Law applicable to a contract: why it is important

Introduction

When there is a dispute about the performance of a contract, one of the first issues that must be determined is which law applies to that contract, particularly where the parties to the contract are based in different countries or the contract involves working overseas. For example, which law will apply to a contract between Peruvian and Malaysian companies to transport goods between Nigeria and India? The law applicable to that contract will inevitably impact on the outcome of any dispute that arises from the performance of that contract.

The recent commercial agency case of Timothy Lawlor v Sandvik Mining and Construction Mobile Crushers and Screens Limited [2012] EWHC 1188 (QB) is a good illustration of how the Court determines what law applies to a contract and why the choice of law can make a big difference to the parties.

Determining Choice of Law

The Courts of all EU member states, including English Courts, apply the same rules for determining choice of law irrespective of the nationality of the parties. In summary: 

• Where there has been an express choice of law in the contract, the Courts will apply that chosen law (Article 3).
• The Court may determine that, on the individual facts of the case, there has been an implied choice of law by the parties (Article 3).
• Where there has been no express or implied choice, the law of the contract will be the law of the country that is most closely connected to the contract. There is a presumption that the applicable law will be the law of the “habitual residence” of the party whose contractual obligation was to provide goods or services rather than pay for those services (Article 4).
• Habitual residence will be where a company has its central administration and where an individual has his principal place of business.
• There is a supplemental provision where the Court can ignore this general rule where there is another country that is more closely connected with the contract than that indicated by the presumption.

Background facts of the Case

The Claimant, Mr Lawlor, was an Irish citizen who owned property in Andorra. He had initially been employed by the Defendant company (Sandvik) as a salesman in 1994 and, after short spells in England and Germany, moved to Spain. Mr Lawlor became Sandvik’s agent in Spain shortly thereafter selling mobile screens and crushing equipment. However, the terms of Mr Lawlor’s commercial agency contract (including what law should apply) were never written down.

The dispute arose between Mr Lawlor and Sandvik when his agency contract was terminated and Mr Lawlor sued for compensation. The Court was asked to determine which law applied to the agency contract because Mr Lawlor would be entitled to considerably more compensation under English law as a result of the termination of his agency contract than he would if the contract was governed by Spanish law. Mr Lawlor claimed that English law applied to his agency contract, either through an implied choice by the parties or by application of Article 4. Sandvik argued that there was no implied choice of law and Spanish law was applicable under Article 4.

Implied Choice of Law

In order to find that an implied choice of law had been made, the Court has to be persuaded with reasonable certainty that both parties clearly intended to choose a particular law either from the wording of the contract or the circumstances of the case. The Court should not assume that there was such an intention just because there were factors that linked the contract to a particular jurisdiction. The Court also stated that subsequent conduct by the parties should be considered if it sheds light on what the parties had impliedly agreed.

In Timothy Lawlor the Court held that if the parties had made a choice, it would have been English law but that the causal and informal circumstances that gave rise to the agency contract indicated that no choice of law was ever considered, or even discussed. The Court consequently held that there was no implied choice of law.

Applicable law where there was no choice

As mentioned above, where there is no express or implied choice of law, the law of the contract will be the law of the country that is most closely connected to the contract. There is a presumption that the country that is most closely connected to the contract will be the “habitual residence” of the party performing the services under the contract, in this case Mr Lawlor, or the place of characteristic performance of those services. The Court had to determine as a question of fact where Mr Lawlor’s principal place of business was in order to establish his habitual residence and therefore what the law of the contract should be. The Court also had to determine whether there was another country that was more closely connected to the contract.

The Court heard considerable factual evidence from six witnesses, including Mr Lawlor, about his agency and his connections with England and Spain. Although both parties accepted that Mr Lawlor was Sandvik’s agent in Spain, Mr Lawlor claimed that he spent about six weeks a year in England showing potential clients round Sandvik’s factory in an attempt to close sales and that he spent time in a number of other countries besides Spain, such as Morocco, Portugal and Tunisia. Mr Lawlor estimated that he spent no more than six months a year in Spain. It was consequently argued that the principal place of business and characteristic performance was both England and Spain. Mr Lawlor also claimed that he had no fixed address between 1994 and 2003 and instead lived a “rootless existence” travelling on business until 2003 when he bought a house in Andorra. Mr Lawlor had occasionally stayed in his brother’s flat when in Spain on business and had not paid income tax in Spain (or anywhere else for that matter) because he did not stay long enough in any one country to meet the residency criteria. Mr Lawlor’s invoices for commission had initially been in Sterling but subsequently in Euros and were submitted to an address in Ireland.  

The Court did not accept a large part of Mr Lawlor’s evidence and considered him to be an untrustworthy witness. The fact that he had not paid tax in any jurisdiction throughout his agency contract was held against him. The Court accepted the factual evidence of Sandvik’s witnesses that indicated that Mr Lawlor had serviced offices in Spain, telephone and fax facilities in Spain and a permanent Spanish business address as sufficient to conclude that the principal place of business was Spain. The Court also decided that the contract was more closely related to Spain than England and so there was no reason to ignore the presumption. The Court consequently held that the law of the contract was Spain and that Spanish law should be used to determine the dispute.    

Conclusions

The Timothy Lawlor case is another helpful reminder that, wherever possible, parties should set out the terms of their contracts in writing. The importance of a governing law clause is often overlooked but it is of fundamental importance in providing certainty.  Failing to agree this in writing, can lead to expensive and time consuming legal disputes, as happened here.