Construction law: international transactions

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15-01-2016

Construction and engineering contracts are becoming increasingly international.  Consequently entering into contracts with a party based in a different country/jurisdiction is not uncommon. 

A considerable amount of time, money and effort is expended in the negotiation of contracts.  However, some of the fundamental principles of English Law will not necessarily apply when contracting with a counterparty from a different jurisdiction which can result in exposing at least one of the parties to unfamiliar legal systems and risk some of which have been highlighted in a couple of cases that came before the Court of Appeal in 2015.

1. Governing Law

The words “This agreement shall be governed by the laws of …” are often found towards the end of a contract and negotiated at the last minute or not at all.  However, this clause is fundamental as the governing law clause determines the law that will be applied to the interpretation of the terms of the contract in the event of a dispute as to their meaning.

The choice of governing law should be determined early on in negotiations as if it is not going to be English a lawyer qualified in the relevant law will be required to advise on and draft the agreement.

If the contract is silent as to the governing law of the contract a court will determine the applicable law by reference to a complex series of principles and regulations which vary depending on whether the court that has been asked to determine the issue in dispute is in a member state of the EU or not.  

If the court where proceedings are commenced is within the EU and the relevant contract was agreed after 17 December 2009 the provisions of Regulation (EC) 593/2008 (known as Rome I) will apply.  Under Rome I a court must recognise an express choice of law.  If there is no express choice of law the applicable law is determined by reference to specific rules that apply to different types of contracts (Article 4 of Rome I). 

Construction and engineering contracts are not expressly provided for.  However, Article 4 provides that in relation to both contracts for the sale of goods and contracts for the supply of services the governing law will be the law of the country where the seller or supplier (as appropriate) has its habitual residence.   

In cases not covered by a specific rule (or where more than one rule applies), Rome I provides that the contract will be governed by the law of the country where the “characteristic performer” has his habitual residence.   If this cannot be determined, the contract is governed by the law of the country with which it is most closely connected.  Finally Rome I allows all other rules to be disregarded if the contract is "manifestly more closely connected" with the law of a different country.

Where a court outside the EU has jurisdiction the rules that court will apply to determine the governing law vary from one jurisdiction to another.  A lawyer qualified in the relevant jurisdiction should advise on the law that the court in that jurisdiction is likely to apply.

This could become even more complex (and costly!) if the parties have not determined how disputes will be resolved and which court or other tribunal has been given authority to resolve a dispute (see following).

2. Jurisdiction

A governing law clause (as described above) does not, however, provide for how disputes are to be resolved or which tribunal will have jurisdiction to consider those disputes.  Therefore a jurisdiction clause should be incorporated to avoid the time and costs that would be involved in disputes over which country’s courts have jurisdiction.

Broadly, there are 3 categories of jurisdiction clause:

• Exclusive – where each party is prevented from bring a claim against the others in courts in any country other than the one agreed in the agreement (usually the country whose law has been selected to govern the contract);
• Non-exclusive – where each party may bring a claim against the others either in the courts of the chosen country or in the courts of any other country which has jurisdiction over the dispute under their own jurisdictional rules.  Whilst such clauses allow flexibility over where proceedings may be commenced they may also have the result that the defendant party finds itself defending proceedings in an unfavourable jurisdiction; and
• One-sided – which allow one party to sue the other in any competent jurisdiction but limits the other to bring proceedings in only one jurisdiction (such an arrangement is only likely to be agreed where one party has a superior bargaining position).

The importance of the certainty of a jurisdiction clause was demonstrated in the relatively recent Court of Appeal case of Hin-Pro International Logistics Limited –v- Compania Sud Americana De Vapores S.A [2015] EWCA Civ 401.  In that case the court found that the jurisdiction clause was exclusive despite the fact that it expressly provided for proceedings in other courts in certain circumstances. 

The background to that case is as follows; CSAV was an international shipping corporation based in Chile.  Hin-Pro was a freight forwarder with a registered address in Hong Kong.  Hin-Pro entered into several contracts with CSAV for the carriage of cargo from Chinese ports to Venezuela on CSAV’s bills of lading. 

Hin-Pro commenced proceedings against CSAV on the basis that CSAV had released cargo without production of the original bills.  Those proceedings were commenced by Hin-Pro in China.  CSAV obtained an interim anti-suit injunction from the English courts precluding Hin-Pro from continuing the proceedings it had commenced in China.  In contempt of court Hin-Pro ignored that injunction and continued with the proceedings in China and damages were awarded against CSAV by the Chinese Courts.  In response CSAV sought a declaration from the English courts that Hin-Pro was obliged to litigate disputes in England.  The English courts held that Hin-Pro was obliged to litigate disputes in the English courts and granted a permanent injunction preventing Hin-Pro from taking any further steps in the Chinese courts.  Hin-Pro appealed that decision in the English Court of Appeal on the basis that the relevant clause of the Bills of Lading did not provide for the exclusive jurisdiction of the English courts. 

The bills of lading contained the following term at clause 23:

“This Bill of Lading and any claim or dispute arising hereunder shall be subject to English law and the jurisdiction of the English High Court of Justice in London. If, notwithstanding the foregoing, any proceedings are commenced in another jurisdiction, such proceeding shall be referred to ordinary courts of law. In the case of Chile, arbitrators shall not be competent to deal with any such dispute and proceedings shall be referred to the Chilean Ordinary Courts.”

Hin-Pro’s case was based on the arguments that the clause did not expressly state that the English courts were to have exclusive jurisdiction and did not state that no other court may have jurisdiction.  Hin-Pro supplemented that argument by submitting that the final two sentences of clause 23 recognised that proceedings may be commenced outside the English courts.  Hin-Pro also argued that as the clause left room for doubt over the exclusivity of the English courts it should be construed against (contra preferentem) CSAV.

The court of appeal decided that clause 23 did provide for exclusive jurisdiction to the English courts on a number of grounds.  In summary the court of appeal held that:

• The words “shall be subject to” meant that the parties were agreeing to submit all disputes to the English courts rather than submitting themselves to that jurisdiction if that jurisdiction was invoked;
• If the parties agree to make English law mandatory (which they did) there was obvious commercial sense in making both English law and English jurisdiction mandatory on the basis that England is the best forum for the application of its own law.  If English law was to apply courts in other jurisdictions might not apply it all or might apply it in an idiosyncratic way.
• The final two sentences of clause 23 covered the situation where a national law or an international convention did not recognise the intended effect of an exclusive jurisdiction clause.
• The contra preferentem rule was of no assistance in this case.  The court held that the rule was of limited application in the interpretation of ordinary commercial contracts and that the clause was sufficiently clear.

Whilst the court of appeal found unanimously in CSAV’s favour the fact that the clause contemplated the possibility of alternative jurisdictions meant that the result was not a foregone conclusion.

If there is no jurisdiction clause a complex set of rules and instruments will apply which vary depending on whether the court is based in Europe or not.  In summary, in Europe the Recast Brussels Regulation will apply to proceedings commenced on or after 10 January 2015.   The general rule in Europe is that where a contract is silent as to jurisdiction, a defendant should be sued in his country of domicile.  Outside of Europe the rules of private international law will be applied to determine the correct forum for settlement of disputes.

Whatever the approach on jurisdiction an important point to consider is the potential for enforcement of any award.  For example, if a judgment is obtained from an English court against a company with assets in a foreign jurisdiction, will the courts of that foreign jurisdiction be prepared to enforce the judgment?  Obtaining a judgment from a court in a respected jurisdiction increases the possibility of enforcement.

3. Signing and execution

The proper execution of a contract (whether a deed or otherwise) is essential otherwise the contract may not be binding on the parties.

In England and Wales a number of statutory formalities created by the Companies Act 2006 regulate the execution (signing) of deeds and documents by companies incorporated in England and Wales.

The execution of agreements (governed by the law of England and Wales) by companies incorporated outside England and Wales is regulated by the Overseas Companies (Execution of Documents and Registration of charges) Regulations 2009 and the law of the country in which the company is incorporated.

In a relatively recent Court of Appeal case (Integral Petroleum SA –v- Scu-Finaz AG [2015] EWCA Civ 144) Integral and Scu (both Swiss companies) had entered into a contract for the supply of oil that was subject to English law and the jurisdiction of the English courts. Integral brought an action against Scu for breach of contract in the English courts.  Scu claimed that it was not bound by the terms of the contract because it had not entered into the contract in accordance with the laws of the country of its incorporation (Switzerland). 

Scu had given more than more person (“prokurist”) joint authority to execute contracts on its behalf.  Under Swiss law, where the authority to sign has been given jointly to more than one prokurist all prokurists must sign for the contract to validly executed.  However the contract in question had only been signed by one prokurist.

The Court of Appeal upheld the first instance decision and held that even though the parties had agreed that the contract was subject to English law, the question of whether the contract had been validly executed by one of the parties was to be determined by reference to the law of that party’s place of incorporation (in that case Switzerland) and not the contract’s governing law clause.  In that case the contract was found to have been executed incorrectly and was not binding.

The case highlights the importance, where a party is contracting with an overseas company, of getting a legal opinion from lawyers in the jurisdiction in which the overseas company is incorporated, confirming not only the validity of the method of execution employed by the overseas company under the applicable local law but also whether those signing have authority to bind the overseas company under the laws of the jurisdiction in which it is incorporated.

It is also sensible to check whether there are any other formalities to be complied with under local law, which may be necessary to enforce the document in the company's place of incorporation.  For example, in some jurisdictions the execution of some documents must be witnessed by a notary to be effective.

4. Commercial Terms

The primary source of the rights and duties of the parties will be the contract itself.  The contract is likely to encompass not only its express terms and terms implied by the governing law but also any trade terms incorporated into it by reference (e.g. the Incoterms published by the International Chamber of Commerce).

A further source of law in international agreements (to the extent the same is not excluded by the express terms of the contract) is the United Nations Convention on Contracts for the International Sale of Goods (CISG).  The CISG sets out uniform rules for the international sale of commercial goods and generally applies to transactions between parties whose places of business are in different countries (to date the CISG has not been adopted by the United Kingdom).

Alongside the terms a number of commercial issues may arise for consideration under an international contract that may not be relevant to a domestic contract.  For example:

• What will the currency of the agreement be and which party will take exchange rate risk;
• Who will be responsible for the costs and duties associated with the import/export of goods and any delay arising from the same;
• Who will be responsible for ensuring that any foreign nationals have the appropriate permits/visas etc. to work in the country where the works are taking place;
• Will force majeure events outside the country where the works are being completed relieve either of the parties of their obligations under the agreement
• What will the language for communications under the contract be and will all contractors be expected to speak it;
• Who will be responsible for ensuring access routes to the site of the works are available and suitable.
• Will there be any requirements for Local content in the works and their procurement;
• What will be the VAT treatment of sums expressed in a currency other than UK sterling.

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In Summary there are a number of issues to take into account when agreeing terms with a party from another legal jurisdiction.  However, contract terms can be drafted to ensure that the contract operates as the parties intended it to.

See also our “Guide to global construction and engineering law”

https://www.eversheds.com/global/en/what/services/construction-and-engineering/guide.page