The relevance and importance of the choice of the governing law in financial agreements


Submitted Assignment, 2015
8 Pages, Grade: 64.00

Excerpt

Introduction

According to Hillman (1992, pp.331-2), the growing importance of transnational investing has led “investment advisers [to] routinely counsel clients to diversify by including foreign equity and debt offerings in their portfolios”. Indeed, he witnessed the “rapid acceleration of transnational investing (…) occurring in an environment in which emerging markets, and foreign interest in these markets are exploding” and realized “the problem of 'extraterritorial' assertion of jurisdiction – the application of domestic securities law to transactions with significant foreign elements”.[1]

Gruson (1996, p.27) argues that “legal risks exists with respect to all contracts”. He argues that “the seriousness of the risk is increased in international agreements because one party is always unfamiliar with the law governing the agreement”[2]. Buchheit (2007, pp.1-4) concludes that “after all, cross-border credits are invariably evidenced by contracts of one kind or another that contemplate enforcement in a national court”[3].

On the choice of law, Blair (1995, p.61) wrote “the classic English choice of law rule was that a contract is governed by the law expressly or impliedly chosen by the party and in the absence of such choice, by the system of law with which the contract had its 'closest and most real connection'”.[4]

Hillman (1992, p.339) holds that “the premise that the limits of a nation's capacity to regulate economic matters is dictated by public international law frames the issue as one of jurisdiction rather than choice of law, which is the province oath, conflict of laws”[5]. According to Reinmann (1999, p.589), it is due to modern needs and practical concern that the choice-of-law clauses emerged. He argues that “in our age, transboundary contacts and thus choice-of-law issues have proliferated, creating the potential for numberless disputes”. And “it is usually to the advantage of all involved if the choice-of-law question is resolved by agreement ex ante”. The benefit of choice-of-law clauses is “to avoid litigation and thus save both the parties ad the court time and money”.[6]

In this assignment, we are to “critically discuss the relevance and importance of the choice of the governing law in financial agreements”.

Development

The transfer of capital through banks and financial institutions and their customers' trading activities at an international level, were to further the « practice of international finance ». Along with international finance, financial contract was to become more complex as it « involves parties that span different jurisdictions », and thus « the laws of several different jurisdictions », such as (Ce Fi MS, Unit 8, pp.3-5) :

- the law of the borrower's jurisdiction of incorporation
- the law selected to govern the loan agreements
- the law of any jurisdiction where enforcement proceedings might be brought

The role of governing law between borrowers and lenders remain difficult because « borrowers often ask for the loan agreement to be governed by the law of their own jurisdiction », while the lenders disagree and argue that they « need to be protected from potentially adverse changes in the law of the borrowers' jurisdiction » In deciding which law should be chosen to govern the contract, relevance should be given to the following elements :

- The jurisdiction concerned should be stable
- Its legal system should provide a sophisticated body of rules that are well suited to dealing with complex commercial disputes
- The judges, and court system generally, should be similarly experienced at handling big commercial cases and be free from outside interference
- The jurisdiction should have a good network of treaties for the reciprocal enforcement of judgements[7].

Following decades of development, according to Reinman (1999, pp.576, 573),“the fundamental rule in the United States as well as Europe today is that the parties to a contract can choose their own law.” Indeed, both texts of the United States' Restatement (Second) of Conflict of Laws (section 187) and the Europeans' Rome Convention on the Law Applicable to Contractual Obligations, through the “principle of freedom of choice”, “provide that courts should apply the law chosen by the parties or, in the absence of such a choice, the law of the state or nation with which the contract is most closely connected”[8].

The parties involved in international financial contracts are thus the ones choosing the governing contract or applicable law. They will consider different factors such as (Ce Fi MS, Unit 8, p.9)[9]:

- tradition, convenience, and familiarity
- avoidance by financial institutions of unknown systems of law
- commercial orientation, stability and predictability of the chosen legal system
- the desire to coincide the governing law with the potential forum of litigation
- the availability of experienced lawyers trained in the type of financial contract concerned
- the language of the transactions

The importance of jurisdiction remains a central factor, with developments in the United States and Europe leading to what Reinmann (1999, p.579) describes as a “multifactor approach under which courts mix various territorial contacts with state interests and policies, trying to determine the jurisdiction with which the contract has the most relevant connection”.[10]

Cases related to securities law have been viewed as pertaining to public law, and the need to define according to Hillman (1992, p.333) “the limits on the extraterritorial application of domestic law by reference to limitations supposedly imposed by international law on a nation's 'jurisdiction to prescribe' law”.[11] Hillman (1992, pp.354-355) concludes that “in an environment in which no state has the capacity to impose unilaterally on the world its standards for securities transactions, allowing room for choice of law recognizes the increasing diversity of legal cultures in ways that the reach of law approach does not”.[12]

According to Blair (1995, p.60) choice of law therefore knows some limits; which are:[13]

- it does not have “any place in the insolvency of borrower or bank”, since “insolvency régimes are imposed according to the dictates of the location of offices and assets, rather than a pre-insolvency choice.
- It cannot “resolve priority claims between, for example, a bank and a third party claimant to an asset held as security.
- “A mandatory choice of law is sometimes imposed by statute”, such as the “UK Bills of Exchange Act 1882”.
- It will be “inoperative to circumvent the mandatory rules of the forum”, such as “the forum state or other illegality”.
- “It will subject to the forum state's international obligations”.

The impact of choice of law, according to Blair (1995, pp.66-), are thus described through five different terms[14]:

- Expropriation (of financial assets)
- Moratorium (bank debts)
- Third party freeze (economic sanctions)
- Extra-territorial orders (information disclosure)
- The fraud exception

Indeed, loan agreements can become more complex if they involve “not only parties across different jurisdictions but also currencies or performance duties”. In order to deal with those cases, “legal doctrine, judicial practice and legislation have developed these two main methodologies”: the unilateral and the multilateral ones(Ce Fi MS, Unit 8, p.5).[15]

With the unilateral approach, “the courts of every jurisdiction will apply their own connecting factors to decide which country is more relevant for the particular transaction”. The multilateral approach, on the other hand, seems to present more certainty, because with “all countries where the international treaty applies there is only one connecting factor (the law of the country of the lender) to determine the chosen law.

However, at the essence, “multilateral conflict rule are [still] products of international legal arguments between sovereign jurisdictions”. In the end, what is relevant to sovereign jurisdictions when dealing with cases related to “cross-border phenomenon is not 'which of the more than one relevant legal systems apply' but 'whether the national domestic law is applicable to this transaction' or 'whether the national public law statutes apply to the subject matter in question'” (Ce Fi MS, Unit 8, pp.6-8).[16]

An example of regional cross-border multi-jurisdictional conflict of laws case is the succession planning concern of wealthy families in the Middle East. Indeed, it was the rise of “privately-held global wealth” [and] prosperity that led to the internationalization of wealth and the concern over succession, along with its complex issues related to “exposure to different legal, tax and regulatory regimes”. Sigrist & Kempster (2013) argues that, “an important issue is the determination of which law applies to a cross-border succession”, because “determination of the applicable law can make a huge difference, not only in relation to how the succession is administered but even to the more basic questions as to what constitutes the estate of the deceased and who is entitled to it”.

The rules regarding conflict of laws “deal with jurisdiction, choice of law and judgment recognition”, and “help to determine if a given court has jurisdiction to hear a case and then apply the choice of law rules to decide which law, either local or foreign, is to be applied”. Thus, “the recognition and enforcement of foreign court decisions is an important aspect in the field of international succession”.

In order to determine the “personal law of the deceased », some factors need to be considered, such as the « habitual residence at death, domicile of the deceased, nationality, and location of the deceased property ». The absence of « international conventions dealing with estate succession » among many countries, will lead to consider different jurisdictions and their different rules, which may not apply foreign laws and judgements, as in the case with Shari'ah law and « adjudicatory authorities ».

Moreover, differences in the « questions of property ownership, matrimonial regimes and inheritance rights » will arise, since « Islamic law and civil law are systems of forced heirship, protecting certain categories of heirs so that they cannot be excluded from inheriting part of a person’s estate », while the English common law follows « the principle of testamentary freedom ». More complexities will thus arise between the very different legal systems of Islamic law, civil law and common law. In addition, « a variety of assets in different locations and the increasing international complexity of wealthy families have brought more exposure to potential challenges, and even litigation, about who should receive which assets on the death of the wealth creator ». Sigrist and Kempster advise that « proper legal and tax planning in all the relevant jurisdictions helps to mitigate the risks associated with multi-jurisdictional exposure ». However, « changing laws and extraterritorial legal effects make it a demanding exercise requiring expert and professional advice »[17].

Among the solutions is the attempt at reducing « the number of relevant jurisdictions for a family », while « anticipating potential conflicts of law issues is likely to bring more legal security in theirarrangements and may help to discourage attempted challenges after the death of the wealth creator ».[18]

[...]


[1] Hillman, R., 1992. 'Cross-Border Investment, Conflict of Laws, And The Privatization of Securities Law. Available from: http://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=4171&context=lcp [Accessed September 2015].

[2] Gruson, M., 1996. 'Management of Legal Risks in International Agreements', Willamette Bulletin of International Law and Policy Vol. 4, pp.27-41.

[3] Buchheit, L., 2007. 'Law, Ethics and International Finance', Law and Contemporary Problems, Vol. 70 (3), pp.1-6.

[4] Blair, W., 1995. 'Insulating Perceived Risks and the Role of Choice of Law in Cross-Border Financings', NAFTA: Law and Business Review of the Americas Autumn Vol 60.

[5] Hillman, R., 1992. 'Cross-Border Investment, Conflict of Laws, And The Privatization of Securities Law. Available from: http://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=4171&context=lcp [Accessed September 2015].

[6] Reinmann, M., 1999. 'Savigny's Triumph? Choice of Law in Contracts Cases at the Close of the Twentieth Century', Virginia Journal of International Law, Vol.39:571.

[7] Center for Financial and Management Studies (Ce Fi MS), 2014. Legal Aspects of International Finance, Units 5 to 8. London.

[8] Reinmann, M., 1999. 'Savigny's Triumph? Choice of Law in Contracts Cases at the Close of the Twentieth Century', Virginia Journal of International Law, Vol.39:571.

[9] Ibid.

[10] Reinmann, M., 1999. 'Savigny's Triumph? Choice of Law in Contracts Cases at the Close of the Twentieth Century', Virginia Journal of International Law, Vol.39:571.

[11] Hillman, R., 1992. 'Cross-Border Investment, Conflict of Laws, And The Privatization of Securities Law. Available from: http://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=4171&context=lcp [Accessed September 2015].

[12] Ibid.

[13] Blair, W., 1995. 'Insulating Perceived Risks and the Role of Choice of Law in Cross-Border Financings', NAFTA: Law and Business Review of the Americas Autumn Vol 60.

[14] Blair, W., 1995. 'Insulating Perceived Risks and the Role of Choice of Law in Cross-Border Financings', NAFTA: Law and Business Review of the Americas Autumn Vol 60.

[15] Center for Financial and Management Studies (Ce Fi MS), 2014. Legal Aspects of International Finance, Units 5 to 8. London.

[16] Ibid.

[17] Sigrist, P. & Kempster S., 2013. 'Conflicts of Laws in Multi-Jurisdictional International Succession Planning', The Oath, The Middle East Law Journal for Corporates.

[18] Sigrist, P. & Kempster S., 2013. 'Conflicts of Laws in Multi-Jurisdictional International Succession Planning', The Oath, The Middle East Law Journal for Corporates.

Excerpt out of 8 pages

Details

Title
The relevance and importance of the choice of the governing law in financial agreements
College
School of Oriental and African Studies, University of London  (CEFIMS)
Course
Legal Aspects of International Finance
Grade
64.00
Author
Year
2015
Pages
8
Catalog Number
V432711
ISBN (eBook)
9783668747647
File size
574 KB
Language
English
Quote paper
Jennie Robinson (Author), 2015, The relevance and importance of the choice of the governing law in financial agreements, Munich, GRIN Verlag, https://www.grin.com/document/432711

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