The choice of governing law is often an issue for contracting parties who are either domiciled in different jurisdictions or where the performance of the contract is multi-jurisdictional.
Rome I Regulation
The Rome I Regulation (Rome I) provides rules to determine, within the European Community (EC), which law applies to contracts that have connections with more than one country, such as cross-border business or consumer contracts. The intention is to provide clarity when the parties have not chosen the applicable law to govern the contract.
In January 2003 the European Commission (the Commission) issued a Green Paper (COM (2002) 654 final) on the conversion of the Rome Convention 1980 (the Rome Convention) on the law applicable to contractual obligations into a community instrument and its modernisation.
Following this, in December 2005, the Commission published its proposal for the replacement of the Rome Convention. The UK took part in the consultation process and in January 2009, after making several modifications and reversions that were of concern to UK stakeholders, the UK announced its intention to opt in. As a regulation, Rome I will be directly applicable and will need no enabling legislation from member states.
Rome I shall apply to contracts concluded after 17 December 2009 (Article 28, Rome I).
For contracts concluded prior to this, the choice of law governing contractual obligations will continue, in the majority of cases, to be determined by the Rome Convention that was implemented in the UK by the Contracts (Applicable Law) Act (CALA) 1990. CALA 1990 applies to contracts that are entered into after 1 April 1991.
Replacement of the Rome Convention
Article 24(1) states that Rome I will replace the Rome Convention in member states with the exception of those that fall within the territorial scope of the Rome Convention and to which Rome I does not apply by virtue of Article 299 of the EC Treaty.
Scope of Rome I
Rome I shall apply to contractual obligations in civil and commercial matters, in situations where there is a conflict of law. It shall not apply to revenue, customs or administrative matters (Article 1(1), Rome I). There are several further exclusions under Article 1(2) that are largely the same exceptions as those set out in the Rome Convention, with the inclusion that Rome I will not apply to ‘obligations arising out of dealings prior to the conclusion of a contract’ (Article 1(2)(i), Rome I).
Freedom to choose the governing law
Integral to both the Rome Convention and Rome I is the freedom of choice that the parties have when deciding the applicable law governing the contract. Article 3(1) of Rome I is substantively the same as Article 3(1) of the Rome Convention. The contract will be governed by the law chosen by the parties, where the choice has been made expressly or is clearly demonstrated by the terms of the contract or the circumstances of the case. The choice of law can be applicable to the whole or part of the contract.
Applicable law in the absence of choice
Article 4 of the Rome Convention sets out as a general rule that, where there is an absence of choice by the parties, the law applicable to the contract shall be governed by the law of the country with which it is ‘most closely connected’ (Article 4(1)). Article 4(2) elaborates that the contract ‘is most closely connected with the country where the party who is to effect the performance’ lives. However, there is an exception in Article 4(5) that states that the presumptions of Article 4(1)-(4):
‘shall be disregarded if it appears from the circumstances as a whole that the contract is more closely connected with another country’.
Rome I takes a different approach. Eight types of contracts are identified at Article 4(1)(a)-(h), including, for example, contracts for the sale of goods or services, consumer contracts, insurance contracts and employment contracts. For each type of contract, a test is specified to establish the applicable law.
For instance, typically, a contract for the sale of goods shall be governed by the law of the country where the seller has their ‘habitual residence’. A similar test is applied for distribution agreements, franchise agreements and contracts for the provisions of services. The governing law for these latter types is the law of the country in which the distributor, franchisee or service provider has their habitual residence.
Contracts outside of Article 4(1)(a)-(h) are also to be governed ‘by the law of the country where the party required to effect the characteristic performance of the contract has his habitual residence’ (Article 4(2), Rome I).
Article 19(1) of Rome I defines habitual residence for companies and other bodies, incorporated or not, as ‘the place of central administration’, while the habitual residence of a natural person acting in the course of their business activity is defined as being their ‘principal point of business’. For contracts concluded in the course of operations of a branch, agency or any other establishment, the habitual residence will be the place of the branch, agency or other establishment (Article 19(2), Rome I). In determining the habitual residence, ‘the relevant point in time shall be the time of the conclusion of the contract’ (Article 19(3), Rome I).
Rome I (like the Rome Convention) also provides that the ‘habitual residence’ test specified under Article 4(1) and (2) will not apply where it is clear from the circumstances that a contract is ‘manifestly more closely connected’ with a country. In these circumstances the ‘law of that other country shall apply’ (Article 4(1)(3)).
As a final catch-all provision, if it is not possible to determine the applicable law using Article 4(1) or (2) the ‘contract shall be governed by the law of the country with which it is most closely connected’ (Article 4(1)(4), Rome I).
Contracts of carriage, consumer contracts, insurance contracts and individual employment contracts are all dealt with specifically in Articles 5-8 respectively. These Articles provide a more detailed analysis of the law applicable to these contracts where there has been no express choice of law.
Some other mandatory provisions
Rome I has many exceptions to the application of the choice of law of the parties where there are mandatory rules of the forum. Article 9 of Rome I maintains that provisions that are regarded as ‘crucial by a country for safeguarding its public interests, such as its political, social or economic organisation’ shall not be restricted by anything in the regulation. Effect may be given to such provisions where the ‘overriding mandatory provisions render the performance of the contract unlawful’ (Article 9(3)).
Similarly, Article 21 of Rome I states that application of the law of a country specified by the rules in Rome I may be refused where such application is ‘manifestly incompatible with the public policy (ordre public) of the forum’.
Article 16 of Rome I elaborates on the issue of multiple liability. Where a creditor has a claim against several debtors who are liable for the same claim, and one of the debtors satisfies the claim in whole or part, the law that governs the debtor’s obligation to the creditor will also govern the debtor’s right to recourse against his fellow debtors. Similarly, the other debtors can raise any defence they had against the claim of the creditor to the extent allowed by the law.
Article 17 of Rome I introduces a provision regarding the right to set-off. Where it is not agreed by the parties, ‘set-off shall be agreed by the law applicable to the claim against which the right to set-off is asserted’.
Article 25(1), which governs the relationship of Rome I with existing international conventions, remains largely the same, with Rome I not prejudicing the application of international conventions. However, Rome I will take precedence over any convention concluded exclusively between two or more member states in so far as such matters are governed by Rome I (Article 25(2)).
Rome II regulation
Contractual agreement for the law applicable to non-contractual obligations
A significant change to English law is the introduction, by virtue of Article 14 of Regulation (EC) No 864/2007 (known as Rome II), of the freedom of parties to agree contractually on the law that will govern their non-contractual obligations.
The choice of law should be expressed or demonstrated with ‘reasonable certainty’ and should not prejudice the rights of third parties (Article 14(1), Rome II). Parties may submit their non-contractual obligations to the law of their choice by agreement, either before or after the event giving rise to damage occurred.
Agreements entered into after the event giving rise to the damage occurred are acceptable (Article 14(1)(a), Rome II). However, those agreed before the event giving rise to damage must be agreed by parties pursuing a commercial activity and must have been freely negotiated (Article 14(1)(b)).
Exceptions to this rule can be found in Article 14(2) of Rome II, where all elements relevant at the time of the event giving rise to damage are located in another country, and in Article 14(3), where all elements relevant at the time of the event giving rise to damage are located in one or more member states. The parties’ choice of applying a non-member state law shall not prejudice the application of provisions of EC law.
There are further mandatory and public policy reasons that may also be taken into account.
These agreements are expected to more become common as parties seek to define the nature and scope of their relationship with other parties with certainty often being favoured over the unknown.
Conclusion
Rome I is very similar to the Rome Convention. It maintains the freedom of the parties to choose the law that will be applicable to the contract. Where there is an absence of choice, or failure to reach agreement, Rome I is intended to provide clear rules to determine the law that should
be applied to the contract, while continuing to provide the courts with flexibility and discretion where it is apparent that the contract should be governed by the law of a different country. The legislation is also intended to protect the interests of consumers and employees. With some exceptions, applicable law will generally be the law of the consumer’s habitual residence.
By James Maton, partner, and Rhys Davies, trainee solicitor, Edwards Angell Palmer & Dodge UK LLP.
E-mail: This e-mail address is being protected from spambots. You need JavaScript enabled to view it ; This e-mail address is being protected from spambots. You need JavaScript enabled to view it .