Iran Continental Shelf Oil Co 7 Ors v IRI International Corp

Factual and Procedural Background

This appeal arises from a decision by Mr Justice McCombe dated 5th December 2001, wherein he held that a contract between the second claimant and the defendant was governed by the law of Texas. The claimants, Iranian corporations ultimately owned by the Government of Iran and involved in oil resource management and extraction, challenge this ruling. The defendant is a Delaware corporation with its principal place of business in Houston, Texas, which also maintained a UK office.

The contract at issue was formed by the defendant’s acceptance of a purchase order dated 18th September 1994. Under the contract, the defendant agreed to supply and ship parts and equipment from Houston to Bandar Abbas for refurbishing an oil rig in Iranian waters and to send engineers to oversee installation. The claimants paid the contract sum of approximately US$1.13 million, which included charges for the engineers’ services.

Following the issuance of an executive order by the US President in May 1995, the defendant refused to send engineers to perform the installation, leading the claimants to engage others at an additional cost. The claimants seek repayment of the engineers' fees and damages for breach of contract, including loss of production.

The English courts accepted jurisdiction and ordered the question of the governing law of the contract to be tried as a preliminary issue. Both parties contended that the contract incorporated a choice of law: the claimants argued for Iranian law, the defendant for Texas law. The trial judge rejected both claims of express choice and applied the Rome Convention’s Article 4 to determine that Texas law governed the contract. The claimants appealed with permission, arguing that English law should govern under Article 4.2 and alternatively under Article 4.5 of the Rome Convention.

Legal Issues Presented

1. Whether the contract was governed by the law chosen by the parties under Article 3 of the Rome Convention.
2. If no valid choice of law was made, which law governs the contract under Article 4 of the Rome Convention, specifically:
1. Whether the contract is most closely connected with England or Texas under Article 4.2;
2. Whether the presumption under Article 4.2 is displaced by Article 4.5, indicating a closer connection with another country (Iran or Texas).

Arguments of the Parties

Claimants' Arguments

• They contend that the parties had chosen Iranian law to govern the contract, or alternatively, that English law applies under Article 4.2 of the Rome Convention.
• If Article 4.2 supports Texas law, Article 4.5 should apply to displace that presumption in favor of Iranian law.
• The contract performance, particularly the characteristic performance, was to be effected through the defendant’s UK office in Sevenoaks, not Texas.
• The contractual documentation and conduct show that the UK office was the place through which the characteristic performance was to be effected, reflecting the parties’ agreement and commercial realities.

Defendant's Arguments

• The defendant argues the contract was governed by Texas law under Article 4.2, as the principal place of business and characteristic performance was in Texas.
• If the contract is presumed to be governed by English law under Article 4.2, that presumption is displaced by Article 4.5 in favor of Texas law due to the contract’s closer connections with Texas.
• The UK office was merely a conduit or branch office without substantive performance obligations under the contract.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Samcrete Egypt v Land Rover Exports Ltd [2001] EWCA Civ 2019	Interpretation of the Rome Convention emphasizing a broad, purposive approach and the limited scope for displacing the presumption under Article 4.2 by Article 4.5.	The court applied the restrictive approach to Article 4.5, holding the presumption under Article 4.2 should only be displaced in exceptional circumstances.
Egon Oldendorff v Libera Corp [1996] 1 Lloyd's Rep 380	Support for a purposive and not narrow literal interpretation of the Rome Convention.	Used to justify a purposive approach to interpreting Article 4 provisions.
Credit Lyonnais v New Hampshire Insurance Co [1997] 2 Lloyd's Rep 1	Clarification that the presumption under Article 4.2 is weak and must be considered in light of geographical connection and circumstances.	Guided the court's analysis of whether Article 4.5 displaced the presumption in favor of Texas law.
Definitely Maybe (Touring) Ltd v Marek Lieberberg Konzertagentur GmbH [2001] 2 All ER (Comm) 1	Analysis of the relationship between Articles 4.2 and 4.5 regarding the location of characteristic performance and contract connection.	Referenced to illustrate competing approaches to the presumption and its displacement.
Print Concept GmbH v GEW (EC) Ltd [2001] EWCA Civ 352	Test for identifying the party effecting the characteristic performance of the contract.	Applied to identify the defendant as the party effecting characteristic performance and to analyze where that performance was to be effected.
Johnson v Taylor Bros [1920] AC 144	Characteristics of CIF (cost, insurance, freight) contracts and obligations of the vendor.	Used to analyze the nature of the contract and the characteristic performance required of the defendant.
Bank of Baroda v Vysya Bank [1994] 2 Lloyd's Rep 87	Application of Article 4.5 and circumstances for displacing the presumption under Article 4.2.	Referred to in discussion of the scope and application of Article 4.5.

Court's Reasoning and Analysis

The court began by confirming that no valid choice of law was made by the parties under Article 3 of the Rome Convention, consistent with the trial judge’s finding. The focus then shifted to Article 4, which governs the applicable law in absence of choice.

Under Article 4.2, the presumption is that the contract is governed by the law of the country where the party performing the characteristic performance has its habitual residence or central administration. The defendant was identified as the party effecting the characteristic performance, which was the supply and delivery of goods and related services. The defendant's principal place of business was Texas.

The dispute centered on whether the characteristic performance was to be effected through the defendant’s UK office in Sevenoaks rather than Texas. The court undertook a detailed examination of the contract terms and the factual matrix, including extensive correspondence, quotations, purchase orders, letters of credit, and shipping documents.

The court found that the contract was deliberately structured to show the UK office as the supplier and shipper, reflecting commercial and political considerations, notably Iranian government policy prohibiting direct purchase from US entities. The UK office arranged shipment, tendered documents under the letter of credit, and played a significant technical role, including producing the quotation and visiting the rig.

Based on these findings, the court concluded that the characteristic performance under the contract was to be effected through the defendant’s UK place of business, thereby shifting the presumption under Article 4.2 in favor of English law.

The court then considered Article 4.5, which permits disregarding the presumption if the contract is more closely connected with another country. Both parties agreed that the claimants could not satisfy the stringent test to displace the presumption in favor of Iran, and the court agreed that Iranian law need not be considered further.

The defendant argued that Article 4.5 displaced the presumption in favor of Texas law due to the physical shipment from Texas and the origin of goods. The court rejected this argument, reasoning that although the contract had connections with Texas and Iran, the overall circumstances did not clearly demonstrate a closer connection with Texas than with England.

The court emphasized the importance of the contractual arrangement and the parties’ agreed structure, which showed the UK office as the place through which characteristic performance was effected. The court found that the presumption in favor of English law under Article 4.2 was not displaced by Article 4.5.

Holding and Implications

The court allowed the appeal and declared that the contract is governed by English law.

The direct effect of this decision is to overturn the trial judge’s ruling that Texas law governed the contract, establishing instead that English law applies. The ruling clarifies the application of the Rome Convention’s Article 4 in complex international contracts where political or commercial considerations influence the structure and documentation of performance obligations. No broader precedent was set beyond the facts of this case, and the decision emphasizes the importance of the parties’ agreed contractual arrangements and the factual matrix in determining the governing law under the Rome Convention.