The English High Court today handed down judgment as to which law governs an Agreement between Merck KGaA, Darmstadt, Germany ("KGaA") and Merck Sharp & Dohme Corp of Rahway, New Jersey ("MSD") dated 1 January 1970. The Agreement regulates the worldwide use of the term "MERCK" by each party and their subsidiaries and affiliates. The English Court decided, as a preliminary issue in the context of a trade mark dispute, that the law of the contract was German law.
KGaA and MSD's businesses have a common heritage dating back to 1889 when the German business founded a US subsidiary. The companies became separate independent businesses following the seizure of the shares in the US business by the US Alien Property Custodian during the First World War. Today they are both substantial international groups in the pharamceutical and chemical sectors.
In 1955 the businesses entered an agreement to regulate the parties’ use of their trade marks throughout the world. In 1 January 1970 an agreement was entered into to similiar effect which made formal changes to the earlier 1955 Agreement. The Agreement did not contain a clause stating the law of the contract. The English Court was asked to decide the law applicable to the contract as a preliminary issue. MSD argued that the contract was governed by the law of New Jersey. KGaA argued that German law applied to the contract.
The parties agreed that which ever law applied to the 1955 Agreement would also be the applicable law of the 1970 Agreement. Since the 1955 Agreement pre-dated the Contracts (Applicable Law) Act 1990 and the Rome I Regulation, the question fell to be determined under the pre-1990 English conflict of law rules. In summary these rules stated
The term “proper law of a contract” means the system of law by which the parties intended the contract to be governed, or, where their intention is neither expressed nor to be inferred from the circumstances, the system of law with which the transaction has its closest and most real connection.
As there was no expressed intention the case largely revolved around which system of law or the country has the closest and most real connection with the transaction.
US State or Federal law
Clause 12 of the 1955 Agreement referred to a requirement for the US business to submit the Agreement to the US Department of Justice for review and seek an appropriate Court order that the US business was authorized to execute and carry out this agreement. The Court decided that the parties would have understood that the "appropriate Court order" meant an order from the US District Court of New Jersey. There was an argument that this was not a factor in favour of the law of New Jersey as it was a Federal not a State Court and in giving any "appropriate Court order" would have been applying US Federal law not the law of the state of New Jersey.
After hearing expert evidence from both sides, the Judge held that for the purposes of conflict of laws, the “law of New Jersey” comprised the totality of the laws applicable in New Jersey, whether they were derived from State legislation (or common law) or Federal legislation; and that the District Court sitting in New Jersey was applying the law of New Jersey in this sense even though it was exercising Federal question jurisdiction.
Requirement to submit to US department of Justice
The Judge then considered whether the requirement in Clause 12 was determinative of the issue of 'closest and most real connection'. He paid particular attention to the fact that the rule referred to the closest and most real connection to “the transaction” not the closest connection to the process of negotiating and agreeing a contract and getting to the stage of a binding and effective agreement. It referred rather to what is to be done under the agreement. Substance was more important than matters of form.
The fact that the 1955 Agreement had to be approved by the Department of Justice and the District Court before it became effective was not of such significance as to be in effect determinative. Rather it was part of the process by which the parties got to the stage of having a binding agreement, not the substance of the transaction, or what was to be done under the contract.
He referred to Apple Corps Ltd v Apple Computer Inc  where two parties with similar names had entered into a worldwide agreement settling litigation and regulating the use of their respective trade marks across the world but without specifying a governing law. It illustrated the point that the fact that a contract does not come into effect until certain formalities have taken place in a particular country was not necessarily a strong connecting factor for the purpose of determining the country with which the contract is most closely connected.
Similarly, in this case, the fact that it was essential for the US company to obtain the approval of the Department of Justice and the District Court was a connecting factor with the law of New Jersey but not a strong one.
The fact that the Agreement was written in English was not a factor in favour of New Jersey law. The judge inferred that it was written in English because the Germans spoke excellent English and all negotiations were carried on in that language.
Silence as to governing law
The omission in the 1955 Agreement of a provision dealing with proper law and jurisdiction did not support an inference that this was because of a shared assumption, nowhere articulated, that it was unnecessary to say anything more because the Agreement was so evidently bound up with New Jersey law it was going to be a New Jersey contract. The evidence showed no sign of the parties having given any thought to the point at all in 1955.
Place of contracting
The 1955 Agreement was negotiated and signed by the parties in Darmstadt, Germany. The place of contracting is only one potential factor among all the others, and the weight it carries must vary from case to case. In some cases it may be of some significance, whereas in others it may be essentially fortuitous, especially if the contract is concluded by parties in different countries (as in the Apple case). However its significance in this case was tied to the main driver of the Agreement.
Substance of the transaction
The Judge decided that the main driver of the 1955 Agreement was the need for the US company to obtain permission to use the name MERCK outside the US and Canada, and the main effect of the Agreement was to grant them such permission. The US company had since the war expanded its overseas operations and had made a concerted effort to obtain the right to use ‘MERCK’ as a trade mark throughout the world, but had run up against the fact that the German business had existing trade mark registrations in very many countries.
As such the subject-matter of the 1955 Agreement was a grant by the German owner of worldwide rights, and this gave the agreement a closer connection with Germany; it also explained why the Americans were travelling to Germany to ask for the permission rather than the other way round. The substantive provisions of the Agreements also supported this analysis.
Although the requirement to obtain a Court order from the District Court in New Jersey was a connection with the law of New Jersey, the Judge decided that the transaction as a whole had a connection with German law. Assessing the significance of the substance of the transaction – what the transaction does – rather than matters which, although important, were essentially subsidiary and ancillary to the transaction, the judge found the requirement to obtain the approval of the District Court was more relevant to the ability of the US company to enter into the 1955 Agreement than to the substance of it.
Therefore the 1955 Agreement (and consequently the 1970 Agreement) was governed by German law rather than the law of New Jersey.
Bird & Bird LLP acted for Merck KGaA, Darmstadt, Germany, the successful party on the preliminary issue. The Bird & Bird LLP team comprised partner, Peter Brownlow; senior associate, Nick Aries; and associates Ning-Ning Li and Ahalya Nambiar. Bird & Bird LLP instructed the barrister team of Henry Carr QC and Benet Brandreth, both of 11 South Square, Grays Inn.
Merck Sharp & Dohme, Rahway New Jersey, were represented by Linklaters LLP, instructing Geoffrey Hobbs QC and Guy Hollingworth of 1 Essex Court
This report was prepared by Audrey Horton.
The full judgment is available here
 Dicey & Morris, The Conflict of Laws. 1987 edition