Immunity from Jurisdiction

Choice of law in contract State contracts

Serbian Loans Case (French Republic v. Kingdom of the Serbs, Croats and Slovenes) PCIJ Reports, Series A, No 20 (1929) (Permanent Court of International Justice)

Any contract which is not a contract between sovereign states in their capacity as subjects of public international law is based on the municipal law of some country. The identification of that governing law is a function of the rules of private international law.

Background

In the period 1895-1913, the Serbian government borrowed money from a number of French banks. The loan contracts (in the form of bonds) were made in France and provided for repayment in gold currency (gold francs). Until 1924, there was parity between the French paper franc and gold and the Serbian government serviced the loans by making repayments in French paper francs at the prevailing rate of exchange. However, following the depreciation of the French paper franc as against gold, the French banks demanded repayment in gold currency. When this demand was rejected by the Serbian government, the French government exercised the right of diplomatic protection in respect of its nationals (the French banks) and the dispute as to the validity of the gold currency provision in the loan contracts, which was now a dispute between Serbia and France, was submitted to the Permanent Court of International Justice for adjudication.

Disposition

Under the rules of private international law, the loan contracts were governed by Serbian law. In Serbian law, the gold currency provision in the loan contracts was valid. Accordingly, the Serbian government was required to service the loan contracts by reference to the prevailing value of gold at the time of repayment.

Judgment extract

THE COURT. ...[41]...Any contract which is not a contract between States in their capacity as subjects of international law is based on the municipal law of some country. The question as to which this law is forms the subject of that branch of law which is at the present day usually described as private international law or the doctrine of the conflict of laws. The rules thereof may be common to several States and may even be established by international conventions or customs, and in the latter case may possess the character of true international law governing the relations between States. But apart from this, it has to be considered that these rules form part of municipal law. ...

[42] In the first place, the law governing the obligations at the time at which they were entered into must be determined. In the Court's opinion, this law is Serbian law and not 2 French law... .

The loans in question are loans contracted by the State of Serbia under special laws which lay down the conditions relating to them. These laws are cited in the bonds; and it appears that the validity of the obligations set out in the said bonds is indisputable in Serbian law. The bonds are bearer bonds signed at Belgrade by representatives of the Serbian Government. It follows from the very nature of bearer bonds that, in respect of all holders, the substance of the debt is necessarily the same, and that the identity of the holder and the place where he obtained it are without relevancy. Only the individuality of the borrower is fixed: in this case it is a sovereign State which cannot be presumed to have made the substance of its debt and the validity of the obligations accepted by it in respect thereof, subject to any law other than its own. ...

Judgment accordingly

1. If private international law is municipal law and “public international law (as the law of the forum) provided no ready-made rules of conflict of laws” (Brownlie, Principles of Public International Law, 7th edn, 2008, p 37), which system of private international law did the Permanent Court of International Justice apply in the Serbian Loans Case to determine that the loan contracts were governed by Serbian law?

2. With regard to the relationship between public international law and private international law in the context of state contracts (contracts, such as loan agreements or natural resource exploitation agreements, between a sovereign state and a foreign national), Brownlie (above) makes the following observations (footnotes omitted):

[549] The rules of public international law accept the normal operation of rules of private international law and when a claim for breach of a contract between an alien and a government arises, the issue will be decided in accordance with the applicable system of municipal law designated by the rules of private international law. Further questions are raised if the parties to a state contract expressly choose an applicable law other than a particular system of local law, either “general principles of law” or public international law. A choice by the parties of public international law is assumed by some writers to place the contract on the international plane, but this cannot be correct since a state contract is not a treaty and cannot involve state responsibility as an international obligation. In practice choice of law clauses in state contracts often [550] specify the local law “and such principles and rules of public international law as may be relevant”, and in face of such clauses arbitrators have a certain discretion in selecting the precise role of public international law.

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