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«IV. CIVILINĖ TEISĖ IR PROCESAS THE LAW APPLICABLE TO CONTRACTUAL OBLIGATIONS: COMPARATIVE ANALYSIS OF THE CHOICE OF LAW RULES UNDER LITHUANIAN AND ...»

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Jurisprudencija, 2002, t. 31(23); 53–66

IV. CIVILINĖ TEISĖ IR PROCESAS

THE LAW APPLICABLE TO CONTRACTUAL OBLIGATIONS:

COMPARATIVE ANALYSIS OF THE CHOICE OF LAW RULES

UNDER LITHUANIAN AND THE UNITED STATES LAW

Doktoral Candidate Herkus Gabartas

Law University of Lithuania, Law faculty, Department of Fiscal and Revenue law Ateities st. 20, 2057 Vilnius, Lithuania Tel. +370 5 271 45 21 E-mail: h.gabartas@takas.lt Pateikta 2002 m. balandžio 11 d.

Parengta spausdinti 2002 m. lapkričio 16 d.

R ecen za vo Lietuvos teisės universiteto Teisės fakulteto Tarptautinės teisės ir Europos Sąjungos katedros vedėjas profesorius dr. Saulius Katuoka ir Vilniaus universiteto Teisės fakulteto Tarptautinės ir Europos Sąjungos teisės katedros asistentas dr. Audrius Perkauskas Abstract This article deals with the specific provisions of the new Civil Code of the Republic of Lithuania that establish the rules used in order to determine the law applicable to contractual obligations (Article 1.37). The purpose of the article – to show the origins of the private international law rules established in the Lithuanian Civil Code and by employing the comparative analysis method to explain their content and meaning. Special emphasis is made to those provisions, which determine the law applicable to the contractual obligations, when the contracting parties failed to choose such law by themselves. By referring to the writings of the world-known legal scholars, author analyzes Lithuanian private international law rules and compares them with the relevant provisions under the American choice of law. Having in mind the unlike legal traditions in Lithuania and in the United States, the existing differences and similarities of various legal concepts are also explained. The great majority of Lithuanian private international law rules are taken from the Rome Convention On the Law Applicable to the Contractual Obligations as of 19 June 1980, therefore this Convention, where relevant, is also analyzed. It is expected that this article will be helpful in understanding the private international law rules under the Lithuanian Civil Code, which are both new and rather complicated.

The subject known in Europe as private international law is usually referred in the

United States to as conflict of laws, and is perceived as covering at least three main areas:

conflict of jurisdictions, choice–of–law and the recognition and enforcement of foreign judgments1. When a court in any country is dealing with international contract case, it usually follows a similar three-step route: first, it deals with a so-called jurisdictional issue, i. e., a court establishes whether it is competent to enter a binding judgment over the matter (as a rule, a court applies the procedural rules of the country where it sits (lex fori) in order to resolve this jurisdictional issue). On its second step, a court needs to select a set of resultoriented (i. e., substantive) national rules that will be applied in deciding the substance of the case. For this purpose a court again must refer to the special rules (i. e., choice–of–law Therefore, except where such distinctions are particularly relevant to the discussion, the terms „private international law“ or „conflict of laws“ or „choice–of–law“ hereinafter will be used in this work interchangeably.

rules) of the country where it sits in order to select the appropriate substantive law, which will determine the rights and obligations of the parties to the dispute. A court may apply the substantive law to the facts of the case only after the court’s jurisdiction has been established and the governing substantive law is correctly determined. And thirdly, after a court issues a judgment, the question of judgment’s recognition and enforcement arises. Hereinafter, following this oversimplified pattern of 3-step judicial process, this article will focus on the second step taken by a court, i. e., on the choice-of-law rules applied by a court in order to determine the relevant substantive law governing the case.

In July 18, 2000, the Civil Code of the Republic of Lithuania (the Code) was adopted 1.

It is a first independent civil code in the history of the Lithuanian state [1, p. 11].

Consequently, many rules and legal concepts enlisted there are still very new to the Lithuanian legal community. The author therefore believes it is useful to analyze these new Lithuanian private international rules and to judge them from the broader international perspective, i. e., by comparing them to the respective choice of law rules under the United States law. Also, since Lithuanian private international law rules repeat to the big extent the Convention on the Law Applicable to Contractual Obligations (the Rome Convention)2, the relevant provisions of the Rome Convention are also discussed in this work.

This article attempts to examine the choice-of-law rules applicable to contractual obligations in general. Therefore certain questions, which are relevant but which nevertheless do not directly determine the contractual obligation itself, e. g., party’s capacity to conclude a contract, the requirements to the form of the contract, etc., are not analyzed therein. Special legal regulation existing with respect to consumer, individual employment or other specific type of contracts is not addressed either.





1. Private International Law Rules in Lithuania and the United States When comparing the private international rules in Lithuania and choice-of-law rules in the United States (US), it should not be forgotten that Lithuania and the US belong to the different legal systems. American law is generally a result of developments formulated by US courts (although a court in US will also apply the relevant existing statutes, the case law is, at least in the area of the choice-of-laws, a major source of law). Lithuania, on the other hand, belongs to the group of countries of civil law system, where legal precedents play a very limited role, if any. As a result, legal language and sometimes even entire legal concepts are understood very differently in Lithuania and the US. Thus, when we talk about private international law in Lithuania, we mean conflict of laws in the US.

1.1. Private International Law in Lithuania

The private international law is a relatively new issue in Lithuania. Until 1990, when the independence of Lithuanian Republic was restored, commercial relations with foreign countries were very limited. Consequently, neither Lithuanian legal theory, nor practice were interested in private international law questions. The situation has changed after 1990, when a relationship with international community began to grow rapidly. Lithuania has already concluded many international treaties with foreign countries and joined the most important international conventions; on the other hand, a number of so-called cases with international (foreign) element, which are decided in Lithuanian courts, is constantly growing each year [2, p. 10].

Starting from July 1, 2001, the Code became effective in Lithuania3. It replaced an old 1964 Civil Code, which was subject to continuous amendments after 1990. Being a major Valstybės ţinios. 2000. Nr. 74–2262.

The Rome Convention was opened for signature in Rome on 19 June 1980, and is effective starting from April 1, 1991. All member states of the European Union are parties to this Convention.

Certain rules listed in the Code have different terms of effectuation. See Art. 2 of the Law of the Republic of Lithuania On Approval, Application and Implementation of the Civil Code // Valstybės ţinios. 2000. Nr. 74–2262.

source of law in the civil law country, the Code reflects the major changes made in various spheres of private law, including the area of private international law. Chapter 2 of Book 1 of the Code, named „International Private Law“, consists entirely of legal principles and rules, which are used to determine the substantive law applicable to civil relations. The rules concerning the determination of applicable law in the area of contracts have been drafted in close accordance with the Rome Convention1. Therefore, when interpreting and applying these rules, the jurisprudence of the European Court of Justice should also be taken into the account.

1.2. Choice of laws in the United States

American choice-of-law is not a uniform body of law. With the exception of the certain constitutional issues that might arise the process of application of foreign law, the questions of choice-of-law in the United States are almost exclusively attributed to the matters of law, which is regulated by the states rather than by the federal government. Each of fifty US states is a separate sovereign as regards their conflict-of-laws, and the precedents of one state’s courts may have at best only the persuasive effect in the courts of the another. Even U.S. federal courts, which are supposed to form the uniform legal practice in the U.S., „borrow“ local state rules (instead of applying some kind of uniform federal law) when the choice–of–law issue is at stake2 – the factor, which does not contribute to idea of unification of US law. Therefore any attempts in this work to reach some general conclusions about American law necessarily involve some generalizations, which may not be valid in all US states. Thus, article does not provide any definite answers on American law; instead, it merely attempts to identify some general patterns and trends existing in the majority of US states.

The American choice-of-law rule went threw a long route of developments in order to achieve its current status. At the beginning of XX century American conflicts thinking was dominated by single-factor „connecting contact“ tests such as lex loci contractus in contracts and lex loci delicti in torts. Pursuant to lex loci contractus principle, the parties to the transaction acquire vested rights under the law of that jurisdiction, where the „last event“ of the transaction takes place. Thus, the applicable law is determined by single factors, which often are far from being characteristic to the entire contract3. For example, following the reasoning of this doctrine, the law of the place of the contract conclusion determines contracting party’s capacity to make contract, the form of the contact or the type of character (absolute or conditional) of the promise. Similarly, the law of the place of contract performance determines a manner, time, locality, sufficiency of performance or excuse for non-performance, etc.4 The majority of US courts accepted this concept nation-wide at the beginning of XX century. Consequently, a single-connecting factor approach, also known as vested-rights or traditional theory, was promulgated at American Restatement First, Conflicts of Laws, (1934) (the Restatement First)5.

However, in the second half of the XX century the state courts in US occasionally started to departure from a single factor conflicts test; as a result, multi-factor approach, encompassing center-of-gravity and significant-connection tests, began to emerge. This theory requires a court to apply the law of the state having the closest connection to the Lithuania, being only an associated member of the European Union, is not a party to the Rome Convention yet.

The US Supreme Court has held that choice-of-law rules are substantive (rather than procedural), thus calling for a federal court to apply the choice-of-law rules of the state where it sits; see Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487, 1941.

The critics to this doctrine usually argue that with modern technology and modern business practices, the place of contracting becomes less certain and more arbitrary.

See American Restatement First, Conflicts of Laws, § 332-334, 358 (1934).

According to Symeonides [3, p. 143], as of the year 1999 the following US states still followed the traditional lex loci contractus rule: Alabama, Florida, Georgia, Kansas, Maryland, Rhode Island, South Carolina, Tennessee and Virginia.

parties and the issues involved. The law is to be determined according to a variety of „contacts“, looking for the „center of gravity“, and no single connecting factor or contact point is allowed to attain more than „presumption“ status1. In other words, the traditional lex loci contractus rule was abandoned. The „most significant relation“ test thus was already established dominant one under American Restatement Second, Conflict of Laws (1971) (the Restatement Second)2.

Later on, a more radical school, led by Duke University professor Brainerd Currie, unfurled the banner of a conflicts revolution by focusing on the analysis of competing state interests. The so-called „interest“ theory generally proclaims that the law of that country, the interests of which in each particular case prevails over the interests of another „competing“ country, shall be applied3. The theory affected all areas of conflict-of-law, especially torts4. It entailed three major changes. First, many courts replaced hard-and-fast rules with openended approaches. Second, the „conflicts revolution“ shifted the emphasis away from territorial factors to state interests and policies. Finally, the method changed from selecting a jurisdiction in a content-blind fashion to selecting a law (at least in part) because of its preferable substance [4, p. 584].

On the other hand, common law is not the only source of choice-of-law rules. A number of states have enacted their own their own statutes addressing this issue (e. g., New York General Obligations Law, § 5-14015). Some state statutes even deviate from the rules enacted in the US Uniform Commercial Code (UCC), which contains some general choiceof-law provisions (UCC, §1-105).

So what is the current status of the American conflict-of-law rules? In the words of one commentator, American conflicts law has become „a tale of a thousand-and-one-cases“ [5, p.



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