On November 7, 1963, a contract was made between Swedish sellers (Monark Line A/B of Stockholm) and Greek buyers (Mr. Tzortzis and Mr. Sykias of Piraeus) for the sale of the steamship "Montrose" at £38,000 in freely transferable pounds sterling.
The deposit was to be made with a Stockholm Bank, and the payment in pounds sterling was to be transferred into Swedish kroner. The vessel was to be delivered and taken over at a Swedish west coast port.
The contract used a standard form approved by the Norwegian Shipowners' Association and adopted by the Baltic and International Maritime Conference.
Disputes arose and were submitted to arbitration. The arbitration clause stipulated arbitration in London.
Each party appointed an arbitrator, and the third arbitrator was appointed by the High Court in England by consent.
Dispute on Applicable Law: The primary question was whether the proper law of the contract was Swedish law or English law.
The arbitrators held that, in view of the arbitration clause, they were to apply English law. It was taken to the Commercial Judge, Mr Justice. Donaldson, who affirmed their decision.
Now the sellers bring the case to this Court.
ISSUE
What is the proper law of the contract: Swedish law or English law?
RULE
Closest Connection Test: The law governing a contract is generally the system of law with which the transaction has its closest and most real connection unless the contract explicitly states otherwise.
If parties choose arbitration in a particular country, it is often implied that they intend for the law of that country to govern the contract.
HELD
Without an express clause, the proper law of the contract is inferred from the circumstances. The arbitration clause specifying London as the arbitration venue suggests an intention to apply English law.
Past cases, such as Hamlyn & Co. v. Talisker Distillery and N.V. Kwik Hoo Tone Handel Maatschappij v. James Finlay & Co. Ltd., support the inference that the choice of an arbitration location indicates the choice of the proper law.
Legal authorities like Dicey and Morris and Professor Cheshire support the view that selecting the place of arbitration implies choosing the law of that country as the proper law.
It is improbable that the parties would have chosen London and English arbitrators if they did not intend for English law to apply, considering the practical difficulties and usual business practices.
By choosing London as the place of arbitration, the parties impliedly chose English law as the proper law of the contract.
This decision was supported by the closest connection principle, established case law, and legal commentary.
The convenient but stark proposition was departed from by the House of Lords in Cie d’ Armament maritime SA v Cie Tunisienne de Navigation SA,in which it was pointed out that the inquiry must always be to discover the law with which the contract has the closest and most real connection. It was there decided that the mere fact that the arbitration was to be in London did not mean that what was in reality a French contract of affreighment had to be governed by English rather than the French law. It did not matter at all that English arbitrators would have to apply French law. In those circumstances, it cannot be automatic that if the relevant inquiry is the converse inquiry (namely to discover the proper law of the agreement) the answer to that inquiry is to be the proper law of the agreement.
In Black Clawson International Ltd v Papierwerke Waldhof-Aschaffenburg AG, set out the three potentially relevant laws, namely; (i) the law governing the substantive agreement; (ii) the law governing the agreement to arbitrate and the performance of that agreement; and, (iii) the law of the place where a reference is conducted (the lex fori).Mustill J further said:
‘In the great majority of the cases, these three laws will be the same. But this will always not be so. It is by no means uncommon for the proper law of the substantive contract to be different from the lex fori(the Cie d’ Armament Maritime) case was then one such an example); and it does not happen, although much more rarely, that the law governing the arbitration agreement is also different from the lex fori.’
Mustill J gave James Miller & Partners Ltd v Whitworth Street Estates (Manchester) Ltd, as an example of this second situation. That was a case where the proper law of the building contract and the arbitration agreement was English but the reference was conducted in Scotland. Mustill J, however, was saying that it would be a rare case in which the law of the arbitration agreement was not the same as the law of the place (or seat)of the arbitration.