ISS MACHINERY SERVICES LTD. v. AEOLIAN SHIPPING S.A. (THE “AEOLIAN”) [2001] EWCA Civ 1162

A choice of English law for a defined contractual claim does not, without more, change the law governing a separate contract relied on as a cross-claim or set-off. Under Articles 3(1) and 3(2) of the Rome Convention, a later choice must be expressed or demonstrated with reasonable certainty by the contract or circumstances, showing a real common intention rather than a hypothetical one. English jurisdiction for the claim determines whether a cross-claim can operate as a defence under English private international law, but not the cross-claim’s substantive validity. Equitable set-off may be available where the cross-claim is inseparably connected with the claim and it would be unfair to ignore it.

Aeolian appealed from an order of Morison J granting ISS summary judgment for the price of replacement turbo-charger spares and dismissing Aeolian’s counterclaim. The counterclaim alleged breach of an implied quality and durability term in an earlier turbo-charger contract. That contract was governed by Japanese law. A P&I Club undertaking secured payment of the defined spares claim and provided for English law and exclusive English jurisdiction. The appeal concerned whether the undertaking also changed the governing law of the earlier contract and whether equitable set-off was available.

1. Appeal dismissed. The Court of Appeal unanimously dismissed the appeal with costs. Permission to appeal to the House of Lords was refused.
2. The undertaking submitted the defined claim for the price of the spares to English law. Applying the principle stated in Meridien BIAO v Bank of New York [1997] 1 Lloyd's Law Rep 437, the question whether the defendants had a defence, including by set-off, was therefore governed by English law, including its private international law rules. The material question was the law governing the agreement from which the cross-claim arose.
3. Per Potter LJ, the turbo-charger contract was, on its face, governed by Japanese law under Article 4 of the Rome Convention. Articles 3(1) and 3(2) permitted a subsequent choice of another law, but only where that choice was expressed or demonstrated with reasonable certainty by the contract or the circumstances. The court could identify a real choice from the circumstances, but could not infer a hypothetical choice which the parties had never clearly intended to make.
4. The undertaking referred only to the spares claim and made no reference to the turbo-charger contract or any cross-claim. Its English jurisdiction clause was confined to the defined claim. The commercial context of a short-form Club undertaking, given to prevent arrest, focused on securing payment of that claim. It did not demonstrate a common intention to change the substantive law governing the separate turbo-charger contract. Mance LJ agreed, emphasising the distinction between English law governing whether a cross-claim constituted a defence and English law governing the substance and validity of the cross-claim.
5. Potter LJ added, obiter, that the correspondence did not establish an unqualified agreement to pay without set-off. If a remedy under the turbo-charger contract had existed, an equitable set-off would arguably have been available because the cross-claim flowed from and was inseparably connected with the dealings giving rise to the claim, and it would have been unfair to ignore it. This alternative view was unnecessary to the result.

• Court of Appeal (Civil Division): [2001] EWCA Civ 1162. The appeal was dismissed with costs. Permission to appeal to the House of Lords was refused.
• High Court, Queen’s Bench Division: Morison J, 4 December 2000. Summary judgment was granted to ISS for the spares claim and Aeolian’s counterclaim was summarily dismissed. The judge held that the turbo-charger contract was governed by Japanese law, that the pleaded implied term was unavailable and time-barred, and that the undertaking did not alter the governing law.