Governing Law of Contract: Place of Business Prevails over Place of Performance 

The Court of Session, the Scottish equivalent to the English Court of Appeal, recently ruled of the factors to be taken into account in determining the governing law of a contract.  The case is Caledonia Subsea v Micoperi SRL (The Times, 6 September 2002). 

In circumstances where parties have not either expressed, or demonstrated with reasonable certainty, the governing law of their contract, certain provisions of the EC Convention on the Law Applicable to Contractual Obligations (Rome 1980) will apply. 

The general rule is that the applicable law is that most closely connected with the contract. 

This is ascertained in the following way: 

1. There is a presumption in Article 4(2) that the country of habitual residence (or central administration, if a company) of the party carrying out the performance which is characteristic of the contract at the time the contract is concluded (known as “place of performance”) is most closely connected to the contract, and as such that country’s governing law will apply.

2. Article 4(2) goes on to say that if the contract is entered into in the course of that party’s trade or profession, the governing law will be that of the principal place of business. However, if the contract is to be carried out through a place of business other than the principal place, the governing law will be that of the country where the other place of business is located.

3. The presumption in Article 4(2) will not apply if it appears “from the circumstances as a whole” that the contract is more closely connected with a country other than where the party’s habitual residence/central administration/ principal place of business/other place of business is located (Article 4(5)).

In this case, Caledonian Subsea, a company with its principal (and only) place of business in Scotland, was seeking payment of monies due in respect of diving services it had provided in Egypt (the place of performance). 

The Scottish Court was asked to determine, as a preliminary issue, which law applied to the contract. The debtor argued that the place of performance could be a circumstance under Article 4(5) that rebutted the presumption in Article 4(2). If the Court’s determination was to allow this argument, the law of Egypt would apply. This could affect whether the Court had jurisdiction to hear the main contractual dispute.  If the law of Egypt applied and the case had to be brought in Egypt, this would have caused immense inconvenience and uncertainty for the Scottish company.

The Court held that it failed for the following reasons: 

1. The aim of Article 4(2) is certainty. The factors falling under Article 4(5) must be substantial to displace Article 4(2).

2. Article 4(2) avoids the need for the Court to weigh up several different, or conflicting factors, or factors of uncertain strength which could result in an inconsistent approach in different Courts and jurisdictions.

3. If Article 4(2) were so easily displaced by place of performance, the Court would frequently have to keep making the difficult balancing exercise under Article 4(5). This is unlikely to have been the intention of the Rome Convention.

4. The position of the presumption in Article 4(2) within the rules suggests it was intended to be more important than Article 4(5).

5. While place of performance may be one of the factors a Court may take into account for displacing the presumption, the fact that place of performance is not expressly mentioned as a factor suggests a movement away from using that as a determining factor.

6. The Court’s interpretation of Article 4(2) in the case would still allow for flexibility under Article 4(5) if the circumstances required.