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Whincop, Michael J; Keyes, Mary E --- "Statutes' Domains in Private International Law: An Economic Theory of the Limits of Mandatory Rules" [1998] SydLawRw 18; (1998) 20 (3) Sydney Law Review 435

Statutes’ Domains in Private International Law: An Economic Theory of the Limits of Mandatory Rules

MICHAEL J WHINCOP AND MARY E KEYES[*]

1. Beyond Realism and Formalism

The determinism of adjudication is a recurring debate in jurisprudence. It has been a foundational premise of radical legal theory, since the time of legal realism, that adjudication is a matter of politics. The only issue, for radical theorists, is how well hidden the politics are. That view is anathema to doctrinal formalists. The formalist regards legal reasoning as a branch of exact inquiry which produces demonstrably correct answers.

Statutory interpretation is an example of the gulf between those two schools. At least since the time of the realists,[1] the capacity of interpretive canons to produce results which are of apodictic validity has been debated. According to formalists, the canons produce correct answers. The realists and their successors take the view that the canons are so vague that one is always available to justify the result the judge wants to reach.

The issues of policy and interpretation have become more important, not less important, as the years have gone by. Not only is there much more legislation than there has ever been before, but the legislation very frequently projects policy aspirations. In turn, interpretation legislation often expresses a metapolitical goal – it enjoins judges to interpret legislation consistently with the policy purposes for which it was enacted, and permits them to use extrinsic material as part of that process.[2] Policy has become part of the foreground of interpretation, as well as part of the background. In this article, we agree with the radical premise that no text can provide completely for its own interpretation. However, we argue that policy and purposive interpretation provide neither better nor clearer answers than other interpretive approaches. We identify several conceptual deficiencies of purposive interpretation. In order to improve the quality of legislative and interpretive outcomes, and to clarify the relationship between legislative text and legislative intent, we use economic theory to generate principles of construction for statutes regulating multi-jurisdictional contracts.

We argue that attempts to avoid legal rules contractually should not be viewed pejoratively. They are frequently rational attempts by parties to realise gains from exchange and to control the contractual hazards they confront. We explain how the enforcement of mandatory rules – those the parliament wishes not to be avoided – impacts on this process. This explanation suggests several interpretive principles which can be applied to statutes enacting mandatory rules. The principles are designed to increase the predictability of outcomes of both legislation and private ordering.

Part 2 expands the conventional economic analysis of the properties of mandatory and “default” rules to a private international law context. We find a more sophisticated range of choices than the binary one assumed in the literature. Part 3 uses this theory to develop interpretive principles. Part 4 then analyses judicial considerations of apparently mandatory rules in private international law cases in Australian courts.

2. Opting Out in Private International Law

A. The Mandatory–Default Balance: A Private International Law Perspective

The principle of freedom of contract suggests that the law should permit the parties to bargain out their agreements to the extent they wish to do so, and to enforce the bargain struck. Much recent research in the law and economics paradigm suggests that the legal rules which best facilitate that process of contracting have two qualities.[3] First, they fill gaps the parties leave in their contracts. This lowers the costs of contracting and increases the amount of exchange. Second, they permit parties to vary, or contract around, those legal rules. Such rules are most commonly referred to as default rules.

This concept of bargaining around legal rules and entitlements is central to the Coase theorem, the foundation of modern law and economics.[4] Coase demonstrated that if it was costless for parties to transact with each other, they could be expected to bargain around the law’s assignment of entitlements and property rights in order to realise all possible gains from exchange. Risks would be imposed on the person who bears them at least cost, and property rights would be acquired by the person who values them most. Whereas in this zero transaction cost world, the form of legal entitlements is irrelevant to allocative efficiency, that may not hold elsewhere. As the costs of transacting rise, some of the gains from exchange are forfeited, because it will be too costly to bargain around entitlements. In these circumstances, efficiency requires that the law allocate property rights in a way that resembles the allocations the parties would have made inter se if bargaining was costless.

Entitlements under some legal rules – usually described as mandatory – do not permit such “Coasean” variation. Mandatory rules are inefficient where preferences for terms are likely to vary, and where parties are likely to know their own preferences better than the lawmaker. This dichotomy between mandatory and default rules is the subject of much analysis.[5] However, the dichotomy oversimplifies. In a world in which there are multiple jurisdictions applying different laws, the default rule concept becomes a more complex phenomenon, and the effectiveness of mandatory rules is substantially limited. Four different rule types can be identified.

The first is a rule default; that is, the legal rule permits the parties to contract around it. The second is a choice of law default. Even if a legal rule is not a rule default, the parties need not be bound by it if they can agree that the law of a different jurisdiction shall govern their contract. The common law has long permitted parties to make such agreements, and it imposes few and rarely invoked limits.[6] However, as we see in part 4, courts look askance at such agreements when the contractual setting has significant connections with the domestic jurisdiction, and the domestic jurisdiction imposes a mandatory rule. The third is a forum default. It may be that a court will not permit parties to choose their own law, and will not enforce contractual rights arising under the parties’ chosen legal system. However, it may nonetheless defer to the parties’ agreement to submit to the exclusive jurisdiction of another forum. That enables the parties to enforce their contractual rights under their chosen law in that other forum. As with choice of law clauses, common law courts have generally enforced jurisdiction and arbitration clauses. The fourth possibility is a mandatory rule, which courts will enforce whatever the parties have agreed to. The three defaults are presumptively hierarchical – a higher level default implies the existence of the lower level defaults. A rule default implies choice of law and forum defaults; a choice of law default implies a forum default.

A rule default is the most efficient type: it permits full opting out. A choice of law default is less efficient, because it means that the parties will have to be subject to the mandatory rules of the chosen legal system. A forum default is less efficient again because it means that the contract cannot be enforced in any jurisdiction which imposes an undesirable mandatory rule, even if that jurisdiction would be the lowest cost forum for litigation, legal services, and so on. Thus, the cost of transacting around intermediate defaults is likely to be higher than under a rule default. The mandatory rule remains least efficient. It commits courts to applying the coercive force of the state to enforce the mandatory rule wherever its jurisdictional requirements are satisfied. The default types are represented in Figure 1:

There are reasons – not necessarily good ones – why lawmakers may choose one of the intermediate defaults, rather than the mandatory extreme. They may conclude that subjecting a transaction to the laws of a foreign system is less likely to occasion injustice than full rule excludability – hence they may retain a choice of law default. Lawmakers may not want courts of their jurisdiction applying anything other than the mandatory rule, but have less objection to foreign courts applying a foreign law when parties have agreed that this should occur. This tolerance might be explained by the fact that choices of foreign forum are most likely to occur where a transaction has a higher number of foreign connections.[7] The more “foreign” connections a transaction has, the lower the marginal transaction cost of contracting around a forum default, and the less dogmatic the lawmaker may be about permitting opting out.

Just as defaults are more extensive than at first they seem, so too mandatory rules are “less mandatory”.[8] Because contracts are consensual in nature, the parties may re-order their relationship to take it out of the reach of the jurisdiction applying the mandatory rule.[9] Alternatively, they might agree to remove their assets from the jurisdiction, so making nugatory a judgment of the court of the jurisdiction applying the mandatory rule. Even where parties are incapable of avoiding the rule, they may change the way in which they contract. A might assure B that she will not invoke rights under a disfavoured, unavoidable mandatory rule. That assurance is not credible in a one-shot contract, as A always has an incentive to defect. However, some contracts (such as insurance contracts or distributorships) may be such that the parties renegotiate the contract periodically. Party B has an opportunity, when renegotiating, to punish A for an earlier defection.[10] In these circumstances, an assurance by A that is not binding can nevertheless be credible.

Even in those contracts which it is not rational to re-order, the party with the entitlement under the mandatory rule ends up paying for it. The other party would be irrational to enter the contract without seeking compensation for the expected marginal cost to him or her of the entitlement conferred on the other party. The problem is that the other’s right to bargain with that entitlement is denied by the mandatory rule. Those who make laws, and courts who enforce them, need to beware of the lure of mandatory rules. What they exclude has costs, and what they provide comes at a price.

B. The Information Effects of Choice of Law and Forum Defaults

In the last section, we introduced the choice of law and forum defaults, as halfway houses between completely enabling and mandatory rules. In this section, we wish to examine why parties might value these as terms in their contracts.

It was a simple extrapolation of the Coase theorem to see that defaults decrease transaction costs by providing rules that parties would incur costs to negotiate for themselves. However, recent research has shown how the existence of defaults, and the process of contracting around them, increase the information available to contracting parties.[11] A major problem confronting transacting parties is imperfect information. As with any decision, information is needed in order to negotiate for the rules that best suit the exchange. Information, however, is costly to produce. It frequently happens that parties are asymmetrically informed – A may know a fact (often about A) that B does not know. In an insurance contract, for example, A knows that they are a high risk, but B may not. A default rule can compel A to disclose that information. This will occur if parties in the position of A have different preferences for rules which correspond to their risk “type”. The applicable default rule can be set in a way which compels those parties who prefer another rule to contract for it. By contracting for it, the party reveals his or her type. By contrast, if a rule is mandatory, these possibilities will not exist. Game theorists describe these two situations as separating and pooling equilibria.[12] In the former, players of different types adopt different strategies. In the latter, strategies do not correspond to type. If it is more costly to do business with persons of certain types (eg, it costs more to insure a high risk), the counterparty, unable to distinguish between types, must ask for a price which reflects the incidence of those persons in the population.[13] Effectively what happens is that the low-cost, low-risk players pay more than their marginal cost, and the high-cost, high-risk players pay less. In other words, there is a cross-subsidy in a pooling equilibrium resulting from imperfectly informed contracting. Too many high risk players will contract, since they pay less than their marginal cost, while too few low risk players will do so, since they pay more. That result – the “adverse selection” problem – is inefficient. How do intermediate defaults affect this process? We use an example from the Insurance Contracts Act 1984 (Cth) – an area of contracting where information issues are paramount. The old law permitted an insurer to withhold indemnity if the insured committed breaches during the course of the policy. That right is very substantially reduced by section 54 of the Act. The ability of an insured to contract on the terms prohibited by the Act would be a means by which insureds could signal to insurers that they are of a type which is unlikely to commit breaches during the currency of the policy (an adverse selection problem), or that they will commit to behaviour where breaches are unlikely to occur (a “moral hazard” problem).[14] Contracting on terms that permit the insurer to withhold indemnity for certain types of breaches signals one’s type, and gives a credible commitment not to engage in risky behaviour.

Converting rule defaults into mandatory terms, as section 54 does, seems to prevent a low risk insured contracting in certain ways that other types of players find costly to imitate. However, if these rules do not exist or are not mandatory in other jurisdictions, it remains possible for low risk insureds to signal their existence. They do so by agreeing to a choice of law and jurisdiction of that country. Thus, choice of law and forum defaults increase the number of strategies available to the parties. As a result, they increase the amount of information in contracting. The choice of law and jurisdiction of that country is a strategy that high risk insureds will avoid because of its higher costs to them.

Although intermediate defaults increase the amount of separating, there will still be a more significant element of pooling than under a rule default. Some low risks may not agree to a foreign choice of law because of the higher costs of understanding the effect of foreign law, or to a foreign choice of jurisdiction because of the higher costs of litigating there. Insurers may not be able to locate a system which supplies a favoured rule, and which is untarnished by some other disfavoured mandatory rule. Choosing foreign law and a local forum (as a choice of law default permits) runs the risk of erroneous application of foreign law by a court unfamiliar with that law. In short, the transaction costs of opting out of intermediate defaults are higher. As those costs increase, the extent of separation declines. Some low risks will find it too costly to signal their existence contractually. Therefore, there will be more pooling in a system with intermediate defaults than in one with higher level defaults, but less than in a system with only mandatory rules.

C. Unilateral Moves Down the Continuum: Defection and Invocation

Our analysis so far assumes that parties know when a law is a rule default, a choice of law default, or a forum default, and can make the agreements needed to exploit the possibilities of these rules. We wish to examine the effect of a court confounding the assumption of the parties by refusing to enforce the parties’ agreement and invoking the law as a mandatory rule. Specific examples are given in part 4. What are the implications of such a possibility?

First, it further decreases the amount of separation. Enabling a party to invoke a rule that he or she has bargained away increases the ability of high risk parties to mimic a strategy which, if the contract was enforced, could only be followed by low risk players. Second, it increases the ability of the parties to act opportunistically by defecting from their agreement, so extracting more of the surplus from the exchange than they had bargained for.[15] Third, it increases the cost of transacting by decreasing the number of effective contracts parties can write, and by prompting the parties to employ costly means to make credible commitments not to defect.[16]

Fourth, the defection possibility increases the expected cost of litigation under the contract. When parties know which legal rule (or which laws) will be applied to the matter in dispute, it will usually be rational for them to settle. If a party believes that there is a chance that he or she can persuade a court to enforce a mandatory rule contrary to the agreement, the parties can be expected to spend more on litigation.[17] Dispute resolution becomes a rush to enliven the jurisdiction of preferred forums. The existence of pleas such as lis alibi pendens makes the “first-mover” advantage palpable.[18] There will be more applications for anti-suit injunctions and stays on the grounds of forum non conveniens. This increased litigation has no social benefits at all – it merely redistributes wealth.

Courts understand these problems and generally distinguish the principles that apply to stays in the general run of cases from those that apply where the parties agree to an exclusive jurisdiction clause. The discretion not to enforce such clauses is not normally exercised in the absence of “strong reasons” against enforcement:


Before a court can refuse to enforce a contractual stipulation in order to allow a plaintiff a right to sue which he has bargained away the court must have substantial grounds prevailing over what Dixon J in The ‘Mill Hill’ called ‘a strong bias in favour of maintaining the special bargain’.19

A “strong reason” should not, in general, include the prospect of substantive advantage under a mandatory law of a system that the parties have agreed is not to provide the law. Our analysis also implies the need for consistency in the means by which courts interpret statutes that create mandatory rules. That is most likely to be achieved by articulating principles of interpretation for these statutes.[20] Interpretation, however, cannot occur in a vacuum.[21] The interpretive principles we recommend derive from the material explored in this part. They are designed to communicate to parties the permitted scope to avoid rules. Where this is not permitted, the parties must fall back to pricing the risks and entitlements under the mandatory rule in a pooling equilibrium.

3. Statutory Interpretation and the Domain of Mandatory Rules

A. Outline of Part

We have outlined an economic theory which prefers defaults to mandatory rules. Before we can address the nature of the interpretive principles that should apply, we need to consider whether our theory needs modification in light of two arguments. We then reformulate our theory as a series of interpretive principles.

B. Arguments Favouring Mandatory Rules

(i) A Doctrine of Mandatory Rules Fawcett argues that parties’ rights to choose law should be limited by a doctrine of mandatory rules when the law which they choose to opt out of expresses a “strong social or economic policy”.[22] The argument is not persuasive. First, Fawcett’s criteria for divining the policy of a law, and deciding which of those are strong, are never articulated. In a world where parliamentary time is scarce, how much legislation is based on “weak” policies? Even if the criteria were clear, one is not told why strong policies require mandatory rules. As we have seen, a default rule can protect a party if it forces the counterparty to disclose information as part of the contracting process – a protection an equivalently formulated mandatory rule does not necessarily offer. Fawcett might have argued that legal rules protect parties other than those contracting. We return to this point later, but the overwhelming majority of contracts are not of this nature. Where laws are not motivated by third party interests, they must be premised on the interests of the parties. Denying parties the right to make the agreements they prefer is unlikely to be in the interests of the parties.

Second, the argument is open to a slate of economic criticisms, most of which we have seen already. Mandatory rules increase the costs associated with inefficient selection of terms by lawmakers where party preferences vary. We have seen that few laws are completely mandatory – parties may re-order their transactions in a way that makes application of the laws of a disfavoured system unlikely.

Third, Fawcett’s view of the world fails to recognise the significance of foreign forums. Fawcett leans towards the enforcement of the mandatory rules of other legal systems – but not where they conflict with English mandatory rules.[23] But if the other jurisdiction applies the same doctrine, the opposite effect would hold, and English law would give way there. As we saw above in our analysis of defection, mandatory rules buckle under the pressure of the parties’ race to enliven their preferred jurisdiction.[24] Although international standardisation holds out the promise of eliminating such rule disparity across jurisdictions, the price of this solution is high – it greatly increases the likelihood and the costs of inefficient rule selection where preferences for the rule in question are not internationally homogeneous.[25]

(ii) “Purposive” and Literal Interpretation: A False Dichotomy The second criticism is that modern interpretive trends favour resolving statutory problems in accordance with the purpose of the legislation. They do not favour reading down remedial provisions. This trend is confirmed, as we said in our introduction, by the content of modern interpretation legislation. This approach lacks clear normative content. We said that Fawcett does not tell us how to identify a “strong social or economic policy”. That criticism applies equally here. There is no foolproof means of identifying purposes. “The act of characterization [of purposes] is ... one of invention rather than discovery.”[26] It will be exceptional that one cannot formulate more than one purpose – if that is so (and we shall show that it is), one needs something else to refine that choice.

Purposive interpretations are generally at their strongest in the context of particular cases.[27] In particular cases, a court may compare the result procured by a literal application of the statute with a result thought to conform to the legislation’s underlying policy. This approach is logical. The improbability of lawmakers doing better for the parties than the parties can do for themselves arises from the lawmakers’ more limited knowledge of the circumstances of the exchange. Hence the crudity or incompleteness of many legislative rules. It therefore makes sense to address policy and purposive issues when sufficient facts have emerged. Purposive interpretation is to statutes what default rules are to contracts – they fill gaps that it was not rational to provide for at the time of contracting, or enacting, and they provide for a more refined allocation of rights, conformably to the parties’ or lawmakers’ intentions.[28]

In contrast, an argument of general application that it was the purpose of parliament to preclude any sort of inconsistent contract – including choices of law and forum – is much weaker, largely because of this information problem. The time spent on law reform advice and statutory drafting is limited; the time spent on debate in parliament or committees is even more attenuated.[29] Given the overwhelming likelihood that specific situation types were never considered, overarching arguments predicated on purpose are at best reconstructive, at worst wholly fictitious. Purposive arguments directed to precluding all forms of contracting around the rules in the statute are likely to be wrong or grossly overgeneralised when the legislative text permits a contrary view. This suggests that purposive arguments are better directed to the more limited question determining whether parliament would have upheld the exclusion of the default in a particular case, had they known its circumstances.

We may illustrate our argument by a hypothetical situation where A and B have agreed that the law of the State of New York should apply to their contract, and that the courts of that state shall have exclusive jurisdiction over the contract. If A subsequently invokes rights under a legal rule in an Australian statute, an Australian court may resolve the matter in one of three ways. First, the judge may ask: do the express statutory provisions invalidate the rights B seeks to enforce? Second, he or she may ask: did parliament intend to invalidate terms which excluded the effect of legislation that would otherwise apply? Third: is the purpose of this legislation served by enforcing this contract, or by striking it down? The second and third are both purposive arguments, but they may generate quite different answers. The third invites a more discriminating analysis of the consequential merits of the competing case. The judge must consider not only the likelihood of the legislation’s purpose being frustrated, but whether parties such as A should be entitled to defect from an agreement that A can be presumed to have entered out of self interest. Legislation affecting contracts usually proposes to retain the basic efficacy of contract as the principal means of dealing with the hazards and uncertainty of exchange. Permitting parties to defect from contracts makes contract a less effective means of controlling exchange. A court could conceivably say: the parliament does not want parties to bargain out of these rules in general, but I believe that this contract should be enforced. Thus:


The rule by which contracts not expressly forbidden by statute or declared to be void are in proper cases nullified for disobedience to a statute is a rule of public policy only, and public policy understood in a wider sense may at times be better served by refusing to nullify a bargain save on serious and sufficient grounds.30

We have seen that the second approach is flawed in conception – it assumes the enactors had a concluded view on the merits of the full range of possibilities for opting out, when the distribution of information makes it likely that the view was formed only in relation to paradigm cases. It is also a gratuitous assumption. It is not difficult to exclude rule, choice of law, and forum defaults. One could do it (a) by using spatial factors as a criterion of operation (for example, the contract is entered into in Australia or is partially performed here); and (b) by using provisions that prohibit contractual exclusions of the rules, and enjoin courts to ignore choices of foreign law and to refuse to grant a stay to enforce a foreign jurisdiction agreement.[31] The absence of those prohibitions must influence the way in which we construe purposes.[32] To return to the purposive interpretation– default rule analogy, the case for filling a gap with an absolute prohibition is weak because the cost – two lines of text – to do so directly is very low.

The point about the ease of eliminating forum and choice of law defaults enables us to turn to the first, “literal” view: enforce what is not prohibited. We do not suggest that judges should rewrite legislation by turning all rules into rule defaults. That would usurp the legislative function. We merely argue that defaults should be treated as defaults, and mandatory rules should be treated as mandatory rules. However, that in turn depends on our ability to be able to identify which rule type is which. Principles of construction for the interpretation of statutes which create mandatory rules have four benefits. First, they provide enactors with a clearer framework in which to determine the effect of their enactments on contracts to enact conclusively by fiat, the remainder being left to private ordering. Second, they enable parties to know what contracts are permitted, and to adopt those contracts if they choose.[33] Third, they give greater predictability to the application of statutes, which in turn decreases the socially wasteful costs spent on jurisdictional challenges. Fourth, they embody clear normative principles, which reflect economic theory. Thus, these principles of construction bring efficiency and judicial restraint into balance.

C. Towards Private International Legal Principles for Interpreting Mandatory Rules

We argued in the last section that purposive interpretation offers no solutions (or none worth having) to the dilemma of interpreting mandatory rules in statutes. However, we do not find any solutions in the plain meaning rule as normally understood. No text can provide completely for its own interpretation.[34] Therefore, while our approach has something in common with a plain meaning approach, it acknowledges its extra-textual norms. It begins not with a blank slate, but with a bias in favour of enforcing contracts. These principles which embody this rule are discussed below. However, before doing so, we wish to consider two possible limitations on our analysis.

(i) Implied Limitations on Choices of Law and Jurisdiction

Forum courts should not enforce choices of foreign law or jurisdiction agreements where the provision is not effectively incorporated into the contract, according to the putative proper law of the contract.

When can a court justifiably refuse to enforce a term that purports to choose law or jurisdiction?[35] Courts can use contractual doctrine to ensure basic procedural fairness in the process of negotiation. The most relevant aspect of contractual doctrine is the requirement of reasonable notice of the term. In Oceanic,[36] all members of the High Court considered the issue of formation in order to determine whether a jurisdiction clause was incorporated into the contract. Applying the reasonable notice requirements imposed on the profferor of a standard form in Australian domestic contract law, the court held that the jurisdiction clause was not incorporated into the contract.[37] Contractual doctrine can therefore operate, like other default rules, to compel the party seeking to rely on a clause to disclose it. That contractual formalities serve to channel the attention of parties to important matters is a proposition that predates law and economics.[38] This argument demonstrates the insecurity of the argument that statutory protection will be destroyed by standard form contracting.

Although formation issues are the most significant example, a case can be argued that vitiating factors, such as contractual capacity, unconscionability, fraud, misrepresentation, and undue influence, are relevant to the validity of choice of law and jurisdiction. For instance, the doctrine of unconscionability could be applied to determine the legitimacy of the bargaining tactics employed by the party relying on the term.[39] These vitiating factors reflect basic principles of fairness and efficiency. The location of the line between these sorts of vitiating factors and invalidation on the grounds of “public policy” is nevertheless difficult to identify a priori. Courts applying these vitiating factors must be very careful that they are not permitting opportunistic renegotiations of contracts.

The contractual doctrine of the putative proper law of the contract should apply for these purposes. Although this is an orthodox view for formation issues,[40] there is some authority for the use of the lex fori.41 Forum law is problematic because of the risk of forum shopping. Discharge by vitiation is normally governed by the proper law per se.[42] The proper law per se suffers from the problem of circularity, since it is being used to determine if a choice of law clause – the issue we are interested in – has been incorporated. On the other hand, the objective determination of the putative proper law can be indeterminate once multi-state connections exist. The rule nonetheless seems the best of a “bad bunch”, especially if it is informed by our “disconnecting factors” principle (studied below).

There is another possible implied limitation: where the contract has third party effects. We suggested that Fawcett’s argument might be justified if the mandatory rule protected a person other than a party to the exchange. Most contracts do not have such effects.[43] Consider the contracts regulated by the best known instances of Commonwealth statutes which prohibit opting out – the Insurance Contracts Act 1984, the Trade Practices Act 1974, and the Carriage of Goods by Sea Act 1991. Insurance contracts and sea carriage contracts have no third party effects. The issues of consumer protection to which the Trade Practices Act 1974 is directed may occasionally have third party effects (for instance, an exploding kettle may injure persons other than the buyer).[44] However, that Act solves the problem by protecting the third party with a liability rule.[45] There is no compelling economic reason even here to restrain the parties from choosing the terms they want to apply inter se. Limiting contractual freedom is justified only in those rare cases where mandatory rules applying to contracts protect third parties, and third parties have no other recognised legal entitlements. Third party effects do not otherwise justify the modification of our approach. Third party rules may themselves be inefficient, especially when they represent deals made between selfinterested lawmakers and interest groups at the expense of contracting parties generally. In part 4, we study this problem in the context of the much cited decision in Golden Acres Ltd v Queensland Estates Pty Ltd.[46]

(ii) The Default Rules Principle

A legal rule in a statute should be presumed to permit variation; that is, a court should presume a rule to be a default.

This and the next two principles correspond to the classification of rules which we have introduced in this paper – rule defaults, choice of law defaults, forum defaults, and mandatory rules. It is logical that we begin with a preference for rule defaults. As we explained, rule defaults operate hierarchically, by including the contractual freedom to make choices of law and jurisdiction. Rule defaults imply, other things being equal, lower transaction costs than intermediate defaults. That, in turn, suggests that the observed contractual equilibrium will involve more separating and less pooling.

We have extolled the advantages of defaults over mandatory rules. An implicit premise is that parties understand the legal effects of the rules they exclude, and the provisions they agree to.[47] This might seem a weakness of the analysis as parties are likely to have high information costs where contracts are complex, especially where they are standard forms. However, stating that a rule is a default implies something about the procedure by which one opts out of it.[48] The substantive law might impose information obligations on a party proffering a standard form which opts out of defaults. Defaults can be formulated to address typical “consumer” issues of information and bargaining. Such a solution is used in Australian credit legislation.[49] The provision makes sense – first, the marginal cost to a party contracting on the terms of standard form contracts to supply that information is certainly lower than the counterparty’s costs in the absence of such a rule. Second, parties proferring such terms might well prefer to bear the cost of providing information about excluded defaults, compared to the higher information and transaction costs of relying on choices of foreign law and jurisdiction. The implied limitations also show how information costs can be decreased by means of contractual formation principles.

(iii) The Choice of Law Principle

Where a legal rule in a statute takes effect as a mandatory rule by its plain language, the statute should be presumed to permit parties to make an express choice of foreign law.

When a statutory provision is inconsistent with a rule’s status as a default, courts must decide, according to our analysis, whether that rule takes effect as a mandatory rule, or as an intermediate default. The choice of law principle is based on the idea that statutes must use plain language in order to take away the choice of law default. A statutory rule should not be enforced where the parties have chosen foreign law, and the provisions of the statute do not prevent them doing so.

(iv) The Forum Principle

Where a legal rule in a statute takes effect as a mandatory rule by its plain language, and the statute plainly precludes parties from making a choice of foreign law, the statute should be presumed to permit parties to make an express choice of a foreign forum.

The second intermediate default we have identified is a forum default. Whereas a choice of law default entitles a party to a judgment on the basis of foreign law in any court (including in the courts of the jurisdiction applying the mandatory rule), a forum default only entitles the party to enforce a foreign jurisdiction clause by means of a stay of proceedings in all jurisdictions other than the one to which parties have agreed to submit. Where a rule is, by plain language, incapable of variation by contract, and the parties cannot, under the statute applying the mandatory rule, choose their own law, choice of forum is permitted unless plain language excludes it. The statute would have to indicate that courts are not to grant stays on the basis of a jurisdiction agreement, where to do so would preclude the court from applying the mandatory rule.

The important question is the extent to which courts should construe provisions as excluding forum defaults by implication. Brian Opeskin refers to the Trade Practices Act’s criterion of operation which prevents the use of choice of law clauses but also “terms to like effect”.50 He argues that this includes forum clauses. This construction avoids the undesirable result of parties being deprived of the protection of remedial statutes by means of a jurisdiction clause.51 In reply, we urge our approach, which rejects the conclusion that the jural operation of a jurisdiction clause can be said to be like that of a choice of law. The difference is integral to distinguishing choice of law and forum defaults. Our approach gives the clause a less expansive operation, because the only terms that have like effect to choice of law clauses are – choice of law clauses. That is, the words would extend to provisions that choose law without using those particular words, but no further.52

(v) The Disconnecting Factors Principle

Where a statute uses private international law principles as its criterion of operation, a court, in the absence of clear prohibitions to the contrary, should have regard to the likelihood that the parties would not have contracted if constrained to adopt the mandatory rule as part of the proper law. Statutes silent concerning their criterion of operation should be presumed to be subject to private international law principles.

Some legislation provides for the use of private international law principles as the criterion of its operation. For example, statutes may apply where the proper law of the contract would be Australian, disregarding choice of law clauses (and perhaps jurisdiction clauses as well). The disconnecting factors principle supplies the normative considerations relevant to how a court should determine the proper law of the contract for those purposes.

There are two possible approaches to determining whether the criterion of operation has been invoked. One is to disregard completely the parties’ preferences. The court must determine the legal system to which the contract has its closest and most real connection. It will need to consider objective evidence (including party domicile or residence, the locus contractus, the locus solutionis, and the situs of the subject matter of the contract). This may be easy to do where factors point only in one direction. In other cases, however, that methodology provides nothing to resolve conflicting possibilities.[53] We remind the reader of our earlier point that it is often within the parties’ ability to manipulate their contractual arrangements to include connections with multiple jurisdictions. In these cases, this method can become indeterminate. It therefore increases the likelihood of forum shopping and defection, and increases the expected costs of litigation.

The approach we prefer – the disconnecting factors principle – recognises that a court should not identify a jurisdiction as the system to which the contract had the closest connection, when there is clear evidence in the contract that the parties at the time of contracting regarded that jurisdiction as unsuitable to their exchange. The court should examine why the parties would prefer one legal system to another, given their contract. Were there factors which caused the parties to want to “disconnect” with Australia? It would examine the unsuitability of the legal system and its legal rules (including its mandatory rules) to the contract the parties wish to enter, and the commitments they seek to give. There can be little justification for applying Australian law (for example) to a contract that would never have been entered into on the basis of an express choice of Australian law.[54] Practically, parties could deal with the evidentiary issue ex ante by documenting these matters in the contractual recitals.

Although this principle would seem to encourage courts to enforce by the “back door” a choice of law clause prohibited entry at the “front door”, there is no reason why it need interfere with the outcomes a parliament wishes to achieve. A parliament does not have to use choice of law principles as the criterion of operation. It may use spatial factors. It may say for instance that an Act shall apply to insurance contracts where (a) the insured has an Australian domicile; or (b) the majority of the risks covered by the contract arise in Australia. This approach has the advantage of requiring parliament to provide a rule to resolve the indeterminacies of the closest and most real connection test. Spatial factors do permit parties to avoid the operation of rules by manipulating the parameters of their contracts. But, as this article has shown, that is true of any rule – parties will always have an incentive to opt out. It is the task of parliament to consider the consequential justifications for limiting the right of the parties to do so. Where the legislation is silent as to its scope of operation, we favour the use of private international law principles as the means of determining its scope.[55] This presumption corresponds most closely to our earlier analysis of choice of law and forum defaults. By contrast, the implication of a spatial “localising” rule[56] for this purpose is undesirable. If parliament wants one, it is easy for it to provide one – and hard for courts to guess correctly the form it would take.

4. Judicial Strategies in the Interpretation of Mandatory Rules

We have examined how private international law transfigures the mandatory/default dichotomy into a more complex range of possibilities. We have shown how those possibilities affect contracting, and suggested principles of construction which apply to statutory rules applying to contracts. We now study how Australian courts have interpreted statutes which create apparently mandatory rules. The common law, as we have said, has generally enforced forum and choice of law clauses. Our focus is primarily on “modern” cases, corresponding with the fact that mandatory rules have become far more numerous in recent times. We contrast two authorities on the interpretation of choice of law and forum defaults: the Queensland Estates case[57] and Akai Pty Ltd v The People’s Insurance Company Ltd.[58]

Queensland Estates involved a contract between parties under which the plaintiff was appointed a sole agent for the sale of land belonging to the defendant who was situated in Queensland. The contract featured what was in effect a choice of law clause, opting for the law of Hong Kong. The plaintiff’s entitlement to commission was inconsistent with Queensland legislation (which required that agents be licensed) and regulated commissions payable. The claimant’s entitlement to commission was held to be illegal, and the selection of law ineffective and not bona fide. The choice of law was regarded as having been made to avoid the consequences of illegality (notwithstanding that the plaintiff was incorporated in Hong Kong, and the parties intended that the land be sold primarily to persons resident there). Hoare J considered that it would be contrary to public policy – which he conceded was unclear – for the legislative intention to be “stultified” by choice of law clauses.[59] However, he said (without explaining) that such a result may not always be obtained, and that bona fide choices of law might be enforced even though to do so would yield an advantage from the avoidance of domestic law.

This much cited decision[60] is a good example of the points we make. The inefficiency of the mandatory rule lies in its anticompetitive, cartel-protecting nature. The regulation created a significant barrier to entry, controlled by the industry.[61] It prohibited price competition. The blatancy of the interest group quality of the legislation does not make it appropriate for a court to refuse to enforce it, but it does make it appropriate for a court to preserve the entitlements of the parties to contract out of the choice of law default (or at least the forum default) to the extent they are not clearly taken away.[62]

A purposive approach runs into difficulties. Hoare J does not identify any purpose – he merely tells us that parliament wanted to regulate real estate agents, and that choice of law clauses would cause that regulation to be unwound. But the argument is circular – it merely tells us that a regulation exists and that easy avoidance would destroy its purpose. It never tells us the purpose. It is an argument about means, not ends; but unless the end is known, the consequences of different views about the means cannot be judged. What ends of the legislation would be sacrificed or compromised if the parties’ rights were decided under Hong Kong law in Hong Kong? None are mentioned; none are apparent.

Hoare J’s disallowance of the choice of law as not being made bona fide is also problematic. Subject to a mysterious exception, the judge equates evasion with a lack of bona fides. This has the potential to turn all choice of law and forum defaults into mandatory rules. We would limit the bona fide limitation to three cases; where there are genuine third party effects, where one of the parties has used the choice of law to gain an unfair advantage that the other party could not have known about,[63] or where the agreement is a sham. Where the parties intend that their rights be governed by the chosen law, we would regard the choice as bona fide – the only issue is whether the legislation proscribes it. Hoare J’s approach to the legislation increases transaction costs by making contracts less effective in accomplishing party ends, increases the costs of litigation, and furthers the incentives of parties to defect from their agreements.

Akai involved a contract of credit insurance, in which PIC (a Singaporean company) was the insurer, and Akai (the Australian subsidiary of a Japanese company) the insured. Although it was neither party’s first choice, the parties agreed after negotiations that English law should govern, and that English courts should have jurisdiction. When Akai sought indemnity under the policy, PIC alleged that breaches entitled it to withhold indemnity. Akai commenced proceedings in New South Wales, claiming rights under section 54 of the Insurance Contracts Act.[64] PIC sought a stay of proceedings in reliance on the jurisdiction clause.[65] Akai relied on sections 8 and 52 of the Act. The latter provision struck down terms which purported to exclude or modify the operation of the Act in a way that was to the prejudice of the insured. Section 8 provided that:


(1) ... [t]he application of this Act extends to contracts of insurance ... the proper law of which is or would be the law of a State of 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 or in some other contract, be the law of a State or a Territory in which this Act applies or to which this Act extends, then, notwithstanding that provision, the proper law of the contract is the law of that State or Territory.

The High Court by a bare majority allowed Akai’s appeal and dismissed the stay motion. The majority judgment of Toohey, Gaudron and Gummow JJ resolves the jurisdictional issue by ascertaining the application of the Act as local substantive legislation. According to the majority, the legislation was remedial in nature and manifested an intent that there should be no power to contract out of its protective provisions.[66] Jurisdiction and choice of law clauses did not oust the application of the Act, if on an objective analysis, the proper law of the contract was that of an Australian jurisdiction. Because the majority held that condition to be satisfied, the

Act applied and the stay had to be refused, based on that legislative “intent”.[67] The majority accepted that different rules apply to the resolution of a stay application where there is an exclusive jurisdiction clause, but stated that an exclusive jurisdiction clause may not be enforceable where “the foreign jurisdiction clause offends the public policy of the forum whether evinced by statute or declared by judicial decisions.”[68] In determining the public policy issues which may be considered in a stay application which seeks the enforcement of an exclusive foreign jurisdiction clause, the majority set out an extraordinary power of review:


[C]onsiderations of public policy present in an Australian court may flow from, even if not expressly mandated by the terms of, the Constitution or statute in force in the Australian forum. Thus, the courts may disregard or refuse effect to contractual obligations which, whilst not directly contrary to any express or implied statutory prohibition, nevertheless contravene “the policy of the law” as discerned from a consideration of the scope and purpose of the particular statute.[69]

Dawson and McHugh JJ considered that the jurisdictional issue should be resolved without reference to the application of local legislation to the substantive issues in dispute. The application of substantive Australian legislation should only be considered once it had been determined that Australia is the proper forum for resolution of the dispute.[70] They held that “it would be a serious and far-reaching interference with the freedom of the parties” not to enforce contractual choices of jurisdiction.[71] The Act did not intend to invalidate an express choice of forum.[72]

Our analysis favours the minority approach. The minority’s approach recognises that the legislation had eliminated rule and choice of law defaults, but that nothing compelled the conclusion that it had eliminated forum defaults. Forum defaults affected the information available to the contracting parties at the time of contracting. Since the legislation did not clearly exclude a forum default, a court should enforce the jurisdiction clause by means of a stay. Alternatively, if one applies the disconnecting factors principle, the facts suggest that PIC would not have agreed to a contract had they been constrained to accept Australian law. The minority refusal to consider the entitlements under the Act that Akai would forego by the application of English law is consistent with our analysis – a juridical advantage is never legitimate if the party has bargained it away.

The approach of the majority demonstrates the problems we discussed in our arguments favouring purposive interpretation. The majority’s analysis of the remedial purposes of the legislation reflects the difficulties with Fawcett’s invocation of mandatory rules to enforce laws expressing strong social and economic policies. That is, the policy is never identified, and cannot be deduced in any uncontroversial way. Section 54 of the Insurance Contracts Act may be taken to imply a purpose that insureds not be prejudiced by their own defaults to the extent of being deprived of all indemnity. That does not tell us conclusively whether or not the purpose behind section 54 is frustrated by allowing parties wishing to avoid the rule to adopt the law of other countries, and enforcing agreed rights in those countries’ courts. The higher transaction costs of agreeing to contract out of a forum default mean that such contracting is unlikely to be observed frequently. Therefore, the likelihood of frustrating the purpose of the Act to effect beneficial changes to the law is virtually zero. If one wishes to look at the preceding law reform report on insurance contracts, it is built on basic assumptions that militate in favour of enforcing the jurisdiction agreement in this case.[73] It presupposes the basic efficacy of the institution of contract.[74] It recognises that adverse selection and moral hazard problems are the fundamental problems of insurance contracting.[75] The centrality of private ordering in insurance is still very strong.

As we said of Queensland Estates, the majority’s identification of a policy opposed to the use of private arrangements to circumvent the Act’s remedial provisions is circular. It tells us something about means, but not ends. We have already shown how this sort of overarching argument is flawed in conception, given the information deficiencies of parliaments, and gratuitous in effect, given the ease with which the forum default could have been destroyed. We concede that interpretation according to the principles we have advanced may, from time to time, be inconsistent with what the parliament would have legislated for had it possessed perfect foresight and unlimited deliberation time. But the costs of these inconsistencies are likely to be substantially less than those of the approach the court followed. This is particularly true of the approach of the majority, where they indicated that courts may refuse to give effect to contractual obligations which, whilst not directly contrary to any express or implied statutory prohibition, nevertheless contravene “the policy of the law”.[76] This jurisdiction increases uncertainty and undermines the most fundamental means in a capitalist society for dealing with future uncertainty – the institution of contractual exchange. It increases the costs of transacting and litigating, and encourages defection. It depends entirely on courts being able to second guess the policy choices that parliaments would have made, despite the manifest inferiority of the judicial process for this nakedly legislative function. Consider the words of Lord Devlin (then Devlin J) in St John Shipping Corporation v Joseph Rank Ltd:


A court should not hold that any contract or class of contract is prohibited by statute unless there is a clear implication or “necessary inference” ... that the statute so intended. ... I think that a court ought to be very slow to hold that a statute intends to interfere with the rights and remedies given by the ordinary law of contract. Caution in this respect is, I think, especially necessary in these times when so much of commercial life is governed by regulations of one sort or another...[77]

5. Conclusions

We have argued in this paper that judicial approaches to the interpretation of statutes affecting contracts need to consider the implications of economic theory. To the extent that the statute is not plainly applicable to the contract in question, courts should approach interpretation in a way which upholds as much of the parties’ bargain as possible. In terms of criteria, interpretations which support private ordering are desirable; those which achieve consistency and predictability are essential. We have put forward principles of interpreting statutes in private international law contexts which achieve both the essential and the desirable criteria. If they be regarded as “literalist” – and, by implication, old fashioned and reactionary – then so be it. But we may just as easily say that our theory is purposive and our principles of construction are presumptions useful for divining purposes. The labels do not matter – the theory does. We put forward our ideas as a normative theory of interpretation which is intended to place the onus on parliament not merely to express its wishes more clearly, but to think also about the virtues of rules which pre-empt agreement. Mandatory rules have real costs, but few benefits that the beneficiaries do not pay for in the long run. Recognising a limited right, where the statute permits, for parties to say “no” to the benefits offered in one jurisdiction, and “yes” to those offered in another, is likely to be good for parties, and, perhaps, a first step to efficiency in an age of globalisation.



[*] Faculty of Law, Griffith University. The authors thank two anonymous referees and the Editorial Board for invaluable comments.
[1] See eg, Llewellyn, K N, The Common Law Tradition: Deciding Appeals (1960) at 521–35.
[2] See in particular, Acts Interpretation Act 1901 (Cth) ss15AA and 15AB. See also Part 3 of this paper.
[3] Ayres, I and Gertner, R, “Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules” (1989) 99 Yale LJ 87 (hereinafter Ayres and Gertner, Filling Gaps); Ayres, I and Gertner, R, “Strategic Contractual Inefficiency and the Optimal Choice of Legal Rules” (1992) 101 Yale LJ 729 (hereinafter Ayres and Gertner, Strategic Contractual Inefficiency); Craswell, R, “Contract Law, Default Rules, and the Philosophy of Promising” (1989) 88 Mich LR 489; Johnston, J S, “Strategic Bargaining and the Economic Theory of Contract Default Rules” (1990) 100 Yale LJ 615; Schwartz, A, “Relational Contracts in the Courts: An Analysis of Incomplete Agreements and Judicial Strategies” (1992) 21 J Leg Stud 271.
[4] Coase, R H, “The Problem of Social Cost” (1960) 3 J L & Econ 1.
[5] This is particularly true of corporate theory. For a synthesis of competing views, see Coffee, J C, “The Mandatory/Enabling Balance in Corporate Law: An Essay on the Judicial Role” (1989) 89 Colum LR 1618.
[6] Vita Food Products Inc v Unus Shipping Co [1939] AC 277. The few limitations imposed at common law are outlined by Lord Wright at 290–1.
[7] For example, the place of the parties’ residence, the place the contract was made and is to be performed, the location of intermediaries, and the like.
[8] See generally Black, B S, “Is Corporate Law Trivial? A Political and Economic Analysis” (1990) 84 Northwestern ULR 542.
[9] Opeskin, B R, “The Use of Choice of Law Rules in Statutes Affecting Contracts: A Note on the Insurance Contracts Act 1984(1996) 10 J Cont L 231 at 242.
[10] This strategy is most effective when the parties are not sure when the contract will terminate. If duration is certain, the parties will expect A to defect in the last period: Baird, D G, Gertner, R H and Picker, R C, Game Theory and the Law (1994) at 165–78. The analysis also depends on A being unable to terminate the contract at no cost.
[11] Ayres and Gertner Filling Gaps, above n3; Ayres and Gertner, Strategic Contractual Inefficiency, above n3.
[12] Baird et al, above n10 at 80–3.
[13] For example, if 10 per cent of the population is high risk, the marginal cost of insuring a high risk customer is 100, and the marginal cost of insuring the remaining population is 40, the insurer would have to assume that the marginal cost of insuring is 46 (ie, .1 x 100 + .9 x 40 = 46).
[14] Moral hazard defines a condition where one contracting party can take actions that are in that party’s interests but which are difficult to observe or verify. It is often discussed in the context of the effect of insurance on the incentives of the insured to be careful.
[15] Accord, The Bremen v Zapata Off-Shore Co.[1972] USSC 129; , 407 US 1 at 14 (1971); Coast Lines Ltd v Hudig & Veder Chartering NV [1972] 2 QB 34 at 44.
[16] See text accompanying nn8–10.
[17] See generally Posner, R A, “An Economic Approach to Legal Procedure and Judicial Administration” (1973) 2 J Leg Stud 399. See also Carnival Cruise Lines Inc v Shute, [1991] USSC 56; 499 US 585 at 593–4 (1991).
[18] Henry v Henry [1996] HCA 51; (1996) 185 CLR 571; CSR Ltd v Cigna Insurance Australia Ltd (1997) 146 ALR 402 (hereinafter CSR).
[19] Oceanic Sun Line Special Shipping Co Inc v Fay [1988] HCA 32; (1988) 165 CLR 197 at 224, 230–2 per Brennan J (emphasis added) (hereinafter Oceanic). See also id at 259–61 per Gaudron J; The Eleftheria [1970] P 94 at 103; Leigh-Mardon Pty Ltd v PRC Inc [1993] FCA 324; (1993) 44 FCR 88 at 99 (hereinafter Leigh-Mardon).
[20] Accord, Easterbrook, F H, “Statutes’ Domains” (1983) 50 U Chi LR 533 at 540; Eskridge, W N, “The New Textualism” (1990) 37 UCLA LR 621 at 688–9; Kramer, L, “Rethinking Choice of Law” (1990) 20 Colum LR 277; Finley v United States, [1989] USSC 96; 490 US 545, 556 (1988). Easterbrook’s ideas resonate strongly in our work (including its title).
[21] Sunstein, C, “Interpreting Statutes in the Regulatory State” (1989) 103 Harv LR 407.
[22] Fawcett, JJ, “Evasion of Law and Mandatory Rules in Private International Law” [1990] CLJ 44 at 53.
[23] Id at 55–6. The capacity of a court to interpret the economic and social policy of a foreign law is presumably even more limited than its capacity with respect to a domestic law. See generally Fawcett, JJ, “Is American Governmental Interest Analysis the Solution to English Tort Choice of Law Problems?” (1992) 31 ICLQ 150.
[24] The High Court’s recent statements of principle in lis alibi pendens offer significant inducements to the winners of such races: Henry v Henry, above n18 at 591; cf CSR above n18; Nygh, P, “Voth in the Family Court Re-visited: The High Court pronounces forum conveniens and lis alibi pendens” (1996) 10 Aust J Family Law 163 at 169–70.
[25] Cf Mann, F A, “Statutes and the Conflict of Laws” (1972–3) 46 Brit Yrbk of Int L 117 at 140–1.
[26] Sunstein, above n21 at 428.
[27] See generally Posner, RA, “Statutory Interpretation – in the Classroom and in the Courtroom” (1983) 50 U Chi LR 800 at 817–20 (interpretation by “imaginative reconstruction”); Bistricic v Rokov [1905] ArgusLawRp 27; (1976) 11 ALR 129 at 136; Wright v Ford Motor Co Ltd [1967] 1 QB 230.
[28] Cf Mashaw, JL, Greed, Chaos, and Governance: Using Public Choice to Improve Public Law (1997) at 89.
[29] Levi, E, An Introduction to Legal Reasoning (1949) at 30–1.
[30] Vita Food Products Inc v Unus Shipping Co, above n6 (emphasis added).
[31] For an example of an Act doing these things, see Carriage of Goods by Sea Act 1991 (Cth), ss11, 16.
[32] Accord, Mills v Meeking [1990] HCA 6; (1990) 91 ALR 16 at 30–31 (Dawson J); Telstra Corp Ltd v Australasian Performing Rights Association Ltd [1997] HCA 41; (1997) 146 ALR 649 at 681–2 (Kirby J).
[33] Accord, Acts Interpretation Act 1901 (Cth) s15AB(3)(a).
[34] Davidson, D, “Belief and the Basis of Meaning” (1974) 27 Synthese 309.
[35] The same arguments apply equally to any contractual provision excluding a default rule (probably, to any contractual provision).
[36] Above n19.
[37] Id Wilson and Toohey JJ at 202–5, 208; Brennan J at 225–9; Deane J at 256; Gaudron J at 261.
[38] Fuller, L, “Consideration and Form” (1941) 41 Colum LR 799; Ayres and Gertner, Filling Gaps, above n3 at 123–4. See below text accompanying nn47–49.
[39] For a recent example, consider the High Court’s decision in CSR, above n18. That case concerned the relevance of duress and unconscionability to an agreement to abandon certain contractual claims. The fact that these unconscionable bargaining tactics arose during the performance of the contract, not at the beginning of it, is consistent with what one would expect from economic theory: Williamson, O E, Economic Institutions of Capitalism (1985) at 61–3. 35 The same arguments apply equally to any contractual provision excluding a default rule
[40] White Cliffs Opal Mines Ltd v Miller [1904] NSWStRp 18; (1904) 4 SR (NSW) 150; The Parouth [1982] 2 Lloyd’s Rep 351; Sykes E I and Pryles, M C, Australian Private International Law (3rd edn, 1991) at 611–3; Nygh, P, Conflict of Laws in Australia (6th edn, 1995) at 304.
[41] Oceanic, above n19 at 222 (Brennan J), 261 (Gaudron J); Mackender v Feldia AG [1967] 2 QB 590, 602–3. See generally Bell, A, “Jurisdiction and Arbitration Agreements in Transnational Contracts, Part II(1996) 10 J Cont L 97 at 98–101; Briggs, A, “The Formation of International Contracts” [1990] LMCLQ 192; Garner, M, “Formation of International Contracts – Finding the Right Choice of Law Rule” (1989) 63 ALJ 751; Australian Law Reform Commission, Choice of Law, Report No 58 (1992) Australian Law Reform Commission, Sydney at pars 8.12, 8.59; Green v Australian Industrial Investment Ltd [1989] FCA 482; (1989) 90 ALR 500.
[42] Bodley Head Ltd v Flegon [1972] 1 WLR 680; Saxby v Fulton [1909] UKLawRpKQB 75; [1909] 2 KB 208; South African Breweries Ltd v King [1900] UKLawRpCh 19; [1900] 1 Ch 273; Dimskal Shipping Co SA v International Transport Workers Federation [1992] 2 AC 152; Mackender above n41 at 596; The Chaparral[1972] USSC 129; , 407 US 1 (1972); Carnival Cruise Lines Inc v Shute [1991] USSC 56; 499 US 585 (1991).
[43] Lawyers often talk of third party effects in the contract of insurance where the benefit of insurance or other contracts is payable to someone other than a party (see, eg, Trident General Insurance Co Ltd v McNiece Brothers Pty Ltd (1988) 165 CLR 107; Insurance Contracts Act 1984 (Cth) ss48, 49, 51). We do not refer to third party effects of this sort, but to contracts the performance of which harms a third person. Neither do we refer to “pecuniary” externalities – those where there are private costs but no social costs. For example, permitting parties to contract out of choice of law and jurisdiction defaults may increase competition in the relevant market, and so affect prices and incomes: Posner, R A, Economic Analysis of Law (4th edn, 1992) at 7.
[44] However, collusive contracts (such as those which attempt to fix prices) are an example where courts should enforce the mandatory rule in the Trade Practices Act 1974 (Cth).
[45] Trade Practices Act 1974 (Cth) s75AD.
[46] [1969] 62 Qd R 378; affirmed on different grounds on appeal: Freehold Land Investments Ltd v Queensland Estates Pty Ltd [1970] HCA 31; (1970) 123 CLR 418. The High Court judgments do not address the issue of the proper law of the contract and are not considered below.
[47] See generally Landes, W M and Posner, R A, Economic Structure of Tort Law (1987) at 280–4.
[48] Ayres and Gertner, above n3 at 119–21.
[49] Consumer Credit Code s15; see also Australian Law Reform Commission, Insurance Contracts, Report No 20 (1982) Australian Government Publishing Service, Canberra at 44–51 (describing this logic in relation to “standard cover”).
[50] Trade Practices Act 1974 (Cth) s67.
[51] Opeskin, above n9 at 238–9.
[52] See, eg, Akai Pty Ltd v The People’s Insurance Co Ltd (1995) 8 ANZ Insurance Cases 61–254 at 75853 (Sheller JA); BHP Petroleum Pty Ltd v Oil Basins Ltd [1985] VicRp 71; [1985] VR 725; British Controlled Oilfields Ltd v Stagg [1921] WN 319.
[53] See, eg, Coast Lines Ltd, above n15 at 44; Stanley Kerr Holdings Pty Ltd v Gibor Textile Enterprises Ltd [1978] 2 NSWLR 372.
[54] Accord; Coast Lines, above n15 at 44 (“In the maritime law of this country ... it is an accepted principle that a contract is, if possible, to be construed so as to make it valid rather than invalid. ... [I]t cannot be assumed that the Dutch charterers put their signatures to a contract which they did not intend to honour.”); In re Missouri Steamship Co [1889] UKLawRpCh 82; (1889) 42 Ch D 321 at 337, 341.
[55] Wanganui-Rangitikei Electric Power Board v Australian Mutual Provident Society [1934] HCA 3; (1934) 50 CLR 581 at 600–1 per Dixon J. See Dutson, S, “The Territorial Application of Statutes” [1996] MonashULawRw 3; (1996) 22 Mon LR 69 at 81–86.
[56] Kelly, D S, Localising Rules in the Conflict of Laws (1974) at 5–7.
[57] Above n46. The appeal to the High Court was dismissed (above although on grounds which did not depend on private international law issues.
[58] [1996] HCA 39; (1996) 71 ALJR 156 (hereinafter Akai).
[59] [1969] 62 Qd R 378 at 385.
[60] Sykes and Pryles, above n40 at 598–9; Fawcett, above n22 at 59–60; Nygh, above n40 at 296, Thomson, A, “A Different Approach to Choice of Law in Contract” (1980) 43 Mod LR 650 at 659.
[61] Here we find some pseudo-third party effects – the agreement increased competition, which has adverse affects on other agents. This is a classic example of a pecuniary (as opposed to a technological) externality, which has no social costs, and should be ignored for policy purposes; see n44 above.
[62] The proper role of statutory interpretation, given interest group politics, is an issue of dispute. Some suggest that courts should interpret interest group deals strictly as if they were contracts; see Easterbrook, above n20. Others suggest that deals be interpreted as if they were in the public interest, so to compel the “real” deals to be made explicit. Explicit deals lower the cost of information in the political process, which in turn increases the ability of others to scrutinise and oppose the deal; Macey, J R, “Promoting Public-Regarding Legislation Through Statutory Interpretation: An Interest Group Model” (1986) 86 Colum LR 223. Others suggest that interest group politics does not compel any particular interpretive approach; Mashaw, above n28 at 81– 105. We favour the Easterbrook view (although the Macey view applies in much the same way), given its proximity to our own theory, at least in the context of the facts of this case.
[63] This is, in effect, an implied limitation; see part 3.C.(i).
[64] For a discussion of s54, see text accompanying n14.
[65] Supreme Court of New South Wales, unreported, 7 December 1993 (first instance); (1995) 8 ANZ Insurance Cases 61–254 (appeal).
[66] Above n58 at 164.
[67] Id at 170.
[68] Id at 171–172, relying upon Compagnie des Messageries Maritime v Wilson [1954] HCA 62; (1954) 94 CLR 577; Agro Co of Canada Ltd v The “Regal Scout” (1983) 148 DLR (3d) 412; and The Hollandia [1983] 1 AC 565. The analysis in The Hollandia is practically identical to that in Akai.
[69] Above n58 at 172. Emphasis added. Contrast the approach taken by the majority of the High Court in Oceanic, above n19, where the potential application of the substantive remedial provisions of the Contracts Review Act 1980 (NSW) was in issue, although the exclusive jurisdiction clause was held not to be incorporated in the contract. Contrast also Leigh-Mardon, above n19 at 108, where Beazley J held that the potential application of s52 of the Trade Practices Act did not displace the prima facie rule that jurisdiction clauses should be enforced. The one case cited, in support of the majority’s view Nelson v Nelson (1995) 184 CLR 538, was fundamentally different to the facts in Akai. It involved an act which was illegal – seeking a subsidy for a loan to which the borrower was not entitled. In that sense, the illegality involved genuine third party effects, since it involved misuse of government welfare. The case in Akai involved no third party effects.
[70] Above n58 at 159.
[71] Id at 160.
[72] Id at 159–60.
[73] See especially Australian Law Reform Commission, above n49 at 8, 280, where the language of the report describes a clear exclusion of a choice of law default, but says nothing at all to contradict the existence of a forum default. It is quite likely that parliament intended that Australian insurance companies’ offshore business should not be constrained by the destruction of the forum default, even though contracts written in the course of that business might possibly be held to most closely connect with Australia.
[74] See eg, id at xxi (“Freedom of contract and promotion of competition, so far as compatible with principles of equity and fairness to the insuring public, are basic goals.”)
[75] Id at 12–3, 47, 132, 231, ch6.
[76] Above n58 at 172. 77 [1957] 1 QB 267 at 288. 76 Above n58 at 172. 77 [1957] 1 QB 267 at 288.


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