The Identification of Appropriate Law in International Contract Obligations and the Rome Convention Application Analysed on the Example of the England and Wales Court of Appeal Decision in the Case Raiffeisen Zentralbank Österreich AG v. An Feng Steel Co

  G Tchervenkova: The Identification of Appropriate Law and the Rome Convention  

Table of Contents:

1.  The conflict of laws and problems associated to it  3

1.1.  Selecting the proper approach for the identification of appropriate law  3

1.2.  The nature of the issue in the case as a key element for the situs determination  

  and the appropriate law identification  4

1.3.  Determination of the connecting factor for the identification of appropriate law  7

1.4.  The international precedence of law and the appropriate law identification  9

2.  The Case: RAIFFEISEN ZENTRALBANK ÖSTERREICH AG v AN FENG  

  STEEL CO LTD AND OTHERS  11

2.1.  Facts of and proceedings in the case  11

2.2.  Court s decision  11

2.3.  Legal background and considerations of the court for the justification of  its

  decision  12

3.  Court s decision in the RAIFFEISEN ZENTRALBANK ÖSTERREICH AG  v.

  AN FENG STEEL CO LTD AND OTHERS Case in the light of the problems  in

  relation to the proper identification of appropriate law as outlined in Part 1  15

3.1.  Approach taken by the Court of Appeal for identification of the appropriate law  15

3.2.  The nature of the issue in the case as a key element for the situs determination  

  and the appropriate law identification  18

3.3.  The assignment as a link to the connecting factor and the identification of  

  appropriate law  21

3.4.  Art 12 of the Rome Convention 1980 and the identification of appropriate law  23

  BIBLIOGRAPHY  26

  APPENDICES  28

Appendix A:  Chronology of the facts in the case  28

Appendix B:  EC Convention on the Law Applicable to Contractual Obligations  

  (Rome 1980) Art 12  33

Appendix C:  Legal Terminology  34

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G. Tchervenkova: The Identification of Appropriate Law and the Rome Convention

1. The conflict of laws and problems associated to it

Conflict of law issues in international matters make cross-border contracts a complex undertaking. Thereby, the problems arising in regard to the identification of the appropriate law can be outlined as a central group of problems in a situation of conflicting domestic laws that relate to a particular legal issue with international dimensions.

1.1. Selecting the proper approach for the identification of appropriate law

The first difficulty in regard to the proper identification of appropriate law is associated with the general absence of an unified and internationally recognised approach that should be followed by national bars of the respective instance when dealing with cross-border issues and when making their decisions. On the basis of a considerable variety of possible, recommendable, and justified approach options in a particular situation there is still no widely shared opinion at international legal level what is indeed the proper approach that should be applied.

Some legal views prescribe as a well- founded approach the involvement of a process comprising a couple of stages (see Staughton LJ, cited in Par. 26 of the case presented in Part 2 below). As examples of such process stages can be mentioned: characterisation of the issue nature and its components; selection of the rule of conflict of laws; laying down the connecting factor between the particular issue and the legal framework outlined by the selected rule of conflict of laws; and identification of the law system, to which the connecting factor relates. It is stressed that if adopting a multi-stage approach when identifying the law appropriate to a given case an important requirement represents the carrying out the whole process in a broad internationalist spirit in accordance with the principles of conflict of laws of the respective forum (Par. 28). As a next key requirement it is then emphasised that the overall aim pursued herewith should be not just the identification of a possible appropriate law but furthermore the identification of the most appropriate law to govern the respective particular issue. On this way, it should be avoided a mechanistic application of law that could disregard the consequences. However, the multi-stage approach for identification of the appropriate law should not be regarded as exclusive and inflexible. It is therefore underlined that the process stages may be redefined or modified, new categories may be added, and new rules may be integrated into it if that turns necessary for achieving the overall aim of identifying the most appropriate law that should be employed to a specific particular case.

While some legal views recommend the multi- stage approach as the justified one for the identification of appropriate law, other legal perceptions rather deny it by stressing the impossibility

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G. Tchervenkova: The Identification of Appropriate Law and the Rome Convention of taking each step of such a process in isolation (see Auld LJ, cited in Par. 28 of the case presented in Part 2 below). The representatives of this viewpoint tend to rely on a kind of inter-play or even circularity of the stages in the process of selecting the right law. Thereby, it is often emphasised the need to look beyond the formulation of a particular claim in order to identify the true issue or issues thrown up by that claim and its defence. That in turn would enable the more correct and more precise identification of both the proper approach to a given case and the applicable l aw to it. However, such a process would require a parallel exercise in classification of the relevant rule of law. As a leading principle is then underlined the need to setting an overall aim which should be achieved. The latter should reflect the striving for establishing a community between the various legal systems rather than the ignorance of one or some of them and the related hereto simultaneous placing of a second one at an overruling position. When pursuing the establishment of such kind of community of legal systems it is important that the thus selected and properly employed approach and the related to it identification of appropriate law should not be constrained by particular notions or distinctions of a certain domestic law or of a competing system of law, which may well have no counterpart in the others’ legal systems. The scope of issue definition is stressed as a second requirement. It is emphasised that the issue in the case should not be outlined too narrowly if wishing to avoid the indirect linking and subjecting of the particular case to a certain domestic law and hence to avoid on that way a choice of law, which may turn inapplicable under the other legal systems (Par. 28).

1.2. The nature of the issue in the case as a key element for the situs determination and the

Regardless of which perceptional basis will be chosen as a methodological and conceptual approach when identifying the appropriate law, a second group of problems arises when the analysis of a certain case reaches the stage of characterising the nature of the issue raised by that case. In other words, it is about the correct identification of the leading right-obligation relationship, i.e. the one of primary position as between the parties in the case, and the outlining of the respective subordinate ones. As the various relation lines that may reveal themselves as implicated in contemporary cross-border legal disputes very often refer to different domestic laws, the right answer to this question can often be crucial for the whole outcomes of a case.

The main difficulty when identifying what legal relation is the decisive leading one, and what are the subordinate ones, consists in the complexity of nowadays private international matters, which often represent a combination of different in their quality subgroups of civil law. Thus, the

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G. Tchervenkova: The Identification of Appropriate Law and the Rome Convention overlapping of contractual and proprietary aspects of the issue raised by certain proceedings reveal the interdependency character of today’s globalised international reality. In a case, for instance, of a voluntary assignment in regard to insurances whereby assignor, assignee and debtors come from different countries there would arise two parallel lines of obligations. The first one will refer to the obligations by whic h the parties as per their covenant relations are bound to each other. The second one will refer to the tangible and intangible rights arising for each of them from their interdependency, especially with respect to the effects from the particular insurance case. Whereas the first line of obligations would enhance the contractual aspects of the issue in the case, the second one would place on a primary position the proprietary rights of the parties and could suggest, under particular circumstances, the justification of third party’s tangible or intangible rights whereby the third party’s claims could be both non-derived from the assignment and/or the insurance contract itself, and at the same time legally founded and grounded. The different nexus in each of these two perspectives for analysing the nature of the issue in the particular case would then turn the question on the nature of the issue actually into a question of a choice between different options for selecting the right situs when identifying the appropriate law – e.g. the proper law of the (insurance) contract or the lex situs of the (insurance) claim.

Conflict of law rules generally dictate the application of lex rei sitae or lex situs, the law of the place where the subject matter is situated. In the simple, traditional paradigm, the lex situs in a situation of third party’s indemnity rights against a debtor is the law of the jurisdiction where the debtor is registered. However, the international jurisprudence acknowledges the existence of other options, too, that should be taken into consideration when deciding on the question of identification of applicable law. Thus, the law of the assignor’s place of residence or business, and the law governing the contract of assignment represent alternatives of equal legal weight (Par. 25). Another option that has been widely recommended is the lex fori.

“Many writers agree that it is the lex fori which, on principle, matters. The reason for this is that the conflicts rule which provides for the connecting factor appertains to the lex fori.” (Spiro 1982: 47)

The correct und unbiased identification of the situs is, in its turn, a complex decision process whereby a series of considerations regarding the case should and have to be taken into consideration. On first place, the question is answered whether there is a transfer of any property rights and what is indeed the kind of this transfer. On a second place it is then important to clarify

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G. Tchervenkova: The Identification of Appropriate Law and the Rome Convention the kind of these property rights – whether it is about a transfer of tangible or of intangible rights. This is essential as

“The determination of the relevant law in the transfer of intangibles presents a different question from that of land and tangible chattels. … But, if a person has a claim against another arising out of contract or otherwise, and wishes to transfer this claim to a third person or to encumber it to secure a loan, there is little to suggest an analogy to the situs concerns incident to transfers of tangibles. It is obvious that this intangible claim has no actual location, but rather the concerns relate to the people involved and notice to the public so third parties may not be misled. Even so, the cases have for different purposes occasionally attributed a situs to intangibles.” (Scoles et al., 2000: 986-987).

In other words, the question of transfer of property rights turns to reveal itself as a source of conceptual, interpretational and approach differences – especially when it is about intangible rights that, because of their nature foremost related to the lack of a definite location they are explicitly connected with, are more difficult to be attached a certain situs to, as well as to be taken a uniform approach for setting a situs to them.

On third place, it is the consideration to be taken account on whether the issue in the case concerned is one implicitly connected and predetermined from the location of the proprietary rights involved or rather one of relations between the parties themselves, i.e. what is the leading relation line – that of the property aspects or that of the consensual aspects. The grounds for this consideration consist in the objective fact that

“Most, though not all, intangibles arise out of consensual transactions, i.e., contracts, and the transfer is usually a consensual transaction, i.e., assignment. … The analysis of this mixed problem of contract and property considerations is perhaps aided if the development of the rules of the law concerning the assignment of choses in action be kept in mind.” Scoles et al., 2000: 987-988)

That third consideration directly results from the second one, i.e. whether it is about tangible or intangible rights, and from the overall absence of a common and internationally widely applied characterisation of the situs to them and especially in regard to intangible rights. On this way, the lack of a unified conceptual and interpretational approach to the classification of proprietary aspects in the international private matters and foremost in respect to the intangible rights reflects and

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G. Tchervenkova: The Identification of Appropriate Law and the Rome Convention precondit ions to a certain degree also the problems when identifying the situs of legal cross-border relations with proprietary implications and thus, the proper selection of the appropriate law that should be applied, too.

This problem becomes even more complex when there are interests of third parties who claim any rights as well. Thus, the crossing of interests as per initial contractual relation between assignor and debtor, and as per subsequent assignment relations between assignee, assignor and debtor on one hand with the ones expressed by third parties through their claims, e.g. in the capacity of affected parties who have been in one or in another way involuntarily involved in the particular case on the other hand, not only reflects the complexity of the problems associated with the identification of the appropriate law but also turns the question on the correct analysis of the nature of the issue in the case, the resulting from it question on the leading line of legal relations involved, and hence at the very end, the question on the proper identification of the dominant situs into a key point for the judgement in a given case.

1.3. Determination of the connecting factor for the identification of appropriate law

The question on the correct determination of the connecting factor in a particular case outlines a third group of problems, which arise in regard to the identification of appropriate law in cross-border civil legal disputes. The connecting factor as a

“category of the legal issue having been found, the act, fact or other incident which connects such category with one of the rival legal systems…” (Spiro 1982: 46-47)

should therefore be distinguished from the characterisation of the nature of the issue. Following the discussion presented above on the difference resulting from a characterisation of the issue in a case as one subjected to a legal relation, i.e. obligation, or as one referring to property, it can be suggested that the connecting factor in a certain case may also be related to either contractual or proprietary rights. However, even when there is a transfer of property rights it cannot straightforward be presumed, the latter itself represented the connecting factor indicating the applicable law. Especially and foremost in the case of intangibles, the issue of assignability

“…would seem to be most closely related to the original transaction out of which the obligation arose and hence should be determined by the law most significantly related to that original transaction and the parties to it, with respect to the issue of assignability … if the intangible is a contractual right, assignability would be determined by the law of

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G. Tchervenkova: The Identification of Appropriate Law and the Rome Convention the state that is most significantly related to the contract and the parties with regard that issue of assignability … This issue relates to the original parties to the original transaction rather than to the parties of the assignment itself…”(Scoles et al.,2000: 988)

A key moot moment when determining the connecting factor is therefore outlined by the issues arising around the legal categories of assignment and of assignability, i.e. the legal requirements they should meet, the circumstances under which they are viewed as valid by a legal system involved in the particular case, the distinction between voluntary and involuntary assignments, and last but not least the distinction between an agreement to assign and the assignment itself. In all these points the legal systems may vary from a little degree up to quite a significant one and on that way, they may predetermine a conflicting or competing legal treatment of cases with private international implications. Thus, whereas the voluntary and involuntary assignments are formally regulated in all domestic laws in a similar way in respect to preconditions and treatment and there could be spoken about a certain degree of uniformly applied principles and rules rather than on serious differences, the second distinction reveals tremendous variations as between the legal systems elaborated on the basis of the existing in the world different legal traditions, e.g. some continental legal systems use to differentiate between an agreement to assign and the assignment itself whereas in the Anglo -Saxon law such a differentiation has generally not been made and the assignability is analysed in the framework of the overall contractual obligations. Multiple layers of intermediaries in different jurisdictions are interposed between the owners of rights and titles and the debtors, e.g. the insurers. In today’s cross-border business system the assignor’s, assignee’s and third party’s entitlement (e.g. in the insurances that have above been given as an example of a hypothetical but realistic situation of conflicting laws) is often against the intermediary, not the insurer themselves or against both of them. For instance, under a typical co- insurance involving insurers from different countries, if solely the lex situs rule should be applied it could require the consideration of each of a number of different laws of the situs in order to determine separately the validity of a given assignment of insurance proceeds in terms of each insurer’s proportionate share. However, it could become arguable whether this situation would not undermine the general intention, behind which stay both approaches for identification of appropriate law (as presented under 1.1.) – namely that there should be a homogeneous treatment of insurance underwriting and claims in accordance with the broad internationalist spirit and the striving for establishing a community between the various legal systems (Par. 38).

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G. Tchervenkova: The Identification of Appropriate Law and the Rome Convention Even if important, the differences in the rules, to which the assignment, as a key link to the connecting factor, is subjected in the various legal orders, cannot however, exhaust the palette of all questions that should be answered in order to properly identify the appropriate law (Par. 50).

1.4. The international precedence of law and the appropriate law identification

The instances of law that can be taken into consideration when identifying the appropriate law to a certain case is another sphere of problems. Generally, the rule is that all norms of contract law as a part of the applicable national law and all uniform law that is transposed into national law can and should be applied to a case of private international law. As a second rule, it can be noted that, in the case of competing foreign law applicable to a given case, the foreign law should be applied by the domestic bar in the same capacity as it would be done in the respective foreign country by its respective forums. In situations when the competing domestic laws do not provide a sufficient legal basis for identification of the appropriate law the issues in the case should be analysed with respect to one instance level higher – namely with respect to international conventions, like e.g. the EC Convention on the Law Applicable to Contractual Obligations (Rome 1980), the propositions of which may or may not be transposed into a certain domestic law. On the correct choice of law do depend the outcomes of a judgment. That comes to stress once again the importance of an unbiased, fair, and proper identification of appropriate law in private international disputes. Even if it cannot prevent conflict of law situations in private international matters, the Rome Convention is supposed to provide a key for preventing them to some degree as well as to contributing towards a solution thereof. The general development can, therefore, be presumed to be towards a greater degree of uniformity in international cases, especially in Western Europe.

“The main reason for this far reaching uniformity is the Rome Convention of 1980. As its rules are being adopted by more and more countries, they are about to become the common law of Western Europe. The Convention determines the rules applicable to the substantive and formal validity of contracts as well their interpretation and performance, the remedies for breach, and many other aspects. … The member states’ courts are required to interpret the Convention with a particular view to uniformity.” (Reimann 1995: 132-134)

The Rome Convention is a good example for an international convention of an appropriate application to private international cases comprising a conflict of law thanks to its applicability

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