The application of English law to a US form contract
SEADRILL v GAZPROM [2009]
The High Court ruled that, despite a contract being derived from documentation originating from the US and using US terminology, the contract must be construed in accordance with English principles of contract law construction where the governing law of the contract is stated to be English law. This case highlighted the danger that international companies need to be aware of if they want to use standard terms from another jurisdiction in a contract governed by English law. The English Courts will interpret contractual provisions in accordance with their local meaning and not that of the originating country.
facts:
- The parties entered into a US standard form contract which was governed by English law and which included broad exclusion and limitation clauses previously held to be effective by US Courts. The English Courts had not considered the effect of these clauses before.
- G tried to terminate the agreement on the basis of S’s negligence. S rejected G’s purported termination, served its own termination notice and then brought proceedings against G to recover unpaid costs.
- G counterclaimed stating that S’s negligence was a breach of its implied obligation under English law to operate with reasonable skill and care which would give S the right to terminate the contract. S tried to argue that, because the form of the agreement was US based, English law construction was inappropriate as it was contrary to the intent and correct construction of the contract and that S was therefore only subject to liabilities that had been “specifically assumed” under the contract.
decision:
- English principles of contract interpretation were applied. The general rule, based on established case law, is that the English Courts are not obliged to consider a foreign interpretation of contractual terms where the governing law is English even though the agreement was in a standard US form.
- The Court looked at the implied statutory duty under English law to use reasonable skill and care in the performance of a contract. As liability for this duty had, in the view of the Judge, not been expressly excluded in clear and unequivocal terms, it was implied and held to be applicable. However, on the facts, the Court concluded that S’s negligence did not amount to a repudiatory breach entitling G to terminate the contract. Due to G’s wrongful termination and repudiation of the contract, S was entitled to accept that the contract had come to an end.
points to note:
- Parties to a contract should not assume that a contract drafted in a foreign form will be construed in accordance with the relevant foreign case law or practice. English Courts will apply English law principles to a contract governed by English law notwithstanding the form of the contract. This is despite how well established the meaning of the term or principle is in the foreign jurisdiction.
- The foreign ‘parentage’ of the contract will not be permitted to subvert or undermine English principles of construction.
- Be careful about using standard documentation prepared overseas without first checking the potential impact of local law when agreeing to the other party’s request for English law to apply. As in this case, obligations may be imposed by statute of which one (or both) of the contracting parties may have been completely unaware.
- Care should be taken to define any terms of art in the contract. Parties should not assume that foreign terms will be found to mean the same, or indeed anything, by the English Courts.