Monetary Obligations and the Conflict of Laws


A. Introduction


B. The Applicable Law


C. The Law of the Place of Performance


D. The Law of the Countries in which the Parties are Established


E. The Law of the Forum State


F. The Law of Connected Third Countries


A. Introduction


Before moving to a detailed consideration of the interpretation and performance of monetary obligations, it is appropriate to reflect upon the system of law which will govern the solution to the various problems and difficulties which may arise in this area.


It should be said at the outset that this text is not intended to provide a detailed review of questions of private international law; apart from other considerations, there are many other texts which already fulfil that function.1 Nevertheless, countless cross-border financial transactions occur on a daily basis, and a brief discussion of the essential private international law framework is thus felt to be necessary.


It should be appreciated that a system of private international law exists in order to resolve the difficulties which may arise where different systems of law may have a bearing upon the same issue.2 Consequently, the points noted in the present chapter would have no application in the context of monetary obligations of a purely domestic character—for example, where a British bank, acting through its London branch, agrees to make a sterling loan available to a company incorporated in England. Such an arrangement involves only one system of law, and no question of a conflict will thus arise; English domestic law will be applied as a matter of course. Inevitably, however, matters become more complex when a transaction involves the laws of two or more jurisdictions.


Against that brief introductory background, it is proposed to examine the impact which the laws of various jurisdictions may have upon a monetary obligation. In particular, it will be necessary to consider the following:

(a) the law applicable to the contract;

(b) the law of the place of performance;

(c) the law of the countries in which the parties are established;

(d) the law of the State in which legal proceedings arise with respect to that monetary obligation; and

(e) the law of third countries with which the monetary obligation may have some connection.


It may be noted that every State is entitled to establish its own system of private international law for the purpose of resolving conflict questions; public international law does not generally appear to prescribe any particular standards or rules with which such a system must comply. Yet, in spite of this apparent flexibility, there is a considerable degree of uniformity amongst the systems which have emerged. Common law jurisdictions naturally tended to evolve similar rules in this area. The Member States of the European Union adopted a uniform code on the conflict rules applicable in a contractual context, and that code in turn reflects principles which had been developed in England and in civil law countries. For convenience, it is proposed to work by reference to Rome I, but it should not be thought that these general principles are confined to a European context. It should be added that the Rome Convention had effect in the United Kingdom from 1 April 19913 until Rome I came into force. The Rome Convention was accompanied by the Giuliano-Lagarde report on its terms.4 Although this report is not specifically carried forward into Rome I, reference will be made to its commentary where it remains germane to terminology employed within Rome I. Nevertheless, the focus will be on Rome I itself, which will now apply to all contractual conflict cases which fall within its scope.5

B. The Applicable Law


It has been observed that no contract can exist in a vacuum; it must subsist against the background of a legal system which clothes the arrangement with some meaning and effect.6 It is necessary to ask at the outset how the relevant legal system is to be identified. The problem can only arise in cases involving a cross-border element, but when it does arise, the question can be one of some difficulty. How is it to be resolved?


In the first instance, Article 3(1) of Rome I reflects the principle of party autonomy and allows the parties the freedom to select the system of law which is to govern their agreement. It provides that:

A contract shall be governed by the law chosen by the parties. The choice shall be made expressly or clearly demonstrated by the terms of the contract or by the circumstances of the case. By their choice, the parties can select the law applicable to the whole or to part only of the contract.


This provision is clear and it is not proposed to discuss it in depth, although it will be necessary to return to the concept of a ‘split’ governing the law in the context of the lex monetae principle.7 For present purposes, it is sufficient to note that the first sentence of Article 3(1) is expressed in mandatory terms. Consequently, the parties’ choice of law must be respected even if it has no connection with the contractual situation as a whole.8


Matters become rather complex where the applicable law cannot be identified in accordance with Article 3 of Rome I. In this respect, Article 4 of Rome I operates at three levels.


First of all, specific rules are given for particular types of contract. For example, contracts for the sale of goods or the provision of services are governed by the law of the place where the seller or the provider has his habitual residence.9 Franchise contracts will be governed by the law of the place in which the franchisee has his habitual residence,10 whilst distribution contracts are governed by the law of the country in which the distributor is habitually resident.11 It will be noted that certain banking arrangements—such as the provision of a current account—should be classified as a contract for the provision of a service and, bearing in mind the application of the ‘habitual residence’ test,12 such an account and the associated contract would be governed by the law of the country in which the account-holding branch is located.


Where the contract does not fall within one of the distinct categories it will be governed by the law of the country in which the party responsible for the ‘characteristic performance’ has his habitual residence.13


The rules are then withdrawn if it is clear from all the circumstances that the contract is manifestly more closely connected with another country, in which case the law applicable to the law of that country applies.14


If the above rules do not generate an answer, then the contract will be governed by the law of the country with which the contract is most closely connected.15