Introduction

The Contracts (Applicable Law) Act 1990 came into force on 1st April 1991, and it applies to contracts concluded after that date. The Act itself is very short, but it incorporates, in the Schedule annexed to it, the Rome Convention on the Law Applicable to Contractual Obligations. This Convention was prepared under the auspices of the European Community and it has therefore been incorporated into the laws of most other European Community States, as well as the United Kingdom. Thus, although this article is concerned with English law, the Convention itself is of wider application.

The Convention, which now has the force of law in the United Kingdom, lays down a set of rules for ascertaining the governing law of contracts. It is not concerned with questions of jurisdiction (i.e. where disputes are to be resolved and before what tribunal). Nor is it concerned solely with contracts of carriage; it applies to all types of contracts, subject only to a number of specific categories which are expressly excluded. There are two exclusions which are of particular relevance when considering contracts for the carriage of goods.

(a) Firstly the Convention does not apply to certain aspects of "negotiable instruments", and there is an issue as to whether (and if so to what extent) this excludes bills of lading from the application of the Convention. This point is considered further below.

(b) Secondly, the Convention does not apply to "arbitration agreements and agreements on the choice of court". Thus jurisdiction clauses and arbitration clauses in contracts of carriage are not themselves governed by the Convention, even though the contract in which they are contained may be. The existence of an arbitration or jurisdiction clause in a contract may, however, be relevant when identifying the governing law of the contract of carriage as a whole.

Other exclusions from the scope of the Convention include issues as to the status and capacity of natural persons, certain issues relating to company law, the authority of agents to bind their principals, and most matters of evidence and procedure. There are also exclusions relating to certain categories of insurance.

If the contract is one to which the Convention applies, its rules will operate whether the governing law turns out to be that of a Contracting State or not. Thus, if the result of applying the Convention Rules is that the contract is governed by Japanese or New York law, these Rules will still be given effect (Article 2). The Convention will also apply regardless of the nationality of the contracting parties.

In construing the Convention (i) regard is to be had to its international character and the desirability of achieving uniformity in its interpretation and application (Article 18); (ii) the courts may have regard to a Report prepared by Professors Giuliano and Lagarde which provides a form of commentary on the provisions of the Convention (S3(3)(a) of the 1990 Act); (iii) regard is to be had to the decisions of the European Court; and provision is also made for issues of interpretation to be referred by the English Courts to the European Court for a ruling. Neither of the provisions relating to the European Court are, however, yet in force.

In most situations, therefore, the Convention has entirely replaced the old English Common Law rules for ascertaining the governing law of a Contract. Given the wide scope of the Convention, this article does not attempt a comprehensive review of all its provisions. We have, however, attempted to summarise its scope and the framework of its rules; and to highlight those provisions which are of greatest relevance in the context of contracts of carriage.

2. To what contracts of carriage does the Convention apply?

As indicated above, the Convention applies to all contracts, including contracts of carriage, other than those which are specifically excluded. Thus charterparties of whatever nature, contracts of affreightment and similar documents will all be covered. The Convention will also apply to non-negotiable documents such as waybills.

It is more difficult to state categorically whether it applies to bills of lading because of the exclusion already mentioned relating to "negotiable instruments". The precise wording of this exclusion is important. It is contained in Article 1(2)(c) which excludes:

"Obligations arising under bills of exchange, cheques and promissory notes and other negotiable instruments to the extent that the obligations under such other negotiable instruments arise out of their negotiable character".

There are therefore two questions to ask. First, is a bill of lading a negotiable instrument at all; and second, if it is, does the obligation in question "arise out of its negotiable character"?

The Giuliano and Lagarde Report makes it clear that the first question is to be decided in accordance with the local law of the country where the matter is being determined (including its conflict of laws rules); so that an English court will apply English law to this issue. Unfortunately, the question of whether a bill of lading is a negotiable instrument under English law is not entirely clear, and it has been the subject of considerable academic debate over the years. Although a bill is obviously "transferable", in the sense that it can (if appropriately made out) be endorsed to a transferee, it is not "negotiable" in the sense that it does not necessarily vest in the transferee a better title than that of the person who endorsed it. Similarly, although a bill is often described as a "document of title", lawful possession of the document does not necessarily connote ownership of the goods to which it relates. It is for example perfectly possible for a CIF or FOB seller to provide that property should pass to the buyer either before or after the endorsement of the bills of lading. The position is complicated still further by the fact that, under English conflict rules, the negotiable effect of an endorsement may fall to be determined by the law of the country in which the endorsement occurs! For all these reasons, there is a quite extraordinary divergence of view as to whether bills of lading are, for this reason, excluded from the scope of the Convention altogether. The majority view now seems to be that, at least under English law, a bill is not to be regarded as a negotiable instrument for the purpose of the Convention, in which case the exclusion will not apply at all. If that is right, bills of lading, like all other contracts of carriage, will be covered by the provisions of the Convention; but the question cannot be regarded as free from doubt.

Even if that is wrong, however, there must be an argument that most relevant obligations which may be in dispute under bills of lading would not be held to "arise out of their negotiable character", so that they would not be excluded from the scope of the Convention for this additional reason as well. For example, if a cargo claim is brought by a transferee of the bill and the issue in dispute relates to whether the transferee has acquired rights of suit, the courts might well hold that the transfer of rights of suit has occurred by virtue of the provisions of the Carriage of Goods by Sea Act 1992, and not because of the "negotiable" or "transferable" status of the bill of lading itself. Unfortunately, no guidance whatsoever is given on this point in the Giuliano/Lagarde Report.

If the above propositions are right, it means that the rules of the Convention will apply to all contracts of carriage under English law. If, however, that is held to be wrong, we will be left with a somewhat unsatisfactory regime under which the governing law of bills of lading will be determined by a different (and largely superseded) set of rules from those governing most other types of contract.

3. What are the Convention rules for establishing the governing law of a contract of carriage of goods?

(a) Express actual choice

Article 3 of the Convention lays down the basic principle that "a contract shall be governed by the law chosen by the parties". It goes on to provide that the choice must be either express, or "demonstrated with reasonable certainty by the terms of the contract or the circumstances of the case". The starting point of the Convention is therefore relatively straightforward. If the contract says that it is to be governed by a particular law, that provision should be given effect. There are however exceptions to this principle where there are "mandatory" rules (i.e. those which cannot be derogated from by contract) under which such a choice of law would be treated as ineffective. These are considered in greater detail below.

(b) Inferred actual choice

If the parties have not included an express choice of governing law in their contract, an actual choice may still be inferred if it can be "demonstrated with reasonable certainty by the terms of the contract or the circumstances of the case". This fall back test is, however, still concerned with identifying an actual choice of governing law, rather than trying to identify what the parties would have chosen if they had thought about the issue. The Giuliano/Lagarde Report cites as an example of inferred actual choice a contract in standard form which is known to be governed by a particular system of law even though there is no express statement to this effect; for example a Lloyd's policy of marine insurance. According to the Report, a course of dealing between the parties under previous contracts which had contained an express choice of law might also indicate an inferred actual choice of law.

One question of considerable importance is the extent to which a jurisdiction or arbitration clause can be taken into account in determining whether there has been an inferred choice of governing law. It is in this area that one of the greatest uncertainties arises in relation to contracts of carriage. Many charterparties, for example, contain an arbitration clause but no governing law clause. Is it possible to infer that, simply by choosing for example London arbitration, the parties have by implication chosen English law as well? In many cases, and in the absence of a contrary indication, commonsense will dictate that they probably have, and this has always been the traditional view under the English common law. There is, however, as yet no direct authority on this question under the Convention. The Giuliano/Lagarde Report addresses the problem, but does not provide a very clear answer. It states:

"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 ... Other matters that 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 arbitrator should apply the law of that place" [emphasis added].

The final words of this passage might be said to imply that a simple arbitration clause, without more, would not be sufficient to infer a choice of law although, at least in a shipping context, this must be doubtful. But, even here, it may be difficult to generalise. The position where there is a simple reference to "arbitration in London" might be different from the position where the clause provides for institutional arbitration before a tribunal whose own rules contain specific provisions for the arbitrators to determine the applicable law.

But even if such an inference can be drawn in the context of a charterparty, what is the position of a bill of lading which does not itself contain an arbitration clause, but which incorporates the terms and conditions of a charterparty which does. English case law establishes that, in order for the arbitration clause to be incorporated, very specific wording is necessary. If, in accordance with this test, the arbitration clause is held to be incorporated, that may (subject to what is said above) give rise to an inference that the parties intended the law of the place of arbitration to be the governing law of the bill of lading contract as well; but it seems that it may be more difficult to draw this conclusion under the new rules than under the old common law rules.

If the arbitration clause is not incorporated, the position is even more doubtful. Under the old law, it would have been argued (i) that the bill of lading incorporated the terms and conditions of the charterparty; (ii) that the charterparty itself was (by virtue of the arbitration clause) governed by English law, and (iii) that even though the arbitration clause was not incorporated, the other terms of the charterparty were, so that this in turn rendered the bill of lading subject to English law. It is perhaps more doubtful whether a similar line of reasoning could, without more, be used to infer an actual choice of law under the Rome Convention. The passage from the Guiliano/Lagarde Report quoted above makes it clear that a choice of law in a related contract "between the same parties" might be taken into account; but here the charter may not be between the same parties; and may not contain an express choice of law.

(c) The absence of express or inferred actual choice

If there is no express choice of governing law clause and one cannot be inferred from the terms of the contract or the circumstances of the case, the contract will then be governed "by the law of the country with which it is most closely connected" (Article 4(1)). That test is, in itself, fairly uncontroversial, but the Convention then lays down a number of provisions for identifying the country with which the contract is "presumed" to be most closely connected. These presumptions are, in many respects, quite different from the previous rules of English law. Moreover, they are not very helpful in the context of many shipping contracts. To add to the confusion, the Convention appears to treat some forms of shipping contract differently from others.

i) The characteristic performance test

Article 4(2) starts with a general presumption for establishing the country with which the contract is most closely connected. This will be presumed to be the country where the party who is to effect the performance which is characteristic of the contract has his central administration or his place of business. Note that it is not the place where the characteristic performance is to occur which is important, but the central administration or place of business of the person who is to perform it. Identification of the central administration or place of business of a company is not always entirely straightforward (consider, for example, the Liberian or Panamanian company managed, at least in part, from Greece). This, however, is not a new problem since similar difficulties arise under a number of other recent Conventions.

In any event, the drafters of the Convention plainly realised that there might be difficulties in applying the characteristic performance test to certain types of shipping contract, because the presumption does not apply at all to contracts "for the carriage of goods". These are defined by Article 4(4) to include "single voyage charters and other contracts the main purpose of which is the carriage of goods". The definition will therefore presumably include bills of lading (assuming, of course, that they fall within the scope of the Convention at all) and waybills. The position of consecutive voyage charters is not expressly dealt with, although they will presumably fall within the definition if their "main purpose" is the carriage of goods. The exclusion, however, may well not apply to time charters (except perhaps trip time charters) so that the test of "characteristic performance" may continue to apply, at least to long term time charters. Finally, contracts for the carriage of passengers are not excluded from the general presumption and the "characteristic performance" test will therefore apply to them.

In contracts to which the characteristic performance test does apply, the next question is "which party is the one which provides characteristic performance"? Generally speaking, the payment of money does not constitute characteristic performance, so that in the vast majority of cases, the relevant party will be the shipowner; but will that always be the case? Would the answer be different, for example, in the case of a demise charter where the charterer is responsible for crewing, insurance, repairs etc?

At this stage, the Convention admits defeat! If the characteristic performance cannot be identified, or if it appears that the contract is in fact more closely connected with another country, the Convention provides that the general presumption will not apply (Article 4(5)).

ii) The test for contracts of carriage of goods

As stated above, the test of characteristic performance does not apply at all to contracts which do fall within the definition of a contract of carriage of goods. The characteristic performance test is then replaced, but only in part, by another presumption which is set out in Article 4(4).

If the country in which, at the time the contract is concluded, the carrier has his principal place of business is also the country in which (i) the place of loading or (ii) the place or discharge or (iii) the principal place of business of the consignor is situated, it shall be presumed that the contract is most closely connected with that country.

A number of points should be noted about this presumption. The Report states that the "carrier" is intended to refer to the contractual carrier (who may not necessarily be the actual carrier or the owner of the ship). The place of loading or discharge refers to the place designated in the contract, rather than the place at which loading or discharge in fact takes place (if this turns out to be different). Finally, as with the "general presumption" discussed above, the Article 4(4) presumption is to be disregarded "if it appears from the circumstances as a whole that the contract is more closely connected with another country" (Article 4(5)).

There will, of course, be numerous situations in which the factual situation described above simply does not arise; in which case, there appear to be no guidelines to assist at all, and one presumably has to fall back on the original principal that the contract will be governed by the law of the country with which it is most closely connected. It is unclear, however, whether the English courts will, in determining this question, continue to take into account all of the same factors as they would have done under the previous common law. In particular, what weight will they give to an arbitration clause, if they have not already concluded that the existence of such a clause amounts to an inferred actual choice of law? If the courts maintain a similar approach to this question as they did under the previous law, the effect of the Rome Convention on contracts of carriage to which the Article 4(4) presumption does not apply may not be very great after all!

4. Mandatory Rules

As indicated above, there are a number of Articles throughout the Convention which prevent its provisions from applying where to give them effect would impact on the "mandatory rules" of a State. Mandatory rules are defined as those which cannot be derogated from by contract.

(a) Firstly, Article 7(2) provides that "Nothing in the Convention shall restrict the application of the rules of the law of the forum in a situation where they are mandatory irrespective of the law otherwise applicable to the contract". These rules would therefore continue to apply regardless either of the parties' choice of law or, in the absence of choice, of the presumptions discussed above. This might, for example, be relevant in England if the choice of law served to cut down the mandatory liability of the carrier under the Hague-Visby Rules. This was of course also the position under the old law (see the decision of the House of Lords in the "MORVIKEN" [1983] 1 Lloyd's Rep. 1). In this context, it is also worth noting that Article 21 of the Convention provides that it "shall not prejudice the application of international conventions, to which a Contracting State is, or becomes, a party".

(b) Secondly, the fact that the parties have chosen a foreign law does not, "where all the other elements relevant to the situation at the time of the choice are connected with one country only", prejudice the application of the mandatory rules of that country (Article 3(3)). This rule is substantially new to English law since it requires the courts, in considering whether to give effect to a choice of law, to have regard to the mandatory rules of another country. While this restriction may give rise to some difficulties, it only applies when all the relevant elements of the contract point to the application of the law of one other country, and this is perhaps unlikely to arise often in the context of international contracts of carriage.

(c) Thirdly, there is a provision contained in Article 7(1) of the Convention which entitles a court to have regard to the mandatory rules of another country with which the contract has a "close connection". This somewhat vague provision is fraught with potential difficulty, but fortunately it does not apply in England since it is expressly excluded by the 1990 Act.

(d) Finally, Article 16 provides that the application of a rule of the applicable law, as determined by the Convention, may be refused if such application is "manifestly incompatible with the public policy of the forum".

5. Miscellaneous Provisions

It is not possible in this brief article to address all of the remaining issues raised by the Convention. A number of points should however be noted.

Firstly, it is provided that the parties may (subject to requirements of logic and consistency) choose different governing laws for different parts of their contract (Article 3(1) - see also Article 4(1)).

Secondly, the parties may change the governing law of the contract at any time, provided that third party rights are not adversely affected (Article 3(2)). There may, however, be a restriction on the parties' ability to do this once proceedings have been commenced. This provision may affect the position of bills of lading which contain a "floating" law clause; under which the governing law is to be decided at the option of the carrier. English common law did not recognise the possibility of a "floating" proper law of a contract; but under the Convention the possibility arises of a contract whose governing law is initially determined under Article 4 (i.e. in the absence of choice), but which is subsequently determined (and therefore changed) by the exercise of the carrier's option. How this possibility will be addressed by the English courts remains to be seen.

Thirdly, Article 10 lays down a non-exhaustive list of those matters which are to be governed by the applicable law of the contract, once it has been identified. These include matters of interpretation and performance (subject to what is said below), the consequences of breach (including the assessment of damages) and the limitation of actions. Article 10(2) provides 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".

Articles 8 and 9 set out a number of specific rules for determining the law applicable to the existence and validity of a contract, and the requirements for its formal validity.

Finally, under the Convention, the consequences of nullity of a contract are also within the scope of the relevant applicable law; but this provision is expressly excluded by the 1990 Act so that the consequences of the nullity of a contract in England remain unaffected by the Rome Convention.

6. Conclusion

As can be seen, the Convention has substantially abolished the old "proper law" rules of the English common law, and replaced them with a series of tests and presumptions which may be somewhat difficult to apply in the context of contracts of carriage and similar shipping contracts. There has as yet been little direct authority on the questions raised in this article, and many fundamental issues of principle remain unanswered.

Fortunately, however, as long as one cardinal rule is observed, this need not matter unduly. It is merely necessary to ensure that, when concluding a contract of carriage (or indeed any other contract), the parties now provide not only for the jurisdiction where they wish their disputes to be resolved, but also the governing law which they wish to apply to it. Parties who use standard form charterparties or bills of lading may be lulled into a false sense of security and assume that the printed forms deal with these issues satisfactorily. But many standard forms do not do so and, even in this situation, therefore, consideration should be given to the addition of an express governing law clause. If that is done, the Rome Convention should be relatively easy to apply.