THE EFFECTIVE REACH OF CHOICE OF LAW AGREEMENTS

• Date: 01 December 2008
• Published date: 01 December 2008
• Author: YEOTiong Min1 LLB (Hons) (National University of Singapore), DPhil, BCL (Oxon); Yong Pung How Professor of Law, School of Law, Singapore Management University

Two fundamental principles relating to party autonomy developed in the recent history of the conflict of laws. Despite initial reservations, the law today takes for granted that the parties’ agreement is nearly conclusive in respect of both their choice of litigation forum and their choice of the law governing the contractual relationship. Meanwhile, the law of obligations — in tort, restitution and equity — has grown apace; disputes between contracting parties today are rarely confined to pure contractual issues. Can contracting parties choose the law to govern non-contractual disputes in cross-border litigation? In the absence of such choice, to what extent can or should the choice of law in contract be relevant to selection of the law applicable to non-contractual obligations in their disputes? It is also important to distinguish between these two situations if different legal consequences follow. This article addresses these issues, with specific reference to Singapore law.

I. Introduction

A. Choice of court agreements

1 One of the earliest modern Singapore cases on the conflict of laws to capture the attention of foreign writers was a judgment of Yong Pung How J (as he then was) in 1990. The plaintiff had started an action in Singapore, but the defendant pointed to a clause in their contract stating that they had agreed to the exclusive jurisdiction of the Japanese court. The action was stayed; Yong J said: “contracts freely entered into must be upheld and given full effect unless their enforcement would be

unreasonable and unjust”. This was The Asian Plutus,2 and it was cited in a note in the Law Quarterly Review by Adrian Briggs, now Professor of Private International Law at the University of Oxford, for making so clear a principle that had been lost sight of by the English courts.3

2 There have been reported cases of the English court giving effect to the litigants’ choice of a foreign court by stay of proceedings from the end of the 18th century.4 There was no question that the parties have no power to exclude the jurisdiction of the court of law, but the court could refuse to exercise its jurisdiction to hear the case. There was some debate about the jurisprudential basis for staying such proceedings,5 but by the middle of the 20th century it was orthodoxy that the action was stayed in order to give effect to the parties’ agreement.6 The common law, in England and Singapore, has waxed and waned in the extent to which they have given effect to such agreements.7 As this article has more to do with party autonomy in choice of law agreements than in choice of court agreements, it suffices to say that today both English8 and Singapore9 law recognise that a contractual exclusive choice of court agreement will be given effect to unless strong cause amounting to exceptional circumstances can be demonstrated otherwise. Similarly, if foreign proceedings are commenced or continued in breach of an exclusive choice of forum court agreement, the court of the forum would readily grant an anti-suit injunction unless strong cause is shown otherwise.10 On a broader note, the role of party autonomy in choice of court agreements is clearly recognised in a recent international

instrument: the Hague Convention on Choice of Court Agreements of 2005.11

B. Choice of law agreements

3 The history of choice of law in contract has been marked by the gradual progress of the recognition of party autonomy.12 Even though the earliest reported cases on choice of law for contracts looked to the law of the place where the contract was made as the proper law of the agreement,13 it was recognised by the middle of the 18th century that the contract was exceptionally governed by the law intended by the contracting parties.14 By the middle of the 19th century, the law of the place of contracting had been re-interpreted as being the presumed choice of law of the contracting parties;15 and it became uncontroversial for the English court to look to the law expressly or impliedly intended by the contracting parties to govern their relationship.16 By the 1930s, it was well settled that a contract was governed by the law intended by the parties to apply to the contract.17Vita Food Products Inc v Unus Shipping Co Ltd (“Vita Food”) remains today the leading Commonwealth authority:18 a contract is governed by the law chosen by the parties, unless the choice is not bona fide or legal, and there is no reason to avoid the choice on public policy grounds. There had been some wavering on the conclusive effect of the parties’ express choice of law in the middle of the 20th century,19 one view being that the chosen law was merely an indication of the law with the closest and most real objective connections with the contract. That view soon petered out, and the proposition in Vita Food on the effect of party choice of law became regarded as unchallengeable.20 In the absence of choice, the contract

would be governed by the law with the closest and most real connection with the transaction and the parties.

4 The leading Singapore case is Peh Teck Quee v Bayerische Landesbank Girozentrale,21 where the Court of Appeal affirmed the Vita Food principle that the express choice of law of the parties will be virtually conclusive unless it is not bona fide or legal. The limitations to party autonomy are narrowly circumscribed. It will be very difficult to demonstrate a case of absence of bona fides outside the situation where the sole purpose of the contractual choice of law was to avoid the application of the law otherwise applicable to the contract.22 Of course, the application of the foreign law chosen by the parties will be denied if the application of that law will be contrary to the fundamental public policy of the forum.23

C. Rise of non-contractual liabilities

5 These developments in choice of court agreements and choice of law clauses in the litigation context emphasise the significant role of party autonomy in cross-border dispute resolution.24 This should mean that commercial parties have significant leeway to plan their transactions in accordance with a single chosen system of law.

6 However, another key line of development lies within the realms of domestic law. Tort law, especially in the law of negligence25 and in

relation to the recovery of economic loss,26 developed exponentially within the last century. The law of restitution or unjust enrichment, a topic which had struggled for a long time for an existence independent from the historical maze of quasi-contract, was eventually recognised by the House of Lords as an independent source of obligations in 1991,27 a development swiftly confirmed in Singapore in 1995.28 Equitable obligations, once mired within the law of trusts, began to emerge in the 1970s as a vital source of liability in commercial litigation.29 Disputes between contracting parties today almost invariably involve more than just contractual liability. Very often, one party does not merely aver the other has breached the contract. Additional allegations will often involve breaches of tortious duties, liabilities for unjust enrichment, breaches of fiduciary duties, confidentiality duties, equitable duties of skill and care, and liabilities as constructive trustees.30

7 As a result, litigants will often have to deal with choice of law rules for torts, restitution and equitable obligations as well. The choice of law rules for these areas are less developed than for contracts, and unlike the case of contracts, there is no direct reference to the choice of the parties. This article does not deal with property issues; the interaction between party autonomy and rights of third parties is a complex topic outside its scope.31 Similarly, matrimonial agreements require special consideration and fall outside the scope of this article as well.32

8 The result of the concurrent existence of different juridical obligations is the potential fragmentation of the legal dispute: different domestic laws potentially apply to different obligations arising out of a single legal relationship, sometimes the same (but concurrent) obligation can be governed by different laws depending on whether it is characterised as contract, tort, restitution, or even equity, or one or more of the above.

II. Outline

9 To address this problem of potential fragmentation, this article proposes to consider three questions:

(a) Where the contracting parties have not chosen a law to govern non-contractual obligations arising out of or relating to their contractual relationship, does the law of the contractual relationship have any effect on the choice of law to govern these non-contractual obligations?

(b) Where the contracting parties have chosen a law to govern non-contractual obligations arising out of or relating to their contractual relationship, should effect be given to the choice?

(c) If there is indeed a legal distinction between the two situations, how is situation (a) to be distinguished from situation (b)?

III. Relevance of underlying contractual relationship to choice of law for non-contractual obligations

10 This article focuses on three main categories of non-contractual obligations that are likely to arise in commercial disputes: torts, restitution and equity.

A. Tortious obligations

11 There is significant divergence in the choice of law rules for torts even within the Commonwealth. Singapore follows closely the original common law position: a tort will be actionable in the Singapore courts if it is actionable as a tort by the law of the forum and civil liability in respect of the same claim can be established by the law of the

place of the tort, subject to a flexible exception.33 A Singapore innovation is that, unlike the English common law where English law invariably applies to torts committed in England,34 under Singapore law the same choice of law rule applies whether the tort is committed in or out of...