(b) Failing a choice of law (the lex causae)
Closest connection and characteristic performance. If the parties fail to express a clear choice of law, the rules of private international law bring the contract under a national law. In case of a contract, that will be the jurisdiction with which it has its ‘closed connection’. This bringing-home of a contract (if the parties did not choose the applicable law) that a contract will be localised in the jurisdiction of the party who has to perform the most characteristic obligation. This principle, which was first formulated under Swiss private international law, has been adopted worldwide, with the most important exception being the fifty United States.
The eight ITC Model Contracts. The characteristic performance of each of the ITC Model Contracts may differ from one to another.
- In a sale of movable goods, the characteristic obligation is the act of sale and delivery of the goods (as opposed to the payment of the purchase price). Accordingly, a contract of sale without a choice of applicable law will normally be governed by the laws of the country where the seller is established. The same applies to a long-term supply agreement, which is essentially a sales contract.
- In distribution (without an express choice of law), the supplier performs the characteristic obligation (not the distributor, since distribution is a species of sales).
- In commercial agency, the situation is slightly more complicated – it is less evident which party’s obligation is more characteristic: most probably the agent’s duties, but agency sometimes resembles an employment relationship. Therefore, (even with an express choice of law) a commercial agent will to a large extent be protected by super-mandatory rules of the jurisdiction where it operates (at least that would be the case in the EU).
- In manufacturing, the manufacturer performs the most characteristic obligation, whether manufacture and sale or the service of manufacturing, so in the absence of a choice of law, the law of the country where the manufacturer is established applies.
- In an incorporated joint venture, the joint venture company’s internal rules would be those of the applicable company law; to avoid uncertainties, a joint venture agreement among shareholders will typically be subjected to the laws of the joint venture company, although exceptionally, the ‘joint venturers’ might have their reasons to opt for another applicable law. If no choice is made, a corporate joint venture agreement and an alliance are difficult to localise: in many collaboration efforts, it appears fairly arbitrary to establish which party performs the most characteristic obligation. In such cases, the more abstract principle of establishing the ‘closest connection’ with a national legal context might provide an answer, one way or another.