3 The South African private international of contract

A documentary letter of credit comprises different contractual relationships. Private international law of contract will determine which legal systems are applicable to these relationships. In this chapter the general principles of the South African private international law of contract are investigated.

The law applicable to a contract is known as its . 1 The parties can either expressly2 or tacitly3 choose the proper law of their contract. There are however limitations to this practice, for example, the mandatory rules of the or maybe a third legal system.4

The parties to a letter of credit contract are therefore also able to choose a legal system to govern the relevant relationship. The question arises whether they can also for example make the Uniform Customs and Practice for Documentary Credits of 1994 (the “UCP 500”) (issued by the International Chamber of Commerce in Paris) applicable to their contract.5 There are two possible views in this regard.

1 Forsyth Private International Law. The modern Roman-Dutch law including the of the Supreme Court (1996) 274. See 274 n 4 for other terms that may be used. 2 Forsyth Private International Law 284. 3 Forsyth Private International Law 282 284; Ex Parte Spinazze 1985 3 SA 633 (A) 665H. 4 See in general Forsyth Private International Law 278-282; Oelofse The Law of Documentary Letters of Credit in Comparative Perspective (1997) 533; Neels “Geoorloofdheid van ‘n kontrak en openbare beleid in die internasionale privaatreg” 1991 TSAR 694; Herbst v Surti 1991 2 SA 75 (Z); Henry v Branfield 1996 1 SA 244 (D) 249E-F. Cf a 7 of the Rome Convention. 5 Van Niekerk and Schulze International Trade 218: “The UCP is a body of rules that, by international banking practice and mutual agreement between international bankers, is incorporated into all contracts involving letters of credit. It thus governs the rights and duties of all the parties involved in the issuing of and payment on such contracts. The aim of the UCP is to create a framework of basic rules which is compatible with both international banking practice and the municipal of states, and so to avoid disputes and to facilitate the orderly and efficient conduct of international trade. It is currently incorporated in the vast majority of letters of credit issued worldwide.” 9

One could see the choice of the UCP as being similar to the choice of a legal system. The parties are then free to choose the UCP in the same way as they could for example choose French law. However, not all aspects regarding documentary letters of credit are governed by the UCP. One will have to determine another legal system to govern the remaining aspects. The parties will choose this legal system either expressly or tacitly, or it will have to be assigned by law.

On the other hand, a choice of the UCP could be seen as dissimilar to the choice of a legal system and then it would be necessary to determine whether incorporation by reference is possible. Incorporation of the UCP will have to be recognised according to the proper law of the contract. First, the proper law of the contract will have to be determined. This could be based on an intention of the parties (expressly or tacitly). If such an intention does not exist, the proper law has to be determined objectively. It will have to be established according to the relevant legal system whether it will be possible to incorporate the UCP by mere reference to it. This will depend on the internal legal rules of that legal system. 6 In South African law incorporation in this manner can readily be accommodated. The relevant test will be whether one could reasonably assume from the client’s conduct in continuing with the contract, that he has either read the UCP and assented to its terms or is prepared to be bound to the code without reading it.7

It is submitted that the first model should be accepted, as being in conformity with commercial expediency and practice in the legal systems of trading nations and specifically South Africa’s trading partners.8

In practice parties do not always choose a legal system to govern their contract. In these cases, the rules of private international law will be applied to determine which legal system will ex lege be applicable to their contract. A proper law of the contract has to be

6 The parties could of course physically incorporate the UCP into their contract by for instance attaching it to their original contract. Incorporation by reference is then not applicable. 7 Cf Christie The Law of Contract in South Africa (1996) 200. 8 Cf Van Niekerk and Schulze International Trade 218. 10 determined either as governing the entire relationship between the parties, or as far as the relationship is not governed by the UCP, or as the legal system to govern the interpretation of the UCP, or to determine whether the incorporation of the UCP is valid.

There are two views in South African law regarding the position where the parties to a contract have not chosen a legal system. The first possibility is that the court presumes that the parties intended a legal system to govern their contract. This is the approach followed by the appellate division in Standard Bank of SA Ltd v Efroiken and Newman.9 Although the parties clearly had no intention in this regard, the court still presumes that they must have had some legal system in mind.10 Forsyth therefore states that it will be artificial to refer to their presumed intention.11 The second and, it is submitted, correct approach is that the court determines the applicable legal system by establishing the law with which the contract has its closest and most real connection12 or the centre of gravity of the contract.13 Authority for this view is found in obiter dicta in the Laconian14 and Improvair15 cases. Although the judges are in favour of the second approach, they state that they are bound by the Standard Bank16 case because it is an appellate division decision. However, they further state that they would nevertheless have arrived at the same conclusion because the same factors would have to be considered.17 In other words, irrespective of whether one refers to the presumed intention or closest connection test, the same factors have to be considered. Support for the second approach is also found in the appellate decision in the Spinazze case,18 where Corbett CJ in passing refers to “the

9 1924 AD 171. This case concerned a letter of credit. See ch 4 for a discussion of this case in respect of the relationship between the applicant and the issuing bank. 10 (n 9) 185. 11 Forsyth Private International Law 283 n 62. 12 Forsyth Private International Law 287. Also see a 4(1) of the Rome Convention. 13 Forsyth Private International Law 288. 14 Laconian Maritime Enterprises Ltd v Agromar Lineas Ltd 1986 3 SA 509 (D) 526D-H 530H-I. 15 Improvair (Cape)(Pty) Ltd v Establissements Neu 1983 2 SA 138 (C) 146H-147B. 16 (n 9). 17 Also see Forsyth Private International Law 287. 18 (n 3). 11 system with which the contract had its closest and most real connection”.19 In this regard Oelofse states: “Although the approach in the Standard Bank case has not yet been overruled by the Appelate Division, the trend is clearly in favour of abandoning it, and of adopting the ‘closest and most real connection’ test of the English common law.”20

It is suggested that inter alia the following factors21 can be taken into account to determine the presumed intention of the parties or, rather, the legal system of the closest and most real connection:

1) The locus solutionis (the place of performance);22

2) the locus contractus (the place of conclusion of the contract);23

3) the place of offer;24

4) the place of acceptance;25

19 665H. The case concerned an ante-nuptial contract. See further Herbst v Surti (n 4) 79C: the court determines the legal system with the closest connection to the contract to establish the presumed intention of the parties. This seems like a combination of the two approaches but in the final analyses it is support for the traditional approach (the first approach discussed in the text). See Neels Geoorloofdheid 694-696 and Forsyth Private International Law 287 n 81 in this regard. Cf the Henry case (n 4) 249E-F. 20 Oelofse Documentary Letters of Credit 532. Also see Van Niekerk and Schulze International Trade 221. 21 The list of factors is largely based on Neels’ class dictate on the private international law of contract (RAU). 22 See for example the Standard Bank case (n 9); Guggenheim v Rosenbaum (2) 1961 4 SA 21 (W); the Laconian case (n 14). Cf the Henry case (n 4) 249E. 23 See the Standard Bank case (n 9); the Guggenheim case (n 21); the Laconian case (n 14); the Henry case (n 4) 249F. In the Laconian case (n 14) the judge also refers to the place where the contract was drafted (528B). 24 See the Laconian case (n 14). 25 See the Laconian case (n 14). 12

5) the place of agreed arbitration; 26

6) the of the parties;27

7) the place where the parties carry on business;28

8) the domicile of the agents of the parties;29

9) the future domicile of the parties;30

10) the of the parties;31

11) the of the parties;32

12) the form, terminology33 and language of the contract;34

13) the locus rei sitae (the place where the property is situated);35

14) the locus libri siti (the place where the property is registered);36

26 See the Laconian case (n 14); Benidai Trading Co Ltd v Gouws & Gouws (Pty) Ltd 1977 3 SA 1020 (T). The judge in the Laconian case also refers to the place where the arbitrators carry on business (528D). See Forsyth Private International Law 285 referring to the adagium qui eligit iudicem elegit ius. 27 See the Laconian case (n 14); Collisons (SW) Ltd v Kruger 1923 PH A 78 (SWA); the Spinazze case (n 3); the Guggenheim case (n 22). 28 See the Lacanion case (n 14). 29 See the Laconian case (n 14). 30 See the Guggenheim case (n 22); the Spinazze case (n 3). 31 See the Spinazze case (n 3); the Henry case (n 4) 249F. 32 See the Spinazze case (n 3). 33 eg technical terms. See the Improvair case (n 15) 145E. 34 See the Spinazze case (n 3). 35 especially in the case of immovable property. 13

15) the locus expeditionis (the place of despatch);37

16) the locus destinationis (the place of destination);38

17) the place of registration of the vehicle (means of conveyance) by which the res vendita is transferred;39

18) the currency in which the contractual obligation of payment is expressed;40

19) the incorporation of a statute in the contract;41

20) the choice of jurisdiction. 42

Not all factors have the same weight, however.43 For instance, factor 18 and 19 were held to be of no great importance in the Laconian case,44 while factor 5 was awarded more significant consideration. 45 The most important factor to determine the proper law, however, is the locus solutionis (the place of performance). The principle that can be

36 in the case of immovable and sometimes also in the case of movable property. 37 in the case of determining the proper law of a contract for the sale of res in transitu, in analogy to the situation in the international law of things. See Neels “Die vir eiendomsoordrag van res in transitu” 1991 TSAR 309; Neels “Die voorlopige regsoordeel in die internasionale privaatreg” 1994 Stell LR 288 292-295. 38 See the previous footnote and the Laconian case (n 14) 528C. 39 See n 37. Also see Forsyth Private International Law 288 291 referring to certain maritime contracts. Cf HR 17 March 1989 NJ 1990 427 and Neels Res in transitu: the law of the flag of the ship may sometimes be the proper law for the transfer of property linked to the ship itself. 40 See the Laconian case (n 14). 41 See the Laconian case (n 14); Stretton v Union Steamship Company Ltd (1881) 1 EDC 315. 42 Forsyth Private International Law 285 n 73. 43 Cf the Laconian case (n 14) 528H. 44 See the Laconian case (n 14) 529H-530H. The weight of factor 17 has also been reduced today by the growth of flag flying for convenience. See Forsyth Private International Law 291. 45 See the Laconian case (n 14) 529F-G. Also see the Benidai case (n 26). 14 deduced from the South African cases is that the lex locus solutionis constitutes the proper law of the contract unless specific circumstances indicate that another legal system has to be applied.46 For instance, in the Collisons case,47 the concurring of the parties to the contract was applied in preference to the solutionis.

However, the locus solutionis is respect of the characteristic performance48 of the contract (for instance delivery) may differ from the locus solutionis in respect of payment. If this happens there are two possibilities: application of either the scission principle or the unitary principle. There is authority for both principles in South African private international law. 49

In terms of the scission principle, each obligation has its own proper law. 50 For instance, if a party sues for payment (delivery having taken place), the proper law will probably be the lex loci solutionis in respect of payment. If, however, payment did take place but not delivery, the proper law will probably be the lex loci solutionis in respect of delivery. The proper law of the contract will therefore depend on what is being sued for. In terms of the unitary principle, the same proper law governs both or all the obligations.51

46 See Neels Voorlopige regsoordeel 289 in n 5 referring to the Standard Bank case (n 9) 185; the Guggenheim case (n 21) 31A; Shacklock v Shacklock 1948 2 SA 40 (W) 51; Hulscher v Voorschotkas voor Zuid Afrika 1908 TH 542 546. 47 (n 27). 48 terminology from a 4(2) of the Rome Convention. The characteristic performance is the performance for which payment is due. See Jack Documentary Credits. The law and practice of documentary credits including standby credits and demand guarantees (1993) 294; Wood Comparative Financial Law (1995) 160. 49 See the cases in n 50 (scission principle) and the case in n 51 (unitary principle). 50 See the Standard Bank case (n 9) 188 and the Laconian case (n 14) 528-529. Also see Forsyth Private International Law 290. 51 See the Improvair case (n 15) 147. Also see Forsyth Private International Law 290-291. 15

As the obligations of the parties are closely connected, a contract should be governed by one proper law. 52 The scission principle complicates matters when making more than one legal system applicable to the same contract. The unitary principle is therefore preferred.

One question remains: what approach should be followed under the unitary principle if the locus solutionis in respect of the characteristic performance differs from the locus solutionis in respect of payment? It is suggested that the choice between the two possibilities should be made in the light of all the other factors.53 If, however, the other factors do not indicate a choice, one has to choose between the following three approaches.

Van Rooyen, usually supporting the unitary principle, states that in these circumstances the sole choice is to apply the scission principle.54 It is submitted, however, that in all circumstances it will be desirable that one legal system governs the whole contract.

Forsyth states that in the above circumstances, the different loci solutionis will be of little use in assigning a governing law to the contract.55 This will often mean that the must play the role of proper law. 56 Neels, however, levels two points of critique against the suggestion:

“Hierdie gevolg is in stryd met die algemene reël dat die locus solutionis voorkeur geniet bo die locus contractus en in die algemeen die belangrikste faktor is by die vasstelling van die lex causae (sien [Forsyth] 275). (Forsyth is trouens self van mening dat die belang van die locus contractus as faktor by die bepaling van die lex causae in die moderne wêreld behoort af te neem: 277).”57

52 Forsyth Private International Law 290. 53 Neels “C F Forsyth Private International Law (1990)” [book review] 1990 TSAR 553 554-555. See the quotes at n 60 and 61. 54 Van Rooyen Die Kontrak in die Suid-Afrikaanse Internasionale Privaatreg (1972) 200. 55 Forsyth Private International Law 291. 56 See Forsyth Private International Law 287: “The central rule generally followed in assigning the appropriate law is that the lex loci contractus governs unless the contract is to be performed elsewhere, in which case the lex loci solutionis applies.” 57 Neels Book review 554. 16

Neels advocates a third approach, partially based on an obiter dictum in the Laconian case,58 where the judge states:

“Be that as it may, the lex loci solutionis of all payments is English law whereas the performance of applicant’s obligations of carriage and delivery had to take place in Argentine, upon the high seas and in Columbia. If I have to strike a balance it seems to tilt towards English law from amongst the leges loci solutionis.”59

Neels interprets the dictum and arrives at the following conclusions based on it:

“Die regter gee waarskynlik te kenne dat, sou hy die eenheidsbeginsel toegepas het, hy nogtans die Engelse reg as proper law sou kies. Hierdie uitleg kom juis voor ook in die lig van die konteks waarin die aanhaling verskyn: direk na ‘n bespreking van die skeidings- en eenheidsbeginsels (528J-529E) en nadat die Engelse reg reeds uitdruklik as die lex causae gekies is (528H). Indien die afleiding korrek is, is dit die benadering van die regter dat – by die toepassing van die eenheidsbeginsel – die onderskeie loci solutionis steeds hulle belangrikheid as faktore by die bepaling van die lex causae behou. Daar moet egter ‘n keuse tussen die leges loci solutionis gemaak word. Dit sal uiteraard met inagneming van die ander relevante faktore moet geskied. Dui die ander faktore nie ‘n duidelike keuse vir een van die leges loci solutionis aan nie, wil dit uit die dictum van die regter voorkom of die reg van die plek waar betaling moet geskied, voorkeur geniet bo die reg van die plek van lewering.”60

In contrast to the approach of Forsyth it is then stated:

“Dit sou beter wees om die loci solutionis tesame met al die ander relevante faktore wel in ag te neem en die gebruiklike gewig daaraan te heg, met ‘n ad hoc-reël ten gunste van die locus solutionis van betaling by ‘n uitbalansering van die genoemde faktore.”61

The approach of Neels therefore entails the following: All relevant factors must be taken into account, including the loci solutionis. The proper law will usually be one of the leges loci solutionis. If the other factors do not indicate a choice between these two legal

58 (n 14). 59 529E-F. 60 Neels Book review 554. 61 Neels Book review 555. 17 systems, an ad hoc rule in favour of the lex loci solutionis in respect of payment must be applied.

The third approach will often have the same result as application of the Rome Convention on the Law Applicable to Contractual Obligations (1980). Payment will usually have to take place (at a bank) in the country of habitual residence or business of the party who has to effect the characteristic performance. The law of this country is also presumed to be the applicable law in terms of article 4 (2) of the Rome Convention. 62 It is suggested that the third approach offers the opportunity to bring our legal system in conformity with that of our most important trading partner, the European Union (EU).63

62 See ch 4. 63 The following is a practical example illustrating the three approaches. Two parties conclude a contract of sale in respect of a number of cars. The buyer has a business in South Africa and the seller in Germany (Mercedes Benz Stuttgart). A dispute arises in respect of either delivery or payment. The parties did not choose (neither expressly nor tacitly) a legal system to govern their contract. The case is heard by a South African court. Delivery had to take place in South Africa, payment in Germany. The other relevant factors to be taken into account are evenly distributed between South Africa and Germany and/or they refer to the law of a third country. According to Van Rooyen, the scission principle will have to be applied. South African law must be applied if delivery is outstanding or in dispute; German law should be applied when payment is the object of dispute. Forsyth’s view will probably lead to application of the lex loci contractus, which could be the otherwise uninvolved country of, say, Mexico. Application of the obiter dictum in the Laconian case will entail the application of the lex loci solutionis in respect of payment (irrespective of which performance is outstanding or in dispute), ie German law. This approach will lead to international harmony of decision as the German courts would also have applied German law. According to the Rome Convention, applicable in Germany, the law of the country where the business of the party is situated who has to effect the characteristic performance, will (probably) be the proper law. As the characteristic performance is the performance for which payment is due, it is the German company that effects the characteristic performance.