Bell, Belinda --- "Notes Proper Law - Ignoring the Contract? A Note on Akai Pty Ltd v The People's Insurance Co Ltd" [1997] SydLawRw 22; (1997) 19(3) Sydney Law Review 400

Proper Law Ignoring the Contract? A Note on Akai

Pty Ltd v The Peoples Insurance Co Ltd

The choice-of-law rule is an odd creature among laws. It never tells what the result will be, but only where to look to find the result; and the author of the rule cannot foresee the outcome. Such rules are made by theorists in an effort to impose an external order upon the states; they do not come naturally from legislatures, which are interested in foreseeable results. Brainerd Currie[1]

1. Background

In Akai Pty Ltd v The Peoples Insurance Co Ltd,[2] the High Court, by majority, held that the insurance contract which had come before them could not exclude New South Wales law as its objective proper law, despite a clause in the contract stipulating English law as the governing law of the contract and conferring jurisdiction on the courts of England to determine any disputes arising from it. The High Court reversed the decision of the New South Wales Court of Appeal,[3] and held that the contract came within the scope of the Insurance Contracts Act 1984 (Cth), as defined in section 8 of that Act:

8(1) ... the application of this Act extends to contracts of insurance ... the proper law of which is or would be the law of a State or the law of a Territory in which this Act applies ...

(2) for the purposes of subsection (1), where the proper law of a contract ... would, but for an express provision to the contrary included ... in the contract... be the law of a State or of a Territory in which this Act applies ... then, notwithstanding that provision, the proper law of the contract is the law of that State or Territory.

Since the particular contract came within this scope, section 52 of the Insurance Contracts Act was operative. Section 52 states that:

Where a provision of a contract of insurance ... purports to exclude, restrict or modify, or would, but for this subsection, have the effect of excluding, restricting or modifying, to the prejudice of a person other than the insurer, the operation of this Act, the provision is void.

On this basis, the High Court decided that there could be no stay of proceedings in Australia to pursue an action in the courts of England.

The parties to the contract were Akai Pty Ltd a subsidiary of a Japanese company but incorporated in NSW, and The Peoples Insurance Company, a Singaporean company. The contract was a credit insurance policy containing a term in clause 9 which read:

This policy shall be governed by the laws of England. Any dispute arising from this policy shall be referred to the Courts of England.

Upon the failure of Norman Ross Ltd, to whom Akai had supplied goods on credit, Akai sought a declaration of indemnity under the contract in the Supreme Court of New South Wales. The Peoples Insurance Company (PIC) responded with a motion seeking a stay of proceedings on the basis of clause 9 of the contract. At first instance, OKeefe CJ Comm D ordered that the proceedings be stayed, a decision which was upheld by the New South Wales Court of Appeal. To Sheller and Meagher JJA, who formed the majority in the Court of Appeal, the phrase an express provision to the contrary meant an express provision that the proper law of the contract was a law other than the law of a state or territory of Australia. There was no doubt that the first sentence of clause 9 of the contract was just that, but their Honours held that the second sentence of clause 9 could not be an express provision to the contrary since it stated only that the forum for resolving any dispute arising from the contract must be England. Thus the majority in the Court of Appeal rejected Akais submissions that each sentence in clause 9 came within section 8(2), and that the whole of clause 9 was to be ignored in the determination of the proper law. When the High Court reversed this decision, the majority took a purposive approach to construction of the legislation. Toohey, Gummow and Gaudron JJ held that both the first and the second sentences of clause 9 were express provisions to the contrary within the terms of section 8(2) of the Insurance Contracts Act and should be disregarded in ascertaining the proper law of the contract.

Despite what may appear from the outline above, these decisions were not merely exercises in statutory interpretation. Closer examination reveals that different theories of contract are given practical application by the different approaches to statutory construction which were taken by the learned judges. These different models of contract theory motivate the construction of the Insurance Contracts Act as well as what is said about the interaction of statutes with choice of law rules and the principles for granting a stay of proceedings, and explain the divergent conclusions reached in the High Court and the Court of Appeal.

2. Contract Theory

The traditional conception of contract law which influenced the majority of the NSW Court of Appeal as well as Dawson and McHugh JJ who were in the minority in the High Court was developed against the nineteenth century background of individualism, laissez faire and free market economic theory. [4] In this climate, the notion of freedom of contract gained much support. Part of the impetus for this concept came from the arguments of Jeremy Bentham against the increase of restrictions on activities such as money lending and the disposition of land, and for the extension of individual liberty.[5] These arguments had an impact on the law of contract and the development of ideas which was far wider than would appear from the particular kinds of contractual relations which Bentham specifically considered.[6] It was said, generally, that when individuals entered into a contract, voluntarily, and in their own interests, they made a piece of private law, binding on each other, and beneficial to both themselves and the community at large, because the good of all was served in the pursuit by each person of his or her own economic gain.[7] The role of the courts in this picture was seen to be in the enforcement of, rather than interference with, contracts.[8]

Yet the legal principle that a promise freely made should be performed[9] is no more than an expression of a basic presumption, that one should be made to keep a promise that has been made.[10] While still an important theoretical justification of contract law, the idea of freedom of contract is generally said to be in decline in the late twentieth century.[11] The old moral presumption can still be seen, untempered, in the minority judgment delivered in the High Court. Justices Dawson and McHugh do not consider the application of section 8 of the Insurance Contracts Act, but rather decide the case solely on the issue of the stay of proceedings, with reference to the choice of jurisdiction in clause 9 of the contract. Their argument is that because Akai contracted to litigate in the Courts of England in the event of any dispute, they should be held to that bargain. There is an obvious moral tone to the argument that a bargaining away of the advantages offered to Akai by the Act which included a reduction in the bases on which an insurer could refuse to pay a claim was part of the consideration for other terms in the contract which would be beneficial to them, and thus that Akai should not be allowed to receive more than its fair reward [12] by seeking to rely on the Act as well as retaining the other benefits.

The decision of the majority of the High Court, on the other hand, recognises that there is no longer freedom of contract in the absolute sense, and that parties are often prevented from including certain terms in their contracts. Only in a very few instances will a contract be free from any interference, no matter that this alters the balance of the bargain. The courts frequently grant relief where it seems that agreement is not the reality of the situation, for example, because of the use of a standard-form contract where terms are imposed rather than agreed to, or where it seems fair to protect consumers against the suppliers of goods and services. The danger of these very common illustrations, however, is that they give the impression that the non-enforcement of promises is predicated solely on a paternalistic concern for the vulnerable party and occurs only as an exception to the rule of holding parties to their word. It is because of this impression that we have difficulty in conceiving of a hardship being suffered by a commercial party like Akai. However, the individual applicants status is not material here, since what is at issue is the place of a private bargain and whether a court may sacrifice operation of a properly-made law of the Parliament in giving effect to a contract.

3. An express provision to the contrary Section 8 and

approaches to Statutory Interpretation

It is a settled principle that an Act must be read in its entirety,[13] that every passage ... must be read, not as if it were entirely divorced from its context, but as part of the whole instrument,[14] yet it was not until the majority in the High Court spelt out the connection between section 8 and section 52 that such an approach was applied in the Akai litigation.

In fact, the determinations of the meaning of section 8 by the Court of Appeal and the High Court in Akai v PIC vary widely, and illustrate the literal, the quasiliteral and purposive approaches to statutory construction. The literal approach to interpretation informs the judgment of Sheller JA, who proceeds on the basis that an express provision to the contrary means an express provision that the proper law is to be a system other than that of the state or territory of Australia with which, objectively, the contract has its closest connection. The first sentence of clause 9, his Honour found, was just that, but the second sentence was not, because it says nothing about which law will govern.[15] This interpretation follows the traditional literal process of enquiry, that is:

we ask what does the language mean; and when we find out what the language means, in its ordinary and natural sense, it is our duty to obey that meaning even if we think the result to be inconvenient or impolitic or improbable ...[16]

This as a process, is quite out of step with modern judicial trends. It is the very improbability of the meaning of section 8 which prompts Kirby P to argue that Parliament could not have intended the proscription of one form of selection and yet condoned another which would in a stroke undo the proscription.[17] This aspect of his Honours judgment, while paying regard to the general policy of the Act, may be characterised as following the golden rule qualification to the literal approach. The golden rule is directed at instances where a mistake has been made in the very wording of the Act.[18]

Kirby P compares section 8 of the Insurance Contracts Act with section 67 of the Trade Practices Act 1974 (Cth) and refers to the parliamentary intention that for the sake of consistency [19] the same methods of preventing evasion should be used in both Acts.[20] His Honours conclusion is that some sort of error must have occurred in the drafting of section 8 of the Insurance Contracts Act. Kirby P strongly condemns the absurd result of the literal approach, and refutes it, first on its own terms by employing the golden rule exception, and then by moving to a more purposive approach, which we see taken up in the judgment of Toohey, Gaudron and Gummow JJ in the High Court.

The High Court majority does not make a detailed enquiry into the defects in the language of section 8. They take a purposive approach from the start. Toohey, Gaudron and Gummow JJ argue that in its adoption of the objective test for the ascertainment of the proper law of the contract, the legislature sought to respond to deficiencies in the private international law concept of proper law namely that it is open to manipulation by the parties in a way that would have adverse consequences for the attainment of the policy pursued.[21] The majority argue that the legislative scheme is thus an acceptance of proper law as the connecting factor, but only in a qualified sense. If, objectively, the connection is with a state or territory of Australia, then that connection cannot be broken by the parties choosing some other governing law.

These different approaches to statutory interpretation are linked to, and are a means of giving effect to, different theories of contract as outlined above. Dawson and McHugh JJ take a literal approach in order to affirm the value of freedom of contract, stating that :

it would be a serious and far-reaching interference with the freedom of the parties to such contracts to prevent them from making provision to that effect. If that were the intention of the legislature one would expect, at least, express words.[22]

Toohey, Gummow and Gaudron JJ use the purposive approach to construe the relevant sections of the Act with a view to giving primacy to : considerations of public policy ... [which] may flow from, even if not expressly mandated by the terms of the Constitution or Statute in force in the Australian forum.[23]

They do not defer to the sanctity of private contracts, nor do they employ the notion that contracts create some sort of special law between the parties. This, with respect, is the preferable approach, since freedom of contract is an illusory concept, and one which operates only inside domestic law. While parties are free to contract as they wish, if they want their bargains to be enforced by the courts, they must comply with the rules.[24] The rules are formulated by the legislature, and represent public interest qualifications on private interests and freedoms. It follows, then, that the rules should be construed purposively, in such a way as to give effect to legislative policy objectives, and not to the very notion of freedom of contract that they were designed to qualify or temper.

4. The Interaction of Statutes and Choice of Law Rules

In the common law tradition, a curious relationship exists between the common law and statute. The latter does not displace or abolish the existing law completely, unless the Act is a comprehensive legislative code. Thus, despite statutory intervention in an area, the common law will remain as the rule, and the legislation which covers no more than the field cut out for it will be the exception.[25] This principle is re-stated in section 7 of the Insurance Contracts Act, which confirms that the Act has limited application: it is confined to acting on particular types of insurance contracts which come within its scope.

The common law in this area includes the private international law concept of proper law. This concept carries a freedom, with very few limitations[26] , for the contracting parties to choose the system of law which will determine their rights and liabilities under the contract. The proper law principle gives effect to their intention as indicated by a selection in a choice of law clause, or, failing that, their intention as inferred from other contractual terms. Prima facie, then, any Act which uses the common law concept of proper law as the factor which attracts its operation, can be circumvented by the simple insertion of a contractual term stating that validity should be a matter for the law of some other country.[27] Toohey, Gaudron and Gummow JJ state that it is at this very problem that the provisions in the Insurance Contracts Act are directed. The majority concluded that the terms of the Act:

... evince a legislative scheme or purpose to accept as the localising or connecting factor with Australia the proper law of the contract of insurance, but only in a limited sense. That is to say, the Act is to extend to contracts the proper law of which is the law of a State or Territory, ascertained by the objective test.[28]

In deciding that the Act overrode both common law forms of selection, the majority made interesting comments on the particular issue of the interaction of the Insurance Contracts Act and the tripartite classification system for choice of law in contract. The traditional process has the court looking for an intention that is manifested in an express choice of law provision. If there is no choice of law clause, the court can infer an intention from another term, usually from a choice of jurisdiction provision. [29] Finally, if no intention can be discerned, the proper law is designated by law to be the system with which the transaction has its closest and most real connection.[30]

It is implicit in the judgment of Sheller JA, and even the judgment of Kirby P in the NSW Court of Appeal that the objective test is available only after taking the first two steps.[31] Sheller JA held that upon its proper construction, section 8(2) provided for disregarding the first step, but not the second. Yet the extraction of the direct statement of choice, followed by an enquiry as to whether there may be inferred from what remains an intention to do what the parties in fact did by the very provision which has been disregarded[32] is perplexing. For this reason, the High Court majority took a different approach to the classification system of choice of law in contract, and a different view on the interaction of the Insurance Contracts Act with the general law scheme. Of the tripartite classification system, their Honours said the first and second categories [that is, steps one and two] are but species of the same genus, that concerned with giving effect to the intention of the parties.[33] The majority preferred a two-tier structure: the first category to cover situations where the parties intention may be gleaned from the contract; the second category to cover situations where no intention may be inferred and thus where the court must use an objective test to determine the proper law of the contract. The majority then proceeded to analyse the effect of the Insurance Contracts Act on the common law. The process where the statute is concerned, they hold, is to apply the objective test from the outset.[34] It is only after this that the expression of intention shown by both parts of clause 9 is disregarded if it is to the contrary.[35] The interpretation of the statutory test as requiring the objective ascertainment of the closest connection before discarding indications of intention to the contrary is the more logical process. This is because clause 9 and its selection of English law and selection of the courts of England is not contrary until such time as the proper law is determined to be New South Wales law by operation of the objective test.

This approach also has the attraction of simplicity in that it obviates the need to determine whether or not any particular sentence (for example, a jurisdiction clause) carries a conclusive, or merely a persuasive, indication that the parties intended their obligations to be governed by the system of law usually administered in the courts that they have chosen an enquiry which distracted the Court of Appeal.

The objective test weighs up all the facts and circumstances, in order to identify the natural seat or centre of gravity[36] or the truest seat of the transaction in question.[37] In Akai v PIC, the factors included:

that the policy was the product of negotiations between Sydney and Singapore, but there was no other factual connection with Singapore, nor any factual connection with England;

that the risk was substantially in New South Wales;

that the debts which became the subject of the claim arose from Akais supply of goods to Norman Ross in Australia;

that the policy only covered Akais business in Australia and New Zealand; and that Australian dollars was the policy currency.

Having listed these features, Toohey, Gaudron and Gummow JJ reach the conclusion that the closest connection, objectively, is with New South Wales. Indeed, this does seem reasonable, but is the exercise just a matter of counting the connections? What would be the result in a case where there was a more even distribution? Is more weight to be attached to some features than to others? A disappointing aspect of Akai v PIC is that the High Court has provided no satisfactory principle for the resolution of these questions. There is no recipe, only a list of ingredients, followed by the product: a statement of result.

It has been suggested that the need for greater certainty in this area of the law would be achieved by the application of certain rebuttable presumptions[38] connecting factors which carry a prima facie determinative weight, subject to stronger counter-veiling factors. In its report on Choice of Law, the Australian Law Reform Commission examined the concept of characteristic performance, as utilised in Article 4 of the Rome Contracts Convention. The ALRC recommended that the place that has the most real and substantial connection with the contract be presumed to be the place where the party which is to effect the performance that is characteristic of the contract habitually resides unless the contract has its most real connection with another place.[39] It may well be that because in Akai v PIC the connections were overwhelmingly with New South Wales, the High Court decided that this was not the time for an examination of the issue, nor for the formulation of principles which could be of assistance in less obvious cases. We now await further comment on the matter from the High Court.

5. The Result No Stay of Proceedings

The traditional approach to the granting of stays of proceedings is that a plaintiff who has invoked the jurisdiction of a competent court has a prima facie right to insist upon its exercise, and to have his or her claim heard or determined. [40] A foreign jurisdiction clause does not automatically deny the forum court the power to hear a matter (even if the clause is exclusive),[41] however, it is also said that where the parties to a contract agree that the courts of a foreign country will have jurisdiction, the courts of the forum will in the absence of countervailing reasons exercise their discretion to stay proceedings brought in the forum.[42]

This principle was applied by Dawson and McHugh JJ, who examined whether or not the obligation to litigate in England had been displaced by reasons strong enough to justify allowing New South Wales proceedings to continue. Thus the minority decided the case solely on the basis of the application for a stay, with reference to the choice of courts provision alone, stating that it was not necessary to determine the proper law, whether or not this was done by applying s8 of the Act.

The minority judgment is infused with the rhetoric of the freedom and sanctity of contract. Relying on the dicta of Dixon J in Huddart Parker v The Ship Mill Hill,[43] McHugh and Dawson JJ in Akai v PIC state that the parties have, by the jurisdiction clause, made a special bargain and that it is natural and proper that they be kept to it. The only alternative to the application of this principle, as McHugh and Dawson JJ see it, is if the case falls into one of the exceptions to the rule of the primacy of the bargain. These exceptions were articulated by Brandon J in The Eleftheria,[44] and cited with approval by Beazley J in Leigh Mardon v PRC.[45] Thus the tension identified by the minority is between holding parties to their bargains, and the notion of justice or inconvenience to the plaintiff by forcing them to keep to the bargain and the jurisdiction selected.[46]

With respect, whether the Akai v PIC situation fits into a recognised Eleftheria exception to the general principle (which is actually no more than a prima facie presumption) cannot be the correct enquiry. This is because the statute operates to override the presumption itself, and there is no need to resort to the exceptions. The issue here is not simply the principles governing the exercise of the courts discretion as regards jurisdiction clauses and applications for a stay in the nonspecified forum. Rather, the question must be whether there is in fact any discretion given the nature of the law in question, and its operation on the jurisdiction clause.

Rules which are mandatory by nature may be distinguished[47] from those which are optional, for example the postal acceptance rule. They must also be distinguished from rules which are compulsory and which apply to an Australian contract regardless of intention, but can still be avoided by the choice of another governing law (for example, the requirement of consideration). Rules which are mandatory in the international sense,[48] however, apply to all contracts, regardless of the selected law.[49] Mandatory rules represent either the interest of the state itself (for example, exchange control laws) or private interests which the state wishes to protect (for example, in the insurance, consumption and employment contexts).[50] Section 8 may be characterised as a mandatory rule, and is a rare example of a mandatory rule which controls the law which governs a contract.[51] Being that it is a law which is properly made it does not purport to extend to all contracts everywhere, or even all insurance contracts everywhere, but only those insurance contracts whose objective connection is with a state or territory of Australia its effect, then, is to invalidate the jurisdiction clause in the Akai/PIC contract. This effect is illustrated by the analogous case of The Hollandia.[52] There, the Hague-Visby Rules, incorporated into English law by the Carriage of Goods by Sea Act 1971 (UK), proscribed any purported limitation on liability of a carrier. The contract under examination did attempt to do so, and it also attempted to choose the courts of the Netherlands to hear disputes. The substantive law of those courts provided a lower ceiling on carriers liability than the Act, so the House of Lords held that the exclusive jurisdiction clause was rendered void. Lord Diplock (with whom the other members of the House agreed) felt that the English court was commanded by the Act of 1971 [Carriage of Goods at Sea Act] to treat the choice of forum clause as of no effect.[53]

What this means is that if the Akai/PIC jurisdiction clause is void, the court can have no regard to it in deciding whether or not to grant a stay, and the presumption that the plaintiff had a right to invoke the jurisdiction of the forum court remains.[54] It is along these lines that Toohey, Gaudron and Gummow JJ reached their decision to lift the stay by approaching the issue on the basis that the policy is one to which the Act does apply. There was no evidence before the Court as to English choice of law principles, so the selection of the lex causae by English courts is presumed to be by the common law rules. Applying the common law rules, the express selection of English law would be the start and finish of the (notional) English courts enquiry. They would apply English law as the law of the obligation, with no room for the Australian Insurance Contracts Act. Thus the requirement to litigate in another jurisdiction would mean circumvention of the protective measures of the Act. That is, the refusal of a stay would allow the use of private engagements to circumvent the Acts provisions which would attract the operation of section 52 of the Act. Section 52 focuses on disadvantage to the insured, and operates to render void the attempted circumvention. There is no need to prove a harshness or injustice, but only that there would be disadvantage to the insured. This is not a variety of the Eleftheria test, as considered by the minority, but the result of the operation of statutory provisions. The scheme has been enacted as mandatory forum law, and the court is bound to give effect to it:

The Parliament has made particular legislative provisions in the case of certain contracts of insurance and, to that extent, there may be curtailed or qualified in an Australian court what would otherwise be the freedom to choose a forum in which the Act has no application.[55]

6. Conclusion

In Akai v PIC the High Court acknowledged that the issue in the case was not, ultimately, the choice of law regime, but rather the operation of an Act of the Australian Parliament. [56]

The Insurance Contracts Act expresses the substantive policy that private arrangements cannot defeat the remedial provisions of the scheme. Conflict of laws rules, as propounded by the courts, do have their own policy, the goals of which include: uniformity which is thought to discourage forum shopping; predictability; respect for the sovereignty of other states; and comity.[57] However, to let conflicts policy trump substantive policy raises the question of the proper division of authority between those who formulate rules, and those who apply them. It is beyond the authority of the court to frustrate substantive policy in the application of conflicts rules, for conflicts rules to return to Brainerd Currie[58] are merely forum rules about where to find substantive rules, and as such must be subordinated to an Act of the Australian Parliament.