Despite the development of European law in many sectors of the economy, there is no community law governing contracts for the sale of goods across national boundaries. There is a United Nations Convention (the Vienna convention) on the International Sale of Goods (CISG). However, unlike all its European trading partners, the UK has so far refused to enact the CISG, despite having played a leading role in its formation. It would therefore apply only to a sales contract between, for example, a German firm and a UK firm when the law applying to the contract is German. If the law of the contract is English, then English domestic law will apply.

The issues of which law applies to a contract and which court has jurisdiction to decide a contractual dispute are separate. It is possible, if expensive, for an English court to be required to decide a case according to a foreign legal system. Equally, a foreign court may be obliged to decide a dispute according to English law. The sales contract may contain an express clause dealing with the choice of law and jurisdiction; for example, that the contract is to be governed by English law and the exclusive jurisdiction of the English courts. It is when this is overlooked that the problems begin.

Within the EC, the rules as to which court is entitled to decide a dispute were established by the Brussels Convention on Jurisdiction and Enforcement of Judgements which was brought into force in the UK in 1982 by the Civil Jurisdiction and Judgements Act. Assuming there is no agreement between the parties on jurisdiction then the basic rule is that where a person is domiciled within a contracting state (one which has enacted the convention) then they should be sued in the courts of that state.

For the purpose of the convention, an individual is domiciled in the UK if they are (a) resident in the UK or (b) the circumstance of their residence indicates a substantial connection with the UK. As regards companies, the seat of the company shall be treated as its domicile; the seat is considered to be in the UK if it was incorporated and has its registered office in the UK or its central management control is exercised here.

In "matters relating to contracts" the only exception is that the defendant can be sued in the courts "for the place of performance of the obligation in question" (Article 5(1)). The meaning of these two expressions was considered recently by the Court of Appeal in Source Ltd v TUV Rhineland and others (The Times, 28 March 1997).

The plaintiff wished to import goods from China and Taiwan. To obtain a certificate of quality for a letter of credit to pay the sellers, the plaintiff arranged with the defendants' registered German companies to inspect the goods and send them a report. After delivery there were complaints about the quality of some of the goods. The plaintiff's claim was that the defendants were in breach of contract for failing to exercise reasonable care and skill in the reports and had been negligent in making a mis-statement about the quality of goods.

The English court, following earlier European Court of Justice decisions, held that, where there was more than one obligation, jurisdiction under Article 5(1) was to be determined by the place of performance of the main obligation (the inspection of the goods in China and Taiwan, not the delivery of the report in England).

As to the alternative claim in the tort of negligence, the Convention's meaning of tort was "all actions which seek to establish the liability of the defendant and are not related to a contract within the meaning of Article 5(1)". Since the facts necessary for establishing the claim in negligence were the same as those for the breach of contract, except that a contract did not need to be established, the claim was excluded by the words "not related to a contract". Both causes of action were related to a contract and, since the plaintiffs could not bring an action in England for breach of contract, they could not bring the claim in tort either. The plaintiffs could only have brought an action against the defendant companies in Germany on the basis that, being incorporated in Germany, their domicile was Germany.

Assuming the contract does not state the applicable law, then this is determined by the rules established under the Rome Convention brought into force in the UK by the Contracts (Applicable Law) Act 1990. The most important of these is the presumption that the law which is to apply is that of the country in which the party whose performance is characteristic of the contract has their principal place of business. For a sales contract, "the performance characteristic of the contract" is the sale and delivery of the goods.

In a case concerning the manufacture and sale of windows by a German firm to an English firm, the German company sued for payment in the German courts. Issues of law and jurisdiction both arose since the contract did not contain terms relating to either of these. However, it was clear that, under the Rome Convention, the applicable law was German - which includes the CISG for international sales. Under Act 57 of the CISG, the place of performance of the obligation to pay was the seller's offices in Germany. Therefore, Germany was held by the European Court to be the place for performance of "the obligation in question" - payment. So, under Article 5(1), the German court had jurisdiction (Custom Made Commercial Ltd v Stawa Metalbau Gmbh 1994).

It should be a golden rule for purchasers doing business with the rest of Europe that they make sure their contract contains express terms stating both the law of the contract and which courts are to have jurisdiction. It is not sufficient to include just one of these.

SM

Peter Marsh and Frank Griffiths are associates at project strategy and contract management consultancy (FGA Ltd (0116 279 3383)