Scottish Court of Session Decisions

As came to be emphasised in the course of submission, the soundness of the proposition which is expressed by way of averment at page 8 of the Record, that each of the first two claims was properly to be regarded as being well-founded (ATG being obliged to pay to the Noter all the monies repaid by the Noter) depends: first, on the issue being characterised as arising out of a contract or contracts of loan where ATG was lender and the Noter was borrower; second, on the proper (or applicable) law of that contract or contracts being German law; and third, on the result of German law being the proper law of the contract having the result that the rule of German company law which makes certain loans the equivalent of the provision of capital, applied to the contract or contracts of loan by ATG to the Noter with the further result that repayment of the loans by the Noter was unlawful and therefore gave rise to claims for repetition at the instance of the Noter against ATG.

The importance of the first stage in this process, what Staughton LJ later describes as stage 1, is explained by Anton in chapter 4 ("Identification of the Applicable Law") of Private International Law (2^nd edition) at page 64:

What Anton describes as the need for systematisation arises because choice-of-law rules differ as between different legal categories: it "results from the fact that the rules which have been evolved to deal with choice-of-law problems are expressed in terms of juridical concepts or categories and localising elements or connecting factors": Dicey and Morris supra para 2-002. The matter is put this way by Cheshire and North supra at page 36:

Counsel for the Respondents in the present case, following Staughton LJ in Macmillan Inc, begin with the exercise of characterising the issue, being stage 1 in a three (or four) stage process by which the court arrives at the lex causae (defined by Staughton LJ in Macmillan Inc at 399C as "the law applicable to the issue"). Counsel for the Noter, on the other hand, dismiss going down "the characterisation route" as a needless endeavour because, as Mr Howie put it, as a result of the enactment of the 1990 Act, the "canonical words" of Staughton LJ were no longer relevant. Before expressing a view on that latter proposition, it is convenient to consider the judgement of Mance LJ, speaking for a unanimous Court of Appeal in The Mount I. This was a case on the Convention. It concerned a policy of marine insurance governed by English law. Ship-owners from Dubai insured their vessel, the Mount I, with French insurers. The cover included hull and machinery, collision and protection and indemnity cover. The Mount I collided with another vessel in the Malacca Strait. That vessel sank. The collision gave rise to claims including a claim at the instance of the owners of the cargo of the sunken vessel. The ship-owners had granted a deed of assignment of the policy of insurance in favour of the plaintiff bank which had advanced the purchase price of the Mount I and was mortgagee of the vessel. A question arose as between the bank and the cargo owners as to the validity of the assignment. Valid notice of assignment had been given to the French insurers according to English but not to French law. The bank sought a declaration, inter alia, that the notice of assignment had been validly given with the result that the assignment had transferred the benefit of the insurance to the bank. It was argued for the cargo owners that the assignment of the claim on the policy was an issue of a proprietary nature which fell to be determined according to the lex situs of the debt under the policy, which was French law. It was argued for the bank that the assignment was an assignment of contractual and not property rights and that, accordingly, in terms of article 12 of the Convention, the governing law of the assignment was the law applicable to the contract between assignor and assignee, which was English law (there was no suggestion that this was a contract of insurance covering risks situated in the European Economic Community which was therefore excluded from the rules of the Convention in terms of article 1(3)). Mance LJ gave the only reasoned judgement in the Court of Appeal. Charles J and Aldous LJ agreed. In that judgement Mance LJ summarised the facts and the order under appeal. He then turned to the opposing analyses of the issue: contractual, according to the bank, essentially proprietary, according to the cargo owners, throwing up a choice between, on the one hand what Mance LJ described as the proper law of the insurance and, on the other, the lex situs of the insurance claims. However, he noted that the proper legal analysis could not depend exclusively upon the legal systems for which the two parties happened to contend in their own partisan interests. Other candidates had to be kept in mind. There follows the part of the judgement which is headed "Principles governing identification of the appropriate law". Paragraphs 26 to 33 of the judgement (The Mount I supra at 840B to 842B) fall under this heading. In these paragraphs Mance LJ begins by discussing the three stage process explained by Staughton LJ in in Macmillan Inc. At paragraph 29 (supra 841B) he observes:

and then, at paragraph 30 (supra 841C):

and then, at paragraph 33 (supra 842A):

There follows, in paragraphs 34 to 57 (supra 842B to 849G), that part of the judgement which is headed, "Application of principles to present case". Mance LJ introduces it by stating that he is approaching the present issue on the basis that he has identified in the previous part of his judgement, including the immediately preceding paragraph. He confesses to an initial impression that the case fits readily into a contractual, and less readily into a proprietary, slot. He then tests that impression at length under reference to the arguments presented, academic writing and authority. There is no question but that in the course of this exercise he has the Convention and the Report at the forefront of his mind. The authorities considered include two decisions of the German Supreme Court and one decision of the Dutch Supreme Court. Mance LJ concludes, at paragraph 57 of his judgement (supra 849G), that article 12 of the Convention applies and that the effect as between the insurers, the ship-owners and the bank, of the ship-owner's assignment to the bank falls to be determined by English law.

Thus, what the Noter puts forward as the foundation of the claims is an unlawful payment out of what is treated as the equivalent of capital by a German limited liability company. It is unlawful because, as I read the averments (and as was taken to be the case during the debate before me), the payment is made to a party which is treated as a shareholder of the company. This unlawfulness, it is averred, gives rise to an obligation on the party to which repayment is made to refund the company. It is not suggested that Scots law would support such a claim, hence the importance of this being "a case which involves a foreign element" and the need to aver German law. From the perspective that I have identified, my initial impression is that the issue thrown up by the claim is about the regulation of the affairs of a limited liability company and, in particular, what is required to ensure the maintenance of the capital of such a company and the protection of its creditors. Taking the averments of the Noter pro veritate, I consider that counsel for the Respondents were correct to characterise the issue as being about the liability of a member of a company and that for the reasons put forward by counsel. The Noter's claim depends on the identity of the parties: the Noter as a German company, and ATG as the ultimate parent of that German company. Without that relationship of ATG being a member of FTP and FTP being a member of the Noter, the Noter would have no basis for seeking the return of the money. The claim is predicated on membership of a limited liability company and that is the basis upon which the claim is advanced. The loan is part of the history of the case but had repayment of a loan been made to a creditor which was not a member of the group of companies, the Noter could not argue for the repayment to be refunded. As Mr Sellar put it, the causa causans leading to liability, on the Noter's argument, is group membership (with the result of ATG being treated as if it were a shareholder of the Noter). The loan is no more than a causa sine qua non. Notwithstanding Mr Howie's assertion in the course of submission that what the Noter was seeking was payment of debts under contracts, as I read them, the Noter's averments do not present the Noter's claims as based upon contractual obligations or upon breach of contractual obligations. They arise as a matter of company law and company regulation. It appeared to me that there was force in Mr Sellar's observation that, for all the averments of the Noter indicated to the contrary, the loan was an entirely spent transaction, in respect of which no obligations were outstanding because they had been obtempered. Be that as it may, I do not find this to be a situation where the court is required to make a choice of law where the issue, properly identified, is one which is governed by the contractual obligations of the parties (or, indeed, of any other party). The rules of the Convention therefore do not apply.

Counsel for the Respondents rather suggested that an implied choice of English law could be discerned by the court simply on a consideration of the averments. Agreeing with Mr Howie, I do not consider that this can be decided as a matter of relevancy. On the assumption (which I have rejected) that the issue here is one of contractual obligations and in the event of the Respondents maintaining that there was an implied choice of law in relation to the loans, I would have allowed proof of the Respondents' averments, it not having been argued on behalf of the Noter that the averments were insufficient or irrelevant for the purpose of supporting a case of implied choice of law.

There follow details of the monthly remissions. The averments continue:

At page 3 it is averred in relation to the second claim:

Essentially, that is as far as it goes. I do not find matters to be advanced by any averments of the Respondents. It is not averred by the Respondents that ATG was carrying on business as bank or that its contract with the Noter was a banking contract or that ATG was otherwise carrying out banking operations. The averments disclose little about the relevant contract or contracts in terms of which the remittances were made beyond that it or they were loans. Mr Sellar's submission was that for the resolution of the present case it was unnecessary for me to reach a concluded view on loans in general. I only needed to reach a view on these particular transactions. I consider that Mr Sellar is right, up to a point. It must be correct that, when determining what performance is characteristic of a contract, the starting position is a detailed consideration of the particular transaction before the court. However, in the present case the averments provide little in the way of detail to consider. I understand the basis upon which Mr Sellar sought to draw an analogy between ATG and a banker in relation to these remittances. ATG was providing funding for the Noter's operations, it being the Noter's obligation to repay the funds provided (presumably on demand). ATG was, as Mr Sellar put it, the "group banker". I can accept that as a figure of speech. What I do not accept, on the basis of the parties' averments, is that what I am concerned with is a banking contract or an aspect of banking operations or loans made by a banker. What I am concerned with is or are a contract or contracts of loan, which, for all is averred to the contrary, fall into the general category of such contracts. Accordingly, it appears to me that, notwithstanding what was said by Mr Sellar, had I characterised the issue here as one of contractual obligation, I could not avoid addressing the question of which party is to be regarded as effecting the characteristic performance in the generality of contracts of loan where the borrower is not a consumer (as that latter expression is defined in article 5).

Agreeing with Mr Sellar, what I would see Professor Morse to be doing in this part of his article is offering a criticism of the concept of characteristic performance, as commented on in the Report, rather than expressing a view as to which party's obligations are characteristic of loan. Similar criticisms, not confined to the example of loan, are made by Professor d'Oliveira supra, cited by Professor Morse at page 127 of his article. What it seems to me that Professor Morse was saying on the matter is that, at least in certain cases, it may not be obvious why one or other party's performance in a mutual contract should be chosen as the characteristic performance or "the centre of gravity and the socio-economic function of the contractual performance". Taking the example of loan he observes that it can be argued that either the borrower or the lender is the party who is to effect the performance which is characteristic of the contract. I would respectfully agree with that. As I have already noted, the Report has it that "Article 4(2) gives specific form and objectivity to the, in itself, too vague concept of 'closest connection'". The Report suggests that it is possible to discern, objectively, the "essence of the obligation", performance of which defines or characterises the contract. The utility of the Report as a guide to ascertaining the meaning and effect of any provision of the Convention is endorsed by section 3 (3) (a) of the 1990 Act and therefore must be taken as a given, but I confess that I find convincing the observation by d'Oliveira, supra at 308:

As is observed by Professor Morse and as appears from the passage quoted from the Report in paragraph [43] above, the approach adopted by the Report is that it is the performance for which the payment is due, for example, the delivery of goods, the granting of the right to make use of an item of property, the provision of a service, transport, insurance, banking operations, security, which "usually constitutes the centre of gravity and the socio-economic function of the contractual transaction" and therefore the characteristic performance in a contract. In the words of Professor d'Oliveira, the perspective of the Report is that "it is more blessed to produce than to consume" (supra at page 327). That this is indeed an underlying philosophy of the Convention appears to me to be underlined by the provisions of article 5 which disapply article 4 where the supply of goods, services or credit is to a consumer with the result that the applicable law in a consumer contract is that of the country in which the consumer has his habitual residence. If the Convention and Report are taken to proceed upon the judgement that the obligations of production or supply are of greater social or economic importance than the obligations of payment or receipt and therefore more apt to confer a character on the contract, as I consider they are, then, in my opinion, that judgement must be applied by the court in construing the Convention. It is, however, as Professors Morse and d'Oliveira point out, a value judgement, rather than an inevitable conclusion of fact.

While one might have hoped for a fuller exposition, Kaye provides some justification for his position whereas Professors Wood and Morse (assuming Professor Morse to be of the same opinion as Professor Wood) and the editors of Cheshire and North do not. The editors of Chitty regard the proposition that the characteristic performance is that of the lender because he provides the relevant service as questionable but, again, do not explain why. Similarly, Morritt V-C in Mirchandandi, if he is taken to be considering the generality of loans, does not explain his view that the characteristic performance is repayment by the borrower at maturity with agreed interest rather than the advance by the lender.

At 407A to C Auld LJ said:

At 418B, having expressed his agreement with the opinion of Millet J at first instance that in order to ascertain the applicable law it was not sufficient to characterise the nature of the claim, rather, it was necessary to identify the question at issue, Aldous LJ went on to say:

The relevant events in Macmillan Inc predated the coming into force of the 1990 Act case but, as I have already explained, I consider that the process of characterisation described in the judgements in the Court of Appeal remains a necessary step whenever the court has to make a choice of law in a case to which the Convention may apply. What I take from the judgements is that what is to be characterised is not only a precise issue (or issues) but also the particular rule of law which is put forward as determining that issue. Different issues may have to be determined by rules drawn from different systems. Whether one describes the making of a choice of law as a three-stage process where characterisation is the first stage of a four-stage process with a preliminary characterisation at the first stage and a secondary characterisation at the fourth stage, does not seem to me to matter very much. As Mance LJ observed in The Mount I supra at 841B, there is an element of interplay or circularity in the process. He goes on to explain that the conflict of laws does not depend upon the application of rigid rules but upon a search for appropriate principles to meet particular situations. Mr Howie suggested that what Mance LJ was describing was the approach of the common law, which had been superseded, in relation to matters of contract, by the 1990 Act. As I have explained, I do not accept that Mr Howie was correct about that. There is no question but that in a Convention case (by which I mean a case where the relevant issue is one of contractual obligation) the Convention rules apply. That requires the relevant issue to be characterised as one of contractual obligation. The Convention rules include what appears in article 4. Article 4(1) provides that "the contract shall be governed by the law of the country with which it is most closely connected" (my italics). Assuming, contrary to the opinion that I have expressed above, that the country with which the loan or loans in the present case was or were most closely connected was Germany, then the law governing that contract or contracts would be German. In my opinion, that does not have the result that, to use Mr Howlin's language, one imports and applies the foreign law lock, stock and barrel, subject only to exclusion by reason of considerations of public policy. Nor does it necessarily have the result, as Mr Howlin more modestly submitted, that any aspect of German law which restricted repayment must be applied by this court. The result of making a choice of law is not necessarily to refer all questions to the same system: Macmillan Inc supra at 399B to C and 418B; Adams v National Bank of Greece supra at 272 to 275, 282, 283; In re Cohn. That is true when the source of the choice-of-law rule is the common law. It remains true when the source of the choice-of-law rule is the Convention. In terms of article 4(1) it is the contract which is to be governed by the system of law indicated by the Convention rules as the applicable law. What is being indicated are the rules of the applicable law which are apt to govern a contract (I was not persuaded that anything that appears in In re claim by Helbert Wagg & Co Ltd requires a different formulation of the effect of article 4(1)). That may require what was referred to in argument before me as secondary characterisation, and what Auld LJ describes in Macmillan Inc supra at 407A as a parallel exercise in classification of the relevant rule of law. It respectfully appears to me that the editors of Cheshire and North supra are correct, from the perspective of Scots private international law, when they state, at page 39:

I have deliberately used the expression "the rules of the applicable law which are apt to govern a contract" to describe the extent to which, in terms of article 4(1), the contract will be governed by, in the assumed case, German law. I recognise that it might be an over-simplication to render that as the German law of contract. Other aspects of the law may intrude upon contracts. There is scope for debate as to what, in a particular system, can properly be regarded as the law which governs a contract. As Mr Sellar appreciated, before coming to a conclusion on a question of secondary characterisation it may well be necessary for the domestic court to have detailed evidence, from a foreign legal expert, as to the nature of the foreign rule. In the present case that is not necessary because of the conclusions that I have reached in relation to the first and second lines of argument. Had I reached different conclusions I would have had to consider whether I required to hear evidence on German law before coming to my decision.