Ultra vires or ineffective: a no-nonsense approach to contractual effectiveness

A short technical point of interest especially to those dealing with foreign state or semi-state entities arises out of a decision of Andrew Baker J a week ago in Exportadora De Sal SA De CV v Corretaje Maritimo Sud-Americano Inc [2018] EWHC 224 (Comm).

The power of a Ruritanian state corporate entity  to conclude a contract is governed by the law of the place of incorporation, i.e. Ruritania. The validity of the contract, and whether anything has happened which has the effect of preventing the parties being liable, or discharging an existing duty, is controlled by the governing law of the contract: if there’s an English law and jurisdiction clause, this means English law, to the exclusion of Ruritanian. But where is the boundary between the two?

A Mexican 51/49 state/private entity contracted for the building of a self-unloading salt barge (don’t say you don’t learn about interesting gadgets on Maricom) for about $27 million. The contract specified English law and London arbitration. The Mexican entity broke its contract, and following arbitration went down for about $7 million.  However the builders, when they tried to enforce the award, encountered a plea that the Mexican entity concerned had had no power under Mexican law to contract for the barge except through a specified tender process; that this hadn’t happened, that there had indeed been a Mexican administrative decision to cancel the contract on that basis, and that this nullified not only the contract but any submission to the arbitral process contained within it.

Andrew Baker J gave the buyers short shrift for a number of reasons we need not go into here. As regards the no-power argument, however, he made the important point that it was a non-starter. Although possibly dressed up as an ultra vires point, it was really nothing of the sort: viewed as a matter of substance it was a question of substantive validity. Substantive validity being governed by English law, the fact that under Mexican law the contract had been declared entirely ineffective was simply beside the point. As his Lordship observed, this decision was merely a mirror-image of the earlier Haugesund Kommune et al. v Depfa ACS Bank [2012] QB 549, where an ostensibly validity-orirnted rule had been held on a proper construction actually to go to the vires of a contracting party. But  the Exportadora de Sal case is none the less a useful weapon in the armoury of an English international commercial lawyer faced with an impressive-sounding plea that an apparently English contract was ultra vires under the laws of Backofbeyondia.



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