Merck KGaA v Merck Sharp & Dohme Corp & Ors

Under the common-law rules governing contracts made before 1 April 1991, the proper law is the law expressly chosen, the law inferred from the circumstances, or, absent such choice, the system of law with which the transaction has its closest and most real connection. The court must focus on the substance of the transaction, namely what is to be done under the contract, rather than ancillary formalities required before the contract becomes effective. A requirement for approval by a court in a particular jurisdiction is therefore a connecting factor, but is not necessarily determinative. A worldwide trade-mark agreement negotiated and signed in Germany, whose substantive effect was permission by a German rights-holder for an American business to use specified marks, was more closely connected with German law than with New Jersey law.

The claimant, a German company owning trade marks for MERCK, brought trade-mark proceedings against companies associated with the United States business. It relied on a 1970 agreement and a 1975 letter regulating the parties’ use of their respective marks. The parties agreed that those instruments had the same governing law as a 1955 agreement.

The preliminary issue was whether the 1955 agreement was governed by German law or New Jersey law. The agreement had been negotiated and signed in Darmstadt, but could not take effect until approval by the United States Department of Justice and an order of the United States District Court for the District of New Jersey.

1. The court applied the common-law proper-law test because the agreements pre-dated the Contracts (Applicable Law) Act 1990 and the Rome I Regulation. The relevant inquiry was the system of law with which the transaction had its closest and most real connection. The analysis was flexible, and the court was required to consider the circumstances as a whole.

2. The 1945 decree and the requirement for approval by the District Court created a connection with New Jersey law. The District Court had exercised federal-question jurisdiction under the Sherman Act, and the approval process was governed by federal law. Nevertheless, the court concluded that the approval requirement related principally to the parties’ ability to make an effective agreement, rather than to the substance of the transaction.

3. Following Coast Lines Ltd v Hudig & Veder Chartering NV [1972] 2 QB 34, the court treated what was to be done under the contract as more important than matters of form. The suspensory condition requiring a United States court order did not mean that the agreement was made in New Jersey or that the approval requirement was determinative.

4. The substantive provisions recognised E. Merck’s senior worldwide trade-mark rights and permitted Merck & Co to use specified names and marks notwithstanding those rights. The agreement was therefore, in substance, a grant of permission by a German rights-holder to an American business. Its negotiation, execution and commercial substance connected it more closely with Germany and German law.

5. The court accordingly declared that the 1955 agreement was governed by German law. Since it was common ground that the 1970 agreement and 1975 letter had the same governing law, the preliminary issue was answered by declaring that those instruments were governed by German law.