“The problem of ascertaining the lex causae is more perplexing
(very puzzling) in the case of contracts than in almost any other
topics” – says Dr. Cheshire
Contracts are infinitely various and may present a multiplicity of
For eg: - A contract may be made in one country; the place of
performance may be in another country; the subject matter may
be situated in a third country; the parties to the contract may be
domiciled in a fourth country and so on.
In such instances, it if difficult to find out which law is to be
applied to govern the rights and liabilities of parties to the
Some countries applies the law of the place of contracting &
some other countries prefer the law of place of performance; and
even a third nation’s law to decide and settle the matter.
PROPER LAW OF CONTRACT :
This principle evolved from the English private international law,
to decide questions arising out of contractual relations in cases
involving foreign element.
‘Proper law’ means the apt to decide a matter. It is ascertained
based on 2 theories:-
(1) Theory of intention / Subjective theory
(2) Theory of Localisation of Contract / Objective theory
THEORY OF INTENTION :
It is propounded by Dicey.
Theory of intention says, proper law is that law which the parties
intended to apply.
Where the parties have chosen the law under which their rights and
obligations are to be determined, this chosen law clearly is the
proper law of contract.
Where the parties have not expressly selected any such law, their
intentions should be gathered by looking into various relevant
So, proper law of contract is the law which the parties intended or
fairly be presumed to have intended, the contract to be governed.
LOCALISATION THEORY :-
This theory is propounded by Westlake.
According to this theory, proper law of contract is the law of the
country in which the contract may be regarded as localised.
What is the country with which the contract is most closely
connected? – that country will be the place of localisation of the
As Westlake says : “ proper law should be the law of the country
with which the transaction has the most real connection and not the
law of the place of contract as such”.
It can be made clear through an illustration:
There was a contract between X – domiciled in France & Y -
domiciled in Italy. The contract was being entered in Italy, and
place of performance was also in Italy. But the money due is to be
paid in a French Bank.
In this case the elements are most densely grouped in Italy or
Italy is the country with which the contract is most densely
grouped in Italy or Italy is the country with which the contract is
most closely connected. So if localisation theory is applied, Italy is
the proper law of contract here.
DIFFERENCE BETWEEN THE TWO THEORIES :-
Considering the differences between subjectivity & objectivity
theory, in the first one court purports to ascertain the actual
intention of the parties, but in the second one, court imposes on
the parties an intention which reasonable men would have had
under the circumstances of the case.
According to intention theory, where the parties have indicated
the law to be applied in the contract itself, that law is the proper
law, irrespective of other considerations. Proper law is the law
which the parties intended to apply and where that intention has
been expressed in the contract, it will be conclusive.
But according to localisation theory, The proper law of contract
depends not so much on the place where it is made, or even on the
intention of the parties , or in the place where it is to be performed
but on the place with which it has the most substantial
Where there is express Choice of the Law to be applied in the
The important question here is whether the parties have
unrestricted freedom in their choice of proper law. For e.g : to
select a system of law with which the contract has no connection
Lord Atkin says: where the intention is clearly expressed, it is
conclusive as already cited.
In Vita Food Products Inc. V/s. Unus Shipping Company(1939)
The defendant was a company incorporated in Nova Scotia
(Eastern Canada). The plaintiff was a New York firm. They entered
into an agreement at Newfoundland (another province of eastern
Canada) by which the defendant agreed to carry a cargo of herrings
in a Nova Scotian ship and deliver them to plaintiff at New York.
The Bills of lading were signed at Newfoundland by agents of the
According to a Newfoundland statute, the Hague rules should
govern any contract of carriage from that country and every bill of
lading signed in the country should contain an express class
making the Hague rules applicable.
The bills of lading in this case omitted to carry that particular
clause. But the parties had selected English law expressly in the
Both the Hague rules and the bills of lading exempted the
defendant company from liability for the negligence of the master
During the voyage the ship ran into a gale due to the negligence of
the master of the ship., The ship ran aground off the Coast of Nova
Scotia. The cargo of Herrings was consequently damaged and was
forwarded to the plaintiff in that damaged condition.
The plaintiff sued the defendants of Nova Scotia for damages.
The privy Council stated that English law was the proper law of
contract since the parties had selected English law expressly in
the contract itself.
Therefore, this decision would appear to accept the position that
the parties are free to select a law which may not have any
connection with the contract.
Where there is no express Selection of the Proper law :-
When the intention of the parties regarding which law to be applied
in case of any breach of contract & in issue regarding distribution of
rights and liabilities , the Court may ascertain whether the parties
have impliedly made it clear about a particular law to govern the
In the absence of such implied intention, the court has to find out the
intention as disclosed by the factors attending the contract.
i.e. , the judge putting himself in the place of reasonable man
determines the proper law.
So, where the proper law is not selected by the parties themselves, it
would have to be decided by examining the system of law with
which the contract is most closely connected.
The Azzunzione (1954.1 All E.R 278)
In this case, the contract was one for carriage of wheat from a
French Port to an Italian Port on board an Italian ship.
The charter party was an organization of French merchants.
The wheat was shipped under an exchange agreement between
French government and Italian government, but this fact was not
known to the Italian ship owners. The contract was concluded in
France by French and Italian brokers.
The contract was drawn up in English language in English standard
form but supplementary by a form in French language.
Freight and demurrage were payable in Italian currency in Italy
*What will be the proper law when considering the facts and
circumstances of that case.
Points of contract with French law
1. Contract was concluded in France
2. Charterers were French merchants
3. French brokers were acting on behalf of the French Govt.
4. The contract though written in English was also write in
Points of contract with Italian Law
1. The ship was Italian
2. Place of performance was Italy
3. Freight and demurrage were payable in Italian currency and
4. Bills of lading were endorsed to consignees in Italy
5. The Italian broker was acting on behalf of the Italian Govt.
The Court of Appeal held unanimously that Italian law was
the proper law of contract.
The decisive factors were the facts that the contract was to be
performed in Italy and the freight and demurrage were
payable in Italian currency.
When the intention of the parties to a contract with regard to
the law governing it is not expressed and cannot be inferred
from the circumstances, the contract is governed by the
system of law with which the transaction has its closest and
most real connection.
The Alwahab Case (Amin Rasheed Shipping
Corporation (1983)2 All.E.R.884) :-
The plaintiff in the case – a Libyan Company doing business in
Dubai, owned a vessel named the ‘Alwahab’ which traded in
Arabian Gulf waters.
The Alwahab was insured with the defendants, a Kuwaiti insurance
company against war and marine risks.
The Insurance policy was based on the Lloyd’s form as set out in
the English Marine Insurance Act.
The policy was issued in Kuwait and provided for the claims to be
paid in Kuwait although the currency specified was Sterling (Pound
Alwahab was seized by Saudi Arabian authorities for alleged
smuggling activities and plaintiffs claimed under the policy for the
constructive loss of the vessel.
The insurance company rejected the claim and the plaintiff sought
permission to sue in the English court.
Here only the English law and the Kuwaiti law were involved and
the question of determination was which of the two was the proper
law of contract.
The House of Lords held that the proper law of contract of
insurance was English law. i.e., the proper law of contract is the
law which parties intended to apply.
Although the parties did not expressly choose English law, the
provisions of the contract taken as a whole, by necessary
implication lead clearly to the conclusion that the intention of
parties was that their mutual rights and obligations should be
determined in accordance with the English law of marine
Case where the Proper law is not the only law applicable :-
situations where law other than English law is applied.
The more important among these are stated below:-
(a) Formal validity
(a) Formal Validity :-
In earlier times, jurists advocated the exclusive application of
Lex loci contractus ( law of the place where the contract is made)
to determine the formal validity of contracts.
According to this view, local formalities are compulsory, and if a
contract fails to satisfy the formalities prescribed by the law of
the place where the contract is made, the contract is
But now, the generally accepted view is that compliance with
local formalities is not compulsory and its absence by itself will
not affect the enforceability of contract.
But both principles of proper law and formal validity co-exists.
(b) Illegality :-
It is not possible to decide the question of illegality of a contract by
referring exclusively to proper law; it may be necessary to take into
account other legal systems also.
For e.g. :- an English court will not enforce a foreign contract
regarded as immoral, although it may be perfectly valid according to
the proper law.
Principles followed to find the illegality in contract are: -
(1) If illegal to proper law
(2) If contrary to English public policy
(3) Illegal by Lex loci contractus
(4) Illegal by Lex loci solutionis (Law of the place of performance)
(5) Illegal by Lex domicili / Lex patriae
Illegality is considered in the following matters:
* immoral * corruptive * contracting with enemy nations
* wagering contracts etc.
Capacity of parties to enter into a contract :-
There is no clear English authority to indicate the law which
governs the question of capacity to enter into a contract.
Some favours the application of lex domicili of the parties
Lord Greene says : capacity to be determined not by the law of the
domicile but the law of the place where the contract is made.
But some favours the proper law
So Cheshire says: the choice lies between lex domicili, lex loci
contractus & the proper law.
Another solution i.e., lex loci contractus is equally objectionable.
The place of contracting in modern conditions may be the place
where the parties were temporarily present.
The best solution is to decide the question of capacity by the
proper law of contracts objectively ascertained, i.e., the law with
which the contract is most closely connected.