Applicable Law in the Absence of Choice
3.1 Most Significant Relationship
In a surprising number of cases the parties fail to choose the applicable law.This may be because they have contracted without consulting lawyers,or they cannot agree on the applicable law.26 In some other cases,though the parties have chosen a governing law,however,their choice is illegal since it violates the statutory limitations on party autonomy as discussed above.Under these circumstances,the determination of the applicable law is called “in the absence of choice.”
Although different countries may resort to different approaches,it appears to be a trend that a certain degree of “connection” or “relationship” with the contract is taken as a benchmark for ascertaining the applicable law.27 In the United States,for instance,there is an emerging consensus that in the absence of an effective choice of law by the parties,a contract should be governed by the law of the state having the most significant relationship with the parties and the transactions,an approach advanced by the Second Restatement.[9]In Europe,under the Convention on the Law Applicable to Contractual Obligations,“to the extent that the law applicable to the contract has not been chosen in accordance with Article 3,the contact shall be governed by the law of the country with which it is most closely connected.”28
China has followed this trend by making “most significant relationship” the rule for determining the applicable law absent a choice by the parties.29 As mentioned above,Article 145 of the GPCL and Article 126 of the Contract Law provide that if the parties to a foreign contract had made no choice,the law of the country to which the contract is most closely connected shall be applied.
It merits mentioning that though Article 41 of the Conflicts Act also reflects the principle of most significant relationship,its application is somewhat different from the above two provisions,which will be discussed later.
3.2 Characteristic Performance
Though “most significant relationship” has been widely accepted as the dominate principle in determining the applicable law of contracts,the lack of an objective test to evaluate the “relationship” or “connection” makes this principle very uncertain and elusive in judicial practice which inevitably leaves judges with too much leeway.This realization has prompted scholars to devise more objective approaches to specifying the principle of “Most Significant Relationship,” and characteristic performance test is the most important one.
It is believed that the source of this approach and the expression of “characteristic performance” is Swiss doctrine.30 According to Schnitzer,a famous Swiss jurist,in most bilateral contracts,the performance of contractual duty of one party is usually the same,i.e,the payment of money,and this performance is the common feature of many contracts,therefore it fails to reflect the characteristic and essence of a particular contract; on the contrary,the performance for which the payment is due,usually,the delivery of goods or the supply of service is more “characteristic” which constitutes the essence of the contract.To illustrate,for a sales contract,a characteristic performance is the performance for which the payment is due,that is,the delivery of goods.Therefore,it shall be presumed that the contract is most closely connected with the country where the party,who is to effect the performance which is characteristic of the contract,has his habitual residence or its central administration.That is to say,because the obligation to supply goods or service is more “characteristic” than the payment of money,the law of supplier’s home state should be preferred.Therefore,the characteristic performance is denoted as the one that usually constitutes the center of gravity and the socio-economic function of the contractual transaction.31
Though a number of criticisms can be leveled at the concept of “characteristic performance,”[10]this approach has been gaining recognition both in legislation and case laws in many countries.32
In an attempt to help make a meaningful determination of applicable law under the rule of “the most significant relationship,” the Supreme People’s Court of China accepted the idea of the characteristic performance and incorporated it into “Provisions by Supreme Court.” Article 5 provides as follows:
Where the parties concerned fail to choose the law applicable to contractual disputes,the law of the country or region which has the closest connection with the contract shall apply.
When determining the law applicable to contractual disputes according to the principle of closest connection,the People’s Court shall determine the law of the country or region which has the closest connection with the contract to be the applicable law to the contract on the basis of special nature of the contract and the factor such as the performance obligation by which party that can be the best to embody the essential characteristics of the contract.
(1) With respect to a sale and purchase contract,the law of the place of domicile of the seller at the time of conclusion of the contract shall be applicable.If the contract is negotiated and concluded in the place of domicile of the buyer or there is explicit stipulation in the contract regarding that the seller shall perform the obligation of delivery in the place of domicile of the buyer,the law of the place of domicile of the buyer shall be applicable.
(2) With respect to a contract for processing supplied materials,assembling supplied parts or other processing works,the law of the place of domicile of the processing contractor shall be applicable.
(3) With respect to a supply contract for complete sets of equipment,the law of the place of installation shall be applicable.
(4) With respect to a contract for sale,lease or mortgage of real estate,the law of the place where the real estate is located shall be applicable.
(5) With respect to a lease contract of moveable properties,the law of the place of domicile of the lessor shall be applicable.(https://www.daowen.com)
(6) With respect to a pledge contract of moveable properties,the law of the place of domicile of the pledgee shall be applicable.
(7) With respect to a loan contract,the law of the place of domicile of the lender shall be applicable.
(8) With respect to an insurance contract,the law of the place of domicile of the insurer shall be applicable.
(9) With respect to a finance lease contract,the law of the place of domicile of the lessee shall be applicable.
(10) With respect to a construction contract,the law of the place where the construction project is located shall be applicable.
(11) With respect to a storage or custodial contract,the law of the place of domicile of the warehouse keeper or custodian shall be applicable.
(12) With respect to a guarantee contract,the law of the place of domicile of the guarantor shall be applicable.
(13) With respect to an entrustment contract,the law of the place of domicile of the trustee shall be applicable.
(14) With respect to a contract for issuance,sale or transfer of bonds,the law of the place where the bonds are issued,sold or transferred shall be applicable respectively.
(15) With respect to an auction contract,the law of the place where the auction is held shall be applicable.
(16) With respect to a brokerage contract,the law of the place of domicile of the broker shall be applicable.
(17) With respect to an intermediate contract,the law of the place of domicile of the intermediary shall be applicable.
If any contract mentioned above has obviously closer connection with another country or region,the law of such country or region shall be applicable.
The adoption of the characteristic performance test by the Supreme People’s Court sets two goals.First,the test will limit the discretionary power of the courts in determining the applicable law,making the determination more objective.Second and more importantly,the test will help achieve certainty,predictability,and uniformity of the results.Actually,in order to make the test more operable,Articles 5 of “Provisions by Supreme Court” provides a laundry list intended to cover all major contracts (a total of seventeen contract types are on the list).For example,in a contract for the international sale of goods,the law that is most closely connected with the contract is the law of the place of the seller’s business at the time of the conclusion of the contract.If,however,the contract was negotiated and concluded in the place of the buyer’s business,the contract was concluded under terms provided by the buyer and as a result of the bid invitation by the buyer,or the contract explicitly provides that the seller must deliver the goods at the place of the buyer’s business,the applicable law shall then be that of the place of the buyer’s business.
An exception to the characteristic performance test occurs when the People’s Court,in determining applicable laws,finds that the contract is most closely connected with the law of another country or region.In this situation,the law of that country or region shall be applied.This exception is intended to give the People’s Courts flexibility to deal with certain special circumstances in determining the applicable law when characteristic performance test fails to work well.
As analysed above,the test of “characteristic performance” provides an objective criterion to evaluate the “relationship” or “connection”,therefore,it has gained recognition both in legislation and case laws in many countries; in this respect,the incorporation of this test in the Conflicts Act of 2010 is in conformity with international practice.Nonetheless,the expression of Article 41 of the Conflicts Act is somewhat different from the relevant provisions contained in most other countries,the international conventions and Article 5 of “Provisions by Supreme Court” as well.To be more specific,Article 41(2) employs an alternative reference rule,i.e.,in the absence of parties’ choice,the contract is governed either by the law of the habitual residence of the party whose performance obligation reflects the essential characteristic of the contract,or the law which has the closest connection with the contract.That is to say,by employing an alternative reference rule,Article 41(2) of the Conflicts Act puts the principle of closest connection and the characteristic performance test on an equal footing.In comparison,the laws of most other countries,as well as Article 5 of “Provisions by Supreme Court”,provide that in the absence of a choice of law,the contract shall be governed by the law of the state with which it is most closely connected; and then they go on to state that it is presumed that the closest connection exists with the state in which the party who must perform the characteristic obligation is habitually resident.In this manner,the characteristic performance test has been established as a principal method to ascertain which connecting factor has the most significant relationship with the dispute in question.
Hence,it is submitted that the alternative reference rule contained in Article 41(2) reflects an improper understanding of the relationship between the principle of closest connection and the characteristic performance test,which may produce knotty problems in practice: if the habitual residence of the party whose performance obligation reflects the essential characteristic of the contract points to the law of Country A,while the law of Country B has the closest connection with the contract,which law shall apply?