4.01  Before moving to a detailed consideration of the interpretation and performance of monetary obligations, it is appropriate to reflect upon the system of law which will govern the solution to the various problems and difficulties which may arise in this area.

4.02  It should be said at the outset that this text is not intended to provide a detailed review of questions of private international law; apart from other considerations, there are many other texts which already fulfil that function.¹ Nevertheless, countless cross-border financial transactions occur on a daily basis, and a brief discussion of the essential private international law framework is thus felt to be necessary.

4.03  It should be appreciated that a system of private international law exists in order to resolve the difficulties which may arise where different systems of law may have a bearing upon the same issue.² Consequently, the points noted in the present chapter would have no application in the context of monetary obligations of a purely (p. 112) domestic character—for example, where a British bank, acting through its London branch, agrees to make a sterling loan available to a company incorporated in England. Such an arrangement involves only one system of law, and no question of a conflict will thus arise; English domestic law will be applied as a matter of course. Inevitably, however, matters become more complex when a transaction involves the laws of two or more jurisdictions.

4.04  Against that brief introductory background, it is proposed to examine the impact which the laws of various jurisdictions may have upon a monetary obligation. In particular, it will be necessary to consider the following:

1. (a)  the law applicable to the contract;

2. (b)  the law of the place of performance;

3. (c)  the law of the countries in which the parties are established;

4. (d)  the law of the State in which legal proceedings arise with respect to that monetary obligation; and

5. (e)  the law of third countries with which the monetary obligation may have some connection.

4.05  It may be noted that every State is entitled to establish its own system of private international law for the purpose of resolving conflict questions; public international law does not generally appear to prescribe any particular standards or rules with which such a system must comply. Yet, in spite of this apparent flexibility, there is a considerable degree of uniformity amongst the systems which have emerged. Common law jurisdictions naturally tended to evolve similar rules in this area. The Member States of the European Union adopted a uniform code on the conflict rules applicable in a contractual context, and that code in turn reflects principles which had been developed in England and in civil law countries. For convenience, it is proposed to work by reference to Rome I, but it should not be thought that these general principles are confined to a European context. It should be added that the Rome Convention had effect in the United Kingdom from (p. 113) 1 April 1991³ until Rome I came into force. The Rome Convention was accompanied by the Giuliano-Lagarde report on its terms.⁴ Although this report is not specifically carried forward into Rome I, reference will be made to its commentary where it remains germane to terminology employed within Rome I. Nevertheless, the focus will be on Rome I itself, which will now apply to all contractual conflict cases which fall within its scope.⁵

4.06  It has been observed that no contract can exist in a vacuum; it must subsist against the background of a legal system which clothes the arrangement with some meaning and effect.⁶ It is necessary to ask at the outset how the relevant legal system is to be identified. The problem can only arise in cases involving a cross-border element, but when it does arise, the question can be one of some difficulty. How is it to be resolved?

4.08  This provision is clear and it is not proposed to discuss it in depth, although it will be necessary to return to the concept of a ‘split’ governing the law in the context of (p. 114) the lex monetae principle.⁷ For present purposes, it is sufficient to note that the first sentence of Article 3(1) is expressed in mandatory terms. Consequently, the parties’ choice of law must be respected even if it has no connection with the contractual situation as a whole.⁸

4.09  Matters become rather complex where the applicable law cannot be identified in accordance with Article 3 of Rome I. In this respect, Article 4 of Rome I operates at three levels.

4.10  First of all, specific rules are given for particular types of contract. For example, contracts for the sale of goods or the provision of services are governed by the law of the place where the seller or the provider has his habitual residence.⁹ Franchise contracts will be governed by the law of the place in which the franchisee has his habitual residence,¹⁰ whilst distribution contracts are governed by the law of the country in which the distributor is habitually resident.¹¹ It will be noted that certain banking arrangements—such as the provision of a current account—should be classified as a contract for the provision of a service and, bearing in mind the application of the ‘habitual residence’ test,¹² such an account and the associated contract would be governed by the law of the country in which the account-holding branch is located.

4.11  Where the contract does not fall within one of the distinct categories it will be governed by the law of the country in which the party responsible for the ‘characteristic performance’ has his habitual residence.¹³

4.12  The rules are then withdrawn if it is clear from all the circumstances that the contract is manifestly more closely connected with another country, in which case the law applicable to the law of that country applies.¹⁴

4.13  If the above rules do not generate an answer, then the contract will be governed by the law of the country with which the contract is most closely connected.¹⁵

(p. 115) 4.14  In the light of these provisions, it is necessary to ask—what is the role of money or monetary obligations in helping to identify the law which is to govern a contract? As noted above, a contract involving the provision of a banking service would be governed by the law of the country in which the relevant bank branch is located. But not all banking activities are necessarily to be seen purely as a ‘service’ in this sense. However, in the case of a loan contract, the obligations of the lender would usually be ‘characteristic’ of the contract for the purposes of the test in Article 4(2) of Rome I, since the borrower's obligations are represented merely by the duty to repay the facility. Consequently, in either case, transactions effected with a bank are likely to be governed by the law of the country in which the bank branch is located.¹⁶ It seems to follow from this discussion that, in the application of the presumption created by Article 4(2), a mere obligation to pay money (without more) will not usually amount to the ‘characteristic performance’ of a contract. Nearly every contract will involve a monetary obligation of some kind, and an obligation which is common to all contracts can scarcely be said to ‘characterize’ individual contracts, or to provide them with their distinctive quality.¹⁷ It follows that it will usually be the party which is to provide the non-cash consideration whose obligations will be ‘characteristic’ of the contract. To this extent, it may be said that monetary obligations will generally play a limited role in the identification of the law applicable to the contract as a whole. The obligations of the creditor may characterize the contract, but those of the debtor will not. For the same reasons, the currency in which a monetary obligation is expressed will not generally lead to the conclusion that the contract as a whole is governed by the law of the country which issues that currency.¹⁸ It should, however, be repeated that one will only have to apply the ‘characteristic performance’ test if (i) the contract does not include an express choice of law; and (ii) the contract falls outside the specific categories covered in Article 4(1) of Rome I.¹⁹

(p. 116) 4.15  It should be repeated that Article 3(1) of Rome I provides that ‘by their choice the parties can select the law applicable to the whole or to a part only of the contract’. In accordance with the earlier provisions of that Article, such choice ‘must be made expressly or clearly demonstrated by the terms of the contract or the circumstances of the case’. Thus, a contract incorporating an express choice of English law may select ‘dollars’ as the medium of payment. English law must therefore determine whether the parties intended to refer to US dollars, Canadian dollars, Australian dollars, or some other unit of that name, for questions of interpretation will be governed by the law applicable to the contract as a whole.²⁰ But if it is found that the parties intended to refer to US dollars, how can the court proceed from there? English law does not itself define the US dollar or any other foreign currency. Instead, the reference must be made to the federal law of the United States for that purpose. This is the foundation of the lex monetae principle, the consequences of which will be discussed in more detail elsewhere.²¹ In the sixth edition of this work,²² it was suggested that the validity of the implied choice of US law to determine the nature of the currency obligation could be justified by reference to the ‘exception’ language in Article 3(1) of the Rome Convention, which was to similar effect. However, it is now more difficult to adopt this approach because a similar rule that could be applied in the absence of an express choice of law²³ has not been carried forward into Article 4 of Rome I. It is thus necessary to find an alternative formulation which justifies the application of the lex monetae principle in all contractual cases, whether or not an express choice of the governing law has been made. The application of that principle can perhaps be said to rest on the principle that English law will give effect to a contract in accordance with the intentions of the parties and, if they have expressly or impliedly referred to a foreign law to explain that nature and scope of those obligations, then the court will give effect to that intention.²⁴ This does not detract from the position that the entire contract is governed by English law. It is submitted that this suggested approach is therefore consistent with the choice of law rules in Rome I. It is appreciated that the point will only rarely arise in a practical context, if only because it will rarely be disputed; but it is important that the application of a core concept of monetary law can be reconciled with the terms of Rome I.

(p. 117) 4.16  For the present, it is necessary to leave aside specific questions touching the identification of the applicable law²⁵ and to proceed on the basis that the governing law has been identified. The law applicable to a contract governs a broad spectrum of contractual issues, including the following:

1. (a)  the material validity of the contract;²⁶

2. (b)  the formal validity of the contract;²⁷

3. (c)  the interpretation of the contract;²⁸

4. (d)  the performance of the contract, save that the law of the place of performance may be taken into account in the context of the mode of performance and the steps to be taken in the event of defective performance;²⁹

5. (e)  the consequences of a breach of contract, including the assessment of damages, in so far as this process is governed by rules of law;³⁰

6. (f)  the various ways of extinguishing obligations and prescription and limitation of actions;³¹ and

7. (g)  the consequences of the nullity of the contract.³²

(p. 118) 4.17  In broad terms, it is entirely appropriate that the applicable law should govern the matters just described. If the parties have chosen to contract by reference to the law of a particular country, then it is natural that those laws should govern the essential validity and meaning of their bargain, and prescribe the general consequences of non-performance.³³ Thus, if a contract governed by English law requires the payment of an amount in US dollars in London, the federal law of the United States will define the currency in which the obligation is expressed and is to be performed, but that will be the limit of such laws in the context of the dispute; all other substantive questions will fall to be governed by English law.³⁴ Consequently, whilst the lex monetae will be a frequently recurring topic of discussion in this book, it is necessary to retain a sense of proportion; the lex monetae defines the monetary unit in which an obligation is expressed or is to be performed, but the applicable law will generally govern the identification of the currency that forms the subject matter of the contract,³⁵ define the amount of the obligation, the date on which it is to be performed, and the consequences of non-performance.³⁶ The scope of the lex monetae is thus limited to that extent.

4.18  In the previous section, it was noted that questions touching the substantive performance of monetary obligations will be governed by the law applicable to the contract as a whole. However, Article 12(2) of Rome I provides: ‘In relation to the manner of performance and the steps to be taken in the event of defective performance regard shall be had to the law of the country in which performance takes place.’

4.19  In the context of a monetary obligation, this provision detracts from the all-embracing dominance of the applicable law; inevitably, there will be marginal areas in which the applicable law and the law of the place of performance will compete and conflict with each other. The point may be of some importance, especially where a monetary obligation is required to be performed in a country other than (p. 119) its State of issue. How are such difficulties to be resolved? A series of points may be made in this context:

1. (a)  The applicable law remains the primary determinant of questions which arise in the field of performance. This point is emphasized by the language of Article 12(1) which stipulates that the law applicable to a contract ‘shall govern … performance’.

2. (b)  In contrast, Article 12(2) provides a role for the law of the place of performance, but—at least in the context of a monetary obligation—the role appears to be a very limited one. First of all, the law of that place only has a role in the context of the manner of performance—an expression which itself tends to reaffirm the dominance of the applicable law in the context of matters of performance. Even then, Article 12(2) does not require that such law must be applied in relation to the mode of performance—it merely requires that ‘regard shall be had’ to that law. As the Guiliano-Lagarde Report stated in its commentary on the corresponding provision in the predecessor Rome Convention, this means that ‘the court may consider whether such law has any relevance to the manner in which the contract should be performed and has a discretion whether to apply it in whole or in part so as to do justice between the parties’. It is suggested that this analysis is plainly right, and serves as further confirmation of the limited role of the law of the place of performance. That law may be entirely disregarded if its application is unnecessary to achieve justice between the parties.

3. (c)  The scope of Article 12(2) is yet further limited by the commentary in the corresponding provision of the Rome Convention as set out in the Guiliano-Lagarde Report, which suggests that the term ‘manner of performance’ should be construed according to the laws of the country in which the proceedings take place,³⁷ but should in particular be taken to refer to matters such as the rules governing public holidays. This point may be relevant in the context of monetary obligations,³⁸ but again this tends to emphasize the limited relevance of the law of the place of performance in the present context.³⁹

4.20  The diminished relevance of the law of the place of performance in the context of monetary obligations will be something of a recurrent theme—it will receive (p. 120) particular attention in the context of exchange controls.⁴⁰ It should, however be noted that Article 9(3) of Rome I allows the court to take into account the impact of illegality under the law of the place of payment. This issue is likewise considered at a later stage.⁴¹

4.21  The preceding sections have explained the essential dominance of the applicable law in the field of monetary obligations. But, in a conflict of laws situation, multiple jurisdictions are necessarily involved, and it is necessary to consider whether the laws of any of those other jurisdictions may have any impact upon monetary obligations.

4.22  In a sense, the dominance of the applicable law almost answers this question by itself. It is thus unsurprising that the law of the place of the parties’ residence or establishment is of limited consequence.

4.23  It is true that the capacity of an individual to enter into a contract may be determined by the law of his country of domicile⁴² and the corporate capacity of a legal entity will generally be governed by the law of the place of incorporation.⁴³ Questions of this kind may be of importance in determining whether a monetary obligation has been validly incurred in the first instance but will not subsequently have any impact upon the character or scope of such an obligation.⁴⁴ Thus, for example, a breach of exchange control regulations in a borrower's home jurisdiction will not usually afford a defence to an action in England under a loan contract governed by English law, for exchange control regulations do not affect individual or corporate capacity.⁴⁵

4.24  It has already been noted that the law applicable to a contract will govern the majority of the key areas of dispute which may arise, for example, as to the proper meaning of the contract, its performance, and the measure of damages in the event of a breach. This approach is designed to give effect to the contractual intentions of the parties and, in principle, it should therefore prevail regardless of the forum in which the relevant proceedings happen to take place. Thus, so far as the English courts are concerned, a contract which is binding under its applicable law should be enforced in this country, even though a corresponding arrangement governed by English law would be unenforceable for some reason.⁴⁶

4.25  There must, however, plainly be some limit to this approach. Respect for the intentions of the contracting parties must be balanced by a degree of respect for the fundamental laws and principles of the State in which the proceedings are taking place. The balancing of these potentially competing interests finds expression in two core provisions of Rome I. First of all, Article 9(2) provides that: ‘Nothing in this Regulation shall restrict the application of the overriding mandatory provisions of the law of the forum’. For these purposes, overriding mandatory provisions are defined as provisions ‘the respect for which is regarded as essential by a country for safeguarding its public interests, such as its political, social or economic organization to such an extent that they are applicable to any situation falling within their scope irrespective of the law otherwise applicable to the contract’. Thus, for example, rules governing cartels, competition, restrictive practices, and consumer protection must be applied by the English courts even if the contracts and monetary obligations at hand are governed by a foreign system of law.⁴⁷ Equally, laws designed for the protection of policyholders resident in this country may be of mandatory application even though the policy concerned is subject to the laws of a different country.⁴⁸ Article 9(2) may apply to a wide variety of domestic rules of the forum.⁴⁹ In the present context, it is sufficient to note by way of example (p. 122) that Article 9(2) provides the basis upon which the English courts may give effect to Article VIII(2)(b) of the Articles of Agreement of the International Monetary Fund, even in relation to obligations governed by a foreign system of law.⁵⁰

4.26  Secondly, Article 21 of Rome I provides that: ‘The application of a provision of the law of any country specified by this Regulation may be refused only if such application is manifestly incompatible with the public policy (ordre public) of the forum.’ This again is a complex subject.⁵¹ For present purposes, it must suffice to note that in England, public policy may prohibit the enforcement of foreign law contracts whose performance would be unlawful in England,⁵² or which created monetary obligations involving the improper use of influence or corruption.⁵³ Likewise, the English courts may refuse to enforce foreign laws which are discriminatory⁵⁴ or which are inconsistent with the relevant country's treaty obligations to the United Kingdom.⁵⁵

4.27  It is finally necessary to consider whether the law of some third country may have consequences for a monetary obligation, where there is some link between that obligation and the country concerned.

It is thus no longer possible simply to ‘import’ rules from a jurisdiction with which the contract may happen to have some connection and the provision reproduced here is now limited to the law of the country in which performance is to take place.⁵⁸

4.29  This brief review of the relevant rules of private international law provides the basis upon which the ensuing chapters will review the rules applicable to the interpretation and performance of monetary obligations.(p. 124)