Cover Page The handle http://hdl.handle.net/1887/41425 holds various files of this Leiden University dissertation

The handle http://hdl.handle.net/1887/41425 holds various files of this Leiden University dissertation

Author: Fredericks, E.A.

Title: Contractual capacity in private international law

Issue Date: 2016-06-30

This study investigates contractual capacity in private international law, in other words: the law applicable to the competence of a natural person to create rights and duties by concluding a contract with another (natural or juristic) person or other persons. In many common-law and mixed juris- dictions this is an issue that is remarkably unclear; it is nevertheless, as is shown, of significant practical importance.

The object of the study (as set out in Chapter 1) is the formulation of conflicts rules in respect of contractual capacity that can be employed in the develop- ment of the law in South Africa and other mixed jurisdictions, as well as in common-law countries. The proposed rules may also be considered in future national, regional, supranational and international instruments, including the envisaged African Principles on the Law Applicable to International Contracts of Sale and the African Principles on the Law Applicable to Inter- national Commercial Contracts, both projects of the Research Centre for Pri- vate International Law in Emerging Countries at the University of Johan- nesburg.

To assist in the formulation of the rules, a wide comparative study is under- taken of 65 legal systems in total from the civil-law, the common-law and the mixed civil/common-law tradition, as well as all relevant regional, supra- national and international instruments. Legal systems were chosen from the following regions: Africa; Australasia; Europe; the Far East; the Middle East; North America; and South America. Considerations for inclusion in this regard revolved around the availability of information; language (with a preference for materials available in English); the importance of countries from a cultural, economic or social perspective; and the modern character and originality of the relevant rules.

Chapter 2 discusses the position in Roman-Dutch and South African law.

The common-law authors employed the lex situs (the law of the country where the property is situated) in respect of immovable property; in respect of other contracts, the lex domicilii (the law of the country of domicile) and the lex loci contractus (the law of the country where the contract was con- cluded) were utilised with some flexibility, taking into account the need for an equitable outcome in the particular case.

These views are all reflected in South African case law. Two decisions, both relying on English authors, may be referred to as support, at least to a certain degree, for the application of the putative objective proper law of the con-

Contractual Capacity in Private International Law

tract, that is the legal system that would be applicable to the contract if both parties had the relevant capacity at the time of the conclusion of the contract, not taking any (purported) express or tacit choice of law into account. There is no decision of the Supreme Court of Appeal (or the Constitutional Court) in this regard yet and therefore no binding authority.

The South African authors are in favour of the application of the lex situs in respect of immovable property; with regard to other contracts, some of the scholars distinguish between mercantile and non-mercantile contracts, while others propose various forms of an alternative reference rule, involv- ing varying combinations of the lex domicilii, the lex loci contractus and/or the (putative objective) proper law of the contract. One author is of the opinion that the lex domicilii and the (putative) objective proper law should apply in the alternative; but the latter should not be employed where the contract- assertor knew, or reasonably should have known, of his counterpart’s inca- pacity under the lex domicilii.

Chapter 3 canvasses other jurisdictions without codified rules in respect of contractual capacity in private international law. All of these are common- law jurisdictions, with the exception of Scotland, a mixed jurisdiction. The discussion focuses on five regions: Europe (the United Kingdom: England and Wales, and Scotland); Australasia (Australia; and New Zealand); North America (the common-law provinces of Canada; and the United States of America); the Far East (India; Malaysia; and Singapore); and Africa (Ghana;

and Nigeria).

In general, contractual capacity is excluded from the scope of the Rome I Regulation, which is binding law in the United Kingdom. Member states therefore apply their domestic private international law rules to the issue of contractual capacity, subject to the provision in Article 13 of the Regulation (which is discussed in Chapter 5). The content of the Restatement (Second), the most important conflicts approach in the United States of America, is dis- cussed in Chapter 3 as this codification only constitutes persuasive author- ity. (The position in Louisiana and Oregon and the Puerto Rican Projet are discussed in Chapter 4.)

The common-law courts apply the lex domicilii, the lex loci contractus or, in more recent decisions, the (putative objective) proper law of the contract; the lex situs is usually applied in respect of immovable property.

Various contemporary authors favour the sole application of the (putative

objective) proper law to contractual capacity but the majority would apply

the proper law as part of an alternative reference rule. Particularly influen-

tial with common-law authors worldwide is the proposal by Dicey, Morris

and Collins (and their predecessors) that an individual must be deemed

to have contractual capacity if he or she has such capacity in terms of the

(putative objective) proper law of the contract, the law of domicile or the law of residence (in respect of immovable property, the lex situs must apply).

A substantial minority of authors argue in favour of the application of the (putative) proper law of the contract, either subjectively or objectively deter- mined, thereby recognising choice of law in the context of capacity. This is also the position under the Restatement (Second), in terms of which an indi- vidual must be deemed to possess capacity if he or she is capable in terms of the (putative) subjective proper law of the contract, the (putative) objective proper law of the contract (if there was no purported choice of law) or the lex domicilli (in respect of immovable property the lex situs must be added to the list).

Chapter 4 is devoted to jurisdictions with codified rules in respect of con- tractual capacity in private international law. Most of these are civil-law jurisdictions (from Europe; the Middle East; the Far East; North America;

and Africa), but some common-law (Israel; and Oregon) and mixed systems (Louisiana; Puerto Rico; and Quebec) are included.

The majority of the jurisdictions canvassed in this chapter apply the lex patriae (the law of the country of nationality) to contractual capacity as the legal sys- tem of departure. Other legal systems utilise the lex domicilii, the law of (habit- ual) residence, the law of the place of business of an individual, the lex loci contractus, the (putative) proper law of the contract, the lex fori (the law of the country of the forum) or a combination of these, as the default applicable law.

Many jurisdictions which in principle apply the lex patriae, the lex domicilii and/or the law of (habitual) residence to contractual capacity, employ the lex loci contractus as an alternatively applicable legal system, but only if one or more of the following conditions are present: (a) the contract in question was concluded in the forum state; (b) the parties to the contract were present in the same country at its conclusion; (c) the forum state is the country where performance is to be effected; and (d) the absence of fault on the part of the capable contractant (the additional application of the lex loci contractus in the absence of fault is generally referred to as the Lizardi rule, after a decision of the French Cour de cassation in the 19

century).

Fault (referred to in condition (d)) plays differentiated roles in the context of the additional application of the lex loci contractus. First, the presence of fault may function as an exception to the applicability of the lex loci con- tractus. The line of argumentation in these cases entails three steps. Step 1:

the application of the law or legal systems applied in principle (the default

legal system(s)), namely, the lex patriae and/or the lex domicilii and/or the

law of (habitual) residence. Step 2: the additional application of the lex loci

contractus where one or more of conditions (a) – (c) referred to above (and as

prescribed by the lex fori’s private international law) are present. Step 3: the

exclusion of the applicability of the lex loci contractus where fault exists on

the part of the capable contractant. Fault exists where the latter contractant was aware of the counterpart’s incapacity (in terms of the latter’s personal law) at the conclusion of the contract, or was not aware thereof as a result of negligence. The existence of fault therefore leads to the non-application of the lex loci contractus. This method of argumentation is referred to by the author as the three-step model.

Secondly, the absence of fault may play the role of a requirement which must be fulfilled for the lex loci contractus to be applied. The line of argumentation here entails only two steps. Step 1: the application of the law or legal sys- tems applied in principle (the default legal system(s)), namely, the lex patriae, and/or the lex domicilii and/or the law of (habitual) residence. Step 2: the additional application of the lex loci contractus where one or more of condi- tions (a) – (c) referred to above (and as prescribed by the lex fori’s private international law) are fulfilled and fault is absent on the part of the capable contractant. Fault is absent where the contract assertor, at the time of the conclusion of the contract, was not aware of the incapacity of the other party and the non-existence of the knowledge of the incapacity was not due to negligence. Fault is therefore absent when two requirements are met: (i) the contract assertor must have believed bona fide that the incapacitated contrac- tant indeed had full capacity to contract; and (ii) a reasonable person in the position of the contract assertor would not have known of the incapacity, for instance, where a contractant’s incapacity is not reasonably ascertain- able (where the incapacity is concealed). The absence of fault therefore leads to the application of the lex loci contractus. This method of argumentation is referred to as the two-step model.

Irrespective of the model chosen, the presence of fault on the part of the contract-assertor leads to the non-application of the lex loci contractus. The absence of fault may (depending on the fulfilment of the other requirements) indicate application of the lex loci contractus.

The chapter contains a detailed discussion of the position in all the relevant jurisdictions as to which one or more of the listed conditions (a) – (d) are required for the alternative application of the lex loci contractus to contrac- tual capacity; it is also indicated whether the absence-of-fault requirement (where applicable) features within the context of the two-step or the three- step model.

Attention is also given to a-typical conflicts rules in this context, for instance

special rules in respect of essential goods and the entrepreneurial activities

of individuals and exceptions in respect of contracts involving family or

succession law or immovable property. In addition, the following issues are

discussed: the subsequent change in an individual’s personal law; the legal

system applicable to the consequences of contractual incapacity; and the role

of public policy.

Chapter 5 investigates the conflicts rules in respect of contractual capac- ity in international, supranational and regional instruments. Contractual capacity is excluded from international substantive-law instruments as the United Nations Convention on Contracts for the International Sale of Goods (1980) and the UNIDROIT Principles of International Commercial Contracts (2010); it is also excluded from international conflicts-law instruments as the Convention sur la loi applicable aux ventes à caractère international d’objets mobil- iers corporels (1955), the Hague Convention on the Law Applicable to Con- tracts for the International Sale of Goods (1986) and the Hague Principles on Choice of Law in International Commercial Contracts (2015), as well as the regional Mexico City Convention on the Law Applicable to International Contracts (1994).

Furthermore, capacity is excluded from the ambit of both the regional Rome Convention on the Law Applicable to Contractual Obligations (1980) and the Rome I Regulation on the Law Applicable to Contractual Obligations (2008) (a supranational European instrument), through the respective Articles 1(2) (a), except for the provisions of Article 11 (Rome Convention) and Article 13 (Rome I Regulation). Articles 11 and 13 provide for the application of the lex loci contractus in addition to the primarily applicable legal system(s) in terms of the lex fori’s private international law, subject to the fulfilment of certain requirements, which are discussed in some detail.

For the purposes of making the proposals as envisaged in Chapter 1, the first part of Chapter 6 contains an evaluation of the various legal systems that govern or have been proposed to govern the contractual capacity of natural persons, either on their own or together with others. The lex domicilii, the law of (habitual) residence, the law of the place of business, the lex patriae, the lex loci contractus, the putative proper law of the contract (whether only objec- tively or also subjectively determined), the lex situs and the lex fori are all considered for inclusion in the proposed rule, whether as primary applicable legal system or only under certain conditions.

The second part of Chapter 6 discusses in more detail the underlying inter- ests and the protection of both parties in the potentially available legal sys- tems. Of course, the protection of the respective parties in a particular case will depend on the content of the relevant legal system(s). However, some legal systems are, in the abstract, more closely connected to either the capa- ble or the incapable party, although the effect thereof may be neutralised by the alternative application of another system or other systems.

The final proposal made entails a rather extensive result-oriented reference

rule, fashioned after the three-step model and based on an underlying prin-

ciple favouring the validity of contracts (favor negotii), as counter-balanced

by converse considerations leading to the following arrangements in the

protection of vulnerable individuals:

(a) The putative proper law subjectively determined is not part of the legal systems listed in the alternative reference rule.

(b) The application of legal systems other than the personal law are restrict- ed, namely as follows: (i) the lex loci contractus only applies where the contract was concluded by the parties in each other’s physical presence or where the contract is of a recurrent nature in respect of reasonably es- sential goods; (ii) the lex loci contractus and the putative objective proper law are not applicable where the capable contractant was aware of the counterpart’s incapacity in terms of the personal law or was unaware thereof as a result of negligence; and (iii) the lex loci contractus and the putative objective proper law do not apply to contracts relating to fami- ly law or the law of succession or to contracts in respect of immovable property (although the lex situs will apply in respect of immovable prop- erty in addition to the relevant personal laws).

(c) Only the contractant lacking capacity in terms of any of the applicable legal systems may invoke incapacity.

The proposal for an arrangement regarding the applicable law in respect of the contractual capacity of a natural person is provided in both a narrative and a codified form. The narrative form is intended for use by the courts in the interpretation, supplementation and development of their rules of pri- vate international law. The codified form is meant to be considered for the purposes of national, regional, supranational and international instruments.

For the purposes of this summary, the final proposal is provided in its nar-

rative form as follows. A natural person should be deemed to have had

contractual capacity if he or she was competent at the time of conclusion of

the contract in terms of the lex domicilii or the law of the country of habitual

residence. In addition, an individual capable in terms of the lex loci contrac-

tus would also have contractual capacity but only if (a) he or she and the

counterpart were in each other’s physical presence at the time of the conclu-

sion of the contract or (b) the contract was of a recurrent nature in respect

of reasonably essential goods. A natural person should also be regarded as

having had contractual capacity if he was capable according to the putative

objective proper law of the contract. A contractant, deemed to have con-

tractual capacity in terms of the lex loci contractus or the putative objective

proper law of the contract, yet incapable according to the lex domicilii and the

law of habitual residence at the time of the conclusion of the contract, may

nevertheless rely on such incapacity if the capable counterpart was aware of

the incapacity, or was unaware thereof as a result of negligence. This excep-

tion does not apply to contracts of a recurrent nature in respect of reason-

ably essential goods. The incapable contractant under the legal systems

mentioned bears the burden to prove that, at the time of the conclusion of

the contract, the capable party was aware of the incapacity or was unaware

thereof as a result of negligence. Whether or not a contractant was negligent

in this regard, should be determined by the law of the forum or, if the rule

forms part of a regional, supranational or international instrument, in an

autonomous manner. The lex loci contractus and the putative objective proper

law do not apply where the contract in question concerns family law or the

law of succession. As a further exception, in as far as immovable property

is concerned, a natural person should be deemed to have had contractual

capacity if he or she was competent at the time of concluding the contract in

terms of the lex domicilii, the law of habitual residence or the lex situs. Where

a natural person acts in the course of his or her business activities, the law of

domicile and habitual residence shall be the law of his or her principal place

of business. The contractual capacity of a natural person that was previously

acquired shall not be affected by a subsequent change in the individual’s

domicile or habitual residence. Only the contractant lacking capacity in

terms of any of the legal systems referred to shall be entitled to invoke such

incapacity. The consequences of an individual’s incapacity shall be governed

by the putative objective proper law of the contract.