Report No. 199

Choice of Law:

We next come to choice of law issue. This aspect is dealt with in section 11. It is well known that whenever a foreign element is involved in a contract, choice of law issues arise. Here obviously, we are concerned with the law applicable to the substance of the contract. Parties should not be allowed to choose a law excluding the laws of India where there is no foreign element at all involved in the contract. It is sometimes common for one party to say that a foreign law would apply to the substantive rights of the parties and such stipulation is made even where there is no foreign element i.e. none of the parties is a foreigner, the contract is not entered in a foreign country, nor its performance is in a foreign country etc. If there is no foreign element, it should not be permissible to impose a foreign law and exclude applicability of Indian law.

The (UK) Unfair Contract of Terms Act, 1977 contained a slightly different provision which stated in section 27(2)(a) that the protective provisions of the Act apply notwithstanding any choice of foreign law where

'the term appears to the Courts... to have been imposed wholly or mainly for the purpose of enabling the party to evade the operation of the Act'.

The said provision was criticized as being "highly subjective" (see paras 7.31 to 7.34 of the UK & Scottish Law Commission's Report, 2004). A new provision is formulated now by the UK and Scottish Law Commissions. As regard section 27(2)(a) of the UCTA, the Commissions stated as follows:

"7.31 This section has been criticized on the grounds that it introduces a highly subjective element into the law. We felt that it is important to investigate alternative means by which inappropriate evasion of the new legislation might be prevented. Following a suggestion made by Dr. Simon Whittakar in his Report to DTI, we looked at the possibility of introducing a provision along the lines of Art 3(3) of the Rome Convention. That Article provides that the application of the mandatory rules of the country with which a 'situation' is wholly connected shall not be prejudiced by the parties' different choice of law clause in the contract.

7.32 Although adding a welcome degree of objectivity, the approach might allow businesses to evade the controls of the new legislations in a wider range of circumstances than section 27(2)(a) would do. Depending on the circumstances of the case, section 27(2)(a) could potentially apply in any case where the parties adopt a choice of foreign law. On the other hand, a provision modeled on Article 3(3) would only prevent evasion in those cases where the contract, apart from the choice of law, is wholly connected to the UK.

7.33 We decided that the possible objection did not offer a compelling reason for rejecting the proposed approach. Given that we are recommending stricter controls over contracts with small businesses which will make it harder to evade the protective regime by a choice of foreign law, we think that a small degree of relaxation in the controls over contracts between larger businesses is acceptable. This is particularly compelling where there is a foreign element to the contract, as there must be for the contract to fall outside the terms of the proposed anti-avoidance provision.

We found support for this view in the fact that we are not aware of any authorities in which section 27(2)(a) has played a key role in determining the party's contractual rights. If the parties seeking to bring themselves within UCTA (1977)'s protection do not now rely upon the broader provisions of section 27(2)(a), it should not matter if those provisions are restricted. Therefore, we recommend that the revised UCTA-type regime which is instituted by the business contract clauses of the new legislation should apply, notwithstanding a choice of foreign law, where the contract is otherwise wholly connected to the UK.

7.34 We recommend that the business contract part of the new legislation should apply, notwithstanding a choice of foreign law where the contract is, in every other respect, wholly connected to the U.K."

Section 19(2) of the Draft Bill, 2004 prepared by the Commission on the basis of this recommendation reads thus:

"Section 19(2): This Act has effect in relation to a business contract despite a term of the contract which applies (or appears to apply) the law of somewhere outside the United Kingdom if the contract is in every respect wholly connected with the United Kingdom."

We agree that this format is better than section 27(2)(a) of the UCTA 1977 and further, according to well settled principles applicable to choice of law, where a contract, otherwise governed by Indian law, contains absolutely no foreign element, it should not be permissible for parties to agree that a foreign law will be applicable to the substance of the contract.

On these lines, we propose section 11 as follows:

"Choice of law clauses

11. Where a contract contains terms applying or purporting to apply the law of a foreign country, despite he contract being in every respect wholly unconnected with the foreign country, such terms shall be deemed to be substantively unfair.