Where a dispute arises from the breach of a term or terms of a contract between
‘A’ a Nigerian and ‘B’ an Italian, the court which entertains the action will employ
an objective test in order to determine the law to govern the resolution of this
dispute. Before arriving at this law, the court considers the intention of the parties
regarding their choice of law.
The parties’ intention could be expressed where they provide that “Nigerian law
shall govern the construction of this contract”, or their intention could be implied
where, from the terms of the contract, the court could hold that the parties’
intention is that Italian law should govern the contract. Where their intention is
neither expressed nor to be inferred from the terms of the contract, the court could
hold that the system of law with which the transaction has its closest and most
real connection shall be the proper law of the contract and this is arrived at by
looking at the surrounding circumstances of the case.
The above explanation is what “Determining the Proper Law of Contract under
Private International Law” is all about and it is that proper law so determined that
is applied in all issues or matters arising from international contract disputes
brought before the court for resolution.
Determining the Proper Law of Contract under Private
International Law
Title page i
Declaration ii
Certification iii
Dedication iv
Acknowledgement v – vi
Table of Nigerian Cases vii
Table of Foreign Statutes viii – x
Table of Nigerian Statutes xi
Table of Foreign Cases xii
Abstract xiii
Table of Contents xiv-xvi
1.0 General Introduction 1
1.1 Introduction 1 – 7
1.2 Aims and Objectives of the Research 7
1.3 Scope of the Research 7 – 8
1.4 Statement of the Problem 8 – 9
1.5 Justification of the Research 10 – 11
1.6 Significance of the Research 11 -12
1.7 Literature Review 12 – 22
1.8 Research Methodology 22
1.9 Organizational Layout 22 – 24
2.0 Determining the Proper Law of Contract – Old and
Classical Theories 25
2.1 Introduction 25 – 27
2.2 The Law of the Place where the Contract is made –
Lex Loci Contractus 27 – 31
2.2.1 Merits and Demerits of Lex Loci Contractus 32 – 34
2.3 The Law of the Place where the Contract is to be
Performed – Lex Loci Solutionis 34 – 36
2.3.1 Merits and Demerits of Lex Loci Solutionis 37 – 39
2.4 Intention of the Parties – The Classical Approach 39 – 46
2.4.1 Merits and Demerits of Intention of the Parties 46 – 47
3.0 Determining the Proper Law of Contract – Modern Approach 48
3.1 Introduction 48 – 51
3.2 Express Selection of the Proper Law 51 – 57
3.2.1 Limitation to the Express Selection of the Proper law 57 – 63
3.3 Implied Selection of the Proper Law 63 – 85
3.4 The Closest and Most Real Connection 86-100
3.5 Merits and Demerits of the Modern Approach 100-103
4.0 Essential Requirements and the Proper Law of Contract 104
4.1 Introduction 104
4.2 Offer and Acceptance 105-110
4.3 Consideration 110-117
4.4 Capacity 117-124
4.5 Performance of the Contract 124-132
4.6 Illegality 132-137
4.7 Interpretation of the Contract 137-141
4.8 Intention to Create Legal Relations 141-144
4.9 Internal Conflict in Contracts 144-147
5.0 Summary and Recommendations 148
5.1 Summary 148-158
5.3 Recommendations 159-162
Bibliography 163-164
Business men and women, the world over, are continually entering into
agreements. It is therefore necessary to know which law should be
applied to govern these agreements, because every international
contract must be governed by a particular law, if not it is no longer a
contract which the court must enforce. Generally, the law of contract
has uniqueness of its own, in that it is the only branch of the law in
which broadly speaking parties are free to make their own choice of
law. The court will apply this law if it passes the objective test. The
courts follow a procedure in conducting this test; it is the result that
constitutes determining the proper law of contract. At first the
choice of law was fixed, rigid and arbitrary but as times went on, the
law became flexible, more reasonable and universally acceptable.
The Proper Law of Contract was defined in Coast Lines Ltd. v. Hudig
and Veder Chartering N.V.1 “as the system of law (e.g. Nigerian Law,
English Law, German Law or Italian Law) by which the parties intended
the contract to be governed, or, where their intention is neither
expressed nor to be inferred from the circumstances, the system of
law with which the transaction has its closest and most real
The proper law of contract was also defined by Lord Wright in Mount
Albert Borough Council V. Australasian Temperance & General Mutual
Life Assurance Society2 as “that law which the English court is to
apply in determining the obligations under the contract. English law in
deciding these matters has refused to treat as conclusive, rigid or
arbitrary criteria such as lex loci contractus or lex loci solutionis, and
has treated the matter as depending on the intentions of the parties
to be ascertained in each case on a consideration of the terms of the
contract, the situation of the parties, and generally on all surrounding
facts. It may be that the parties have, in their agreement expressed
what law they intend to govern, and in that case prima facie their
intention will be effectuated by the court. But in most cases they do
not do so. The parties may not have thought of the matter at all.
1. (1972) 2 Q.B. 34 (C.A.)
2. (1938) A.C. 224, 240
Then the court has to impute an intention or to determine for the
parties what is the proper law which as just and reasonable persons
they ought to or would have intended if they had thought about the
question when they made the contract.”
It can be deduced from the above definitions that what constitutes
the proper law of contract is not very easy to determine, because of
its complex nature. One cannot at a glance pick a particular law as the
proper law of contract.
The difficulty arises from the fact that businessmen and women
representing their companies from different parts of the world, enter
into various kinds of contracts; such as contracts of sale of goods,
hire purchase contracts, contracts of employment, equipment leasing
agreements, consolidation contracts, etc. In Nigeria, commercial
banks for example, are required to raise their minimum share capital
from N2 billion to N25 billion. To meet this target, banks enter into
merger agreements with other banks both local and international.
Therefore the proper law to govern contract of sale of goods is not
the same as contract of hire purchase or contract of employment or
equipment leasing contract or a share acquisition contract.
These contracts contain terms, conditions and multiplicity of
connecting factors. These terms and conditions form the constitution
of the contract of which the breach of any clause will lead to action
for claims.
At first and in relation to the determining of the proper law of
contract, there may be no problem among the parties to the contract,
where each respects or carries out his obligation under the contract.
But problem arises where one party to the contract breaches or fails
to perform his own obligation under the contract.
Where the contract is a domestic one, the issue in dispute before the
court may not pose much problem, because the domestic law i.e.
Nigerian Law of Contract, which is based on common law principles as
well as on legislation, shall apply. However, where a Nigerian company
enters into a contract with an Italian company and the issue before
the court involves a foreign element, problem arises as to which
country’s proper law, Nigerian Law or Italian Law is the applicable law
in resolving the matter.
Where the matter is brought before a Nigerian Court and the parties
file their pleadings and tender various documents including a copy of
the contract which binds them, the court will of course study the
parties’ pleadings including the agreement. In the course of the
study, the court may discover that the Agreement provides that
foreign law governs the contract.
The court can determine the applicable law by looking at the place
where the contract was made. It can also look at the place where the
contract is to be performed, from the intention of the parties, the
domicil, nationality or business centre of the parties; the situation of
the subject matter, the nationality of the ship in the case of a
charter party etc. The place of contracting, place of performance
and intention of parties represent the old and classical theories,
which were relevant for some time before they were discarded and
replaced by more flexible rules.3
3 The examples of the recent principles are:
(a) where there is an express choice of the proper law
(b) where there is an implied choice of the proper law
(c) where there is no choice of the proper law express or implied
The proper law applies either because the parties have chosen it and
the choice has been objectively tested by the court, or because it is
the law most closely connected with the contract. In the absence of
strong evidence to the contrary, the parties must be deemed to have
intended to refer to the domestic rules and not to the conflict rules
of their chosen law, and the connection with a given legal system is a
connection with substantive legal principles and not with conflict of
laws rules.4
The development of this area of private international law is still at its
infancy in Nigeria. This is because industrial growth in the country
has been at its lowest ebb, with few local companies having
international connections and associates. Therefore foreign elements
in contracts between Nigerian companies and their foreign
counterparts are not so rampant and hence, our courts are not so
burdened with such cases for determination.
There are also very limited local legal materials on the subject matter.
For instance there are few Nigerian text books on the subject with
heavy reliance on foreign cases and legislation. Also there is yet
4. Dicey and Morris, Conflict of Laws (Stevens & Sons Ltd., London
1973), p. 724.
no local legislation on proper law of contract as we have in Europe.
These problems have made reliance on opinions of foreign writers and
decided cases inevitable in this research.
This work aims at highlighting the various rules which courts follow
in determining the proper law to apply in resolving disputes arising
from international contracts. It is also the aim of the work to examine
and determine the various problems encountered by the courts in
choosing the proper law. In trying to do this, the researcher will look
into the various theories and solutions postulated in resolving the
This research work focuses attention on various rules for
determining the proper law of contract entered into between parties
from different countries, such as between a corporate organization in
Nigeria and another corporate organization doing business in Germany.
Also attention shall be focused on some essential requirements such
as offer and acceptance, consideration, capacity, performance of the
contract, illegality and interpretation of the contract.
International contracts entered into between parties from different
countries for the execution of their various obligations is a document
of extreme importance. Once parties endorse the agreement, they
are bound by its terms and conditions.
The area that is very crucial in realizing their dreams is that which
deals with determining the proper law that governs their rights and
obligations in the contract should any dispute arise.
In the event of such dispute, the court is normally saddled with the
onerous task of determining the proper law to apply in order to
resolve the dispute. If the parties have expressly chosen a law of a
particular country, say English law as the law to govern the contract,
the problem is not over till the parties can prove that their choice is
bona fide and legal.5
5 See Lord Wright’s definition of the proper law of contract in the case of
Vita Foods Products Inc. V. Unus Shipping Co. Ltd (1939) A.C. 277.
Where the parties have expressly chosen the governing law can the
courts go ahead to apply the law chosen? This is a problem because
the law expressly chosen by the parties can only become the proper
law to be applied by the court if it passes the objective test.
However where the parties cannot expressly choose the law, problem
arises as to which law of a particular country can be implied to govern
the contract. To solve this problem the court has to look at the
terms of the contract to be able to know which elements of the
contract constitute the natural seat and thereby determine the
proper law. The court can also look at the system of law with which
the contract had its closest and most real connection.
This search is cumbersome because it does not entail looking at the
facts of the case from one aspect. It entails looking at all the
relevant facts and all the surrounding circumstances of the
transaction in order to choose the proper law of the contract. Again,
does the alleged contract fulfill all the essential requirements of a
valid contract notwithstanding the fact that the parties have chosen
the governing law? All these and more, form the statement of the
The subject matter of this research – determining the proper law of
contract under Private International Law is a subject of monumental
importance. As a result of the emergence of technological
advancement in virtually all spheres of human endeavour, the effect
of globalization, the need for stronger and well managed
organizations, companies all over the world embrace mergers,
acquisitions, restructuring, consolidations etc in order to form a
stronger group and dominate the world market.
To achieve above objectives there is the need to make contacts and
search for investors. This search always results, in the final analysis,
into signing of contract documents which bind parties to it. One of
the important terms of this contract is the law that will govern the
contract in the event of dispute. Therefore certain clause(s)
stipulating the governing law and place of arbitration are commonly
provided in these contracts.
These provisions will enable the parties to resolve disputes that may
arise as the courts will rely on them when such problems arise.
Therefore the proper understanding of the subject matter and
resolution of business disputes based on them will go a long way in
enhancing business harmony, co-operation and growth among different
corporate organizations around the world. It must be emphasized
that it is not only in the formation of companies that the proper law is
relevant, the proper law is also relevant in resolving contractual
disputes between companies and individuals as well as companies and
companies. Therefore once a dispute resulting from an international
contract is resolved through the application of the proper law of
contract, it enables the parties and their various organizations to
move forward and forget about the past, learn from the consequences
of their actions, principles and rules of law are made by the decisions
of the court which create precedents for the courts below. All these
combined results in the development of private international law as it
relates to contracts.
This research work is of importance to legal practitioners on
international business law, legal advisers to multinational companies.
It is also of importance and beneficial interest to private
international law students. The Judges of our various courts of
record who are saddled with adjudicating on issues brought before
them – deciding on proper law governing international contracts, will
immensely benefit from this research. Businessmen and women, who
have interest in legal literature, will find the research work equally
The subject matter – determining the proper law of contract under
private international law has generated heated comments and
contributions by eminent legal scholars who propounded various
theories which have assisted the courts of both Anglo-American and
Continental countries in resolving issues emanating from international
contracts. Despite their contributions, confusion and lack of proper
understanding of the subject matter have made further inquiries
Also many of these legal writers who have contributed much on this
topic, have not fully discussed thoroughly the technicalities involved in
determining the proper law of contract in a simplified and lucid
manner for proper understanding by legal practitioners and non-legal
practitioners alike. Consequently we had a situation where courts of
different countries apply rules quite different from the others. For
example, American courts apply the lex loci contractus, following the
English courts. Later Lex loci solutionis was applied only as an
exception. American courts refused to apply the intention rule. Some
Continental countries apply intention theory while some apply lex loci
contractus and lex loci solutionis.
At a point, the doctrine of the proper law of contract in Europe
became a legislative matter, making the decisions of courts tied to
the provisions of the law. In this way, legal provisions became
superior to judicial decisions thereby making it difficult to follow
precedents. For example, Articles 3(1) and 4(1) of the Contracts
(Applicable Law) Act 1990 of the Contractual Obligations Convention
1980 (usually referred to as the Rome Convention), provide that a
contract ‘shall be governed by the law chosen by the parties. Their
choice must be express or demonstrated with reasonable certainty by
the terms of the contract or the circumstances of the case’ failing
which, ‘the contract shall be governed by the law of the country with
which it is most closely connected’.
In as much as this Law tries to solve the problem of determining the
proper law of contract, it gives room for forum shopping and does not
affect a party from a non-European country. The law only binds
parties from different countries within Europe. It has therefore
compounded the problem of determining the proper law because a
party from non-European country may opt out of the provisions of this
law and lean on the theory or principle applied by the courts of his own
It is therefore the responsibility of this research to as much as
possible simplify these complications and technicalities arising from
the writing of such authors and the certain comments by some
Judges. This will go a long way in the proper understanding of what is
determining the proper law of contract.
The need for the proper understanding of the subject matter is very
crucial in that international contract as it stands today is the bedrock
of industrial growth and development. No country is an island;
therefore there is the need for business co-operation and
understanding between parties from different countries. The
interdependence nature of world commerce has made this cooperation
unavoidable. For example the recent world economic summit
which was held in Switzerland brought together various countries of
the world for discussions which bothered on cross fertilization of
ideas on economic cooperation and integration. In this type of forum,
various contracts are entered into and concluded by businessmen and
women who participated from various countries of the world. In these
agreements, legal practitioners who are versed in private international
law, particularly those knowledgeable in issues of proper law of
contract shall be consulted before the final signing ceremonies.
The Scholars who made significant contributions in this area of the
law can be categorized into ancient and modern writers. The early
writers have propounded theories which enabled the courts then to
resolve conflict matters in contracts entered between parties from
different countries. Huber6 for example, propounded the lex loci
contractus theory. This theory states that the law of the place
where a contract is entered constitutes the governing law. However,
where parties have another place in mind, then the law of the place of
contracting will give way. The lex loci solutionis which means the law
of the place where the contract is to be performed became an
exception to the theory of place of contracting.
6. Ademola