private international law principles have generally been adopted by
the courts. In Delhi Cloth and General Mills v. Harnam Singh4, the Supreme Court had to
examine whether Indian private international law permitted the parties to select any
applicable domestic law from any country. The plaintiff, who lived in Pakistan and did
business with the defendant in India, was the subject of the action, which concerned the
recovery of a balance.

The subjective view, according to Justice Bose, may result in unusual outcomes due to the
disconnected laws, and it is possible that it must be difficult to enforce the laws if they are
illegal or against public policy. The court emphasized the law established in the ista Foods
case and concluded that the selection of the appropriate law must be genuine, legitimate, and
not contrary to public policy. A similar observation was made in the case of British India
Steam Navigation Co Ltd v. Shanmughavilas Cashew Industries5. And they added that it
might not be appropriate to select legislation that has no connection to anything else. Similar
to this, the Calcutta High Court upheld the same principle in Rabindra N Maitra v. Life
Insurance Corporation of India and noted that there would not be any justification for a
choice of an unrelated law in the contractual agreement between international parties unless
the law is also the proper law.

It has been asserted that the situation has since altered, and in the case of National Thermal
Power Corporation v. Singer Company6, the Supreme Court rejected the restrictive strategy
that constrained the parties to choose a governing law that was unrelated to the contract. Even
4
Delhi Cloth and General Mills v. Harnam Singh, 1955 AIR 590.
5
Navigation Co Ltd v. Shanmughavilas Cashew Industries, 1990 SCC (3) 481.
6
National Thermal Power Corporation v. Singer Company, 1993 AIR 998.

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though there was no connection between the obligation in the contract and the chosen law's
jurisdiction, the parties were free to choose their law. Thus, it suggested that the parties'
autonomy in selecting the applicable law increased. By noting that the parties were allowed
to adopt different laws to regulate certain aspects of the contract, the court further expanded
the autonomy. It further stated that the only thing that may restrict the parties' freedom to
select the applicable law for an international business contract was if their choice wasn't
legitimate or went against public policy. In a similar vein, the Supreme Court reiterated in
Modi Entertainment Network and Others v. WSG Cricket Pte Ltd 7 that Indian private
international commercial law authorizes the selection of any legal system, even if that legal
system has no link to the contractual obligation in question.

Since there might be broad criteria for determining whether something is "bonafide and
opposed to public policy," there is still some misunderstanding regarding what that phrase
means in these judgments. So, it has been stated, although Indian private international
commercial law is in line with the world's best practices in the area, it is unpredictable and
uncertain for the courts to apply these principles effectively due to the ambiguity regarding
this terminology.

Conclusion

A problematic area for stakeholders has been the selection of legislation in the context of
international business relationships. It becomes more difficult to choose a law when there is
uncertainty about the fundamentals of international commercial contracts in Indian practice.
As a result, courts need to be aware of global trends that provide certain fundamentals for the
resolution of cases involving international contracts. Given that increased global trade
unavoidably leads to more disagreements between parties, this argument becomes
increasingly pertinent. Therefore, the courts must establish more definite and predictable
norms so that the parties can select the appropriate law while the latter's autonomy is
preserved.

Finally, the party’s choice of law in international transactions is subject to several constraints
that might impact the contract's validity, enforceability, and interpretation, as well as the
party’s rights and responsibilities. Some of the primary causes of limits include mandatory

7
Entertainment Network and Others v. WSG Cricket Pte Ltd, Appeal (civil) 422 of 2003

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legal regulations, public policy, and the forum court's choice of law rules. As a result, while
negotiating and writing international contracts, parties should be aware of the possible limits
and obtain legal guidance to ensure that their choice of law is acceptable and by existing laws
and regulations.

It is also critical for parties to perform research on the laws of the chosen jurisdiction to
ensure that they are aware of any required requirements or public policy considerations that
may influence the contract. Furthermore, parties may want to include a choice of law clauses
that provide for other laws if the chosen law is proven to be defective or unenforceable.

Furthermore, certain countries may take a different approach to constraints on parties' choice
of law. Some nations, for example, may have more stringent required restrictions or public
policy concerns than others. As a result, parties should consider the legal systems of all
jurisdictions that may be involved in the contract and get legal assistance from specialists
who are familiar with the applicable laws and regulations.

Finally, as laws and regulations change over time, the constraints on parties' choice of law are
continually altering. As a result, parties should keep an eye out for changes in the laws of
their selected jurisdiction and be ready to modify their contracts accordingly.

Finally, constraints on the parties' choice of law in international contracts are a complicated
and growing field of law. When negotiating and writing international contracts, parties should
be aware of potential limits and should get legal guidance to ensure that their choice of law is
acceptable and by existing laws and regulations.

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