On Thursday 17 December the EU introduced a revision of the rules by which all courts within the EU (apart from Denmark) must decide which law applies to contractual obligations. The "Rome 1" Regulation replaces the Rome Convention of 1980, designed to harmonize conflicts of law between EU States. It must always be applied even if one or more of the parties to a dispute are based outside the EU and even where the law determined under Rome 1 is not the law of an EU State. Rome 1 is relevant to all businesses which have any trade outside England and Wales.
Rome I applies to contractual obligations in civil or commercial matters entered into on or after 17.12.09. The old rules apply to contracts made before that date. Some contracts are excluded. Examples are: arbitration and jurisdiction agreements, trusts and some company law obligations (personal liability of officers and members).
Rome I, Rome II and Brussels Regulation on Jurisdiction
Rome I follows 11 months after the introduction in January 2009 of the Rome II Regulation, Rome II determines which law applies to non-contractual obligations (torts and similar claims, including claims based on pre-contractual negotiations).
Rome I does not affect EU rules on jurisdiction. Questions about which court determines a dispute are still governed by the Brussels Regulation on Jurisdiction and the Enforcement of Judgments (44/2001).
Parties may agree law, but there are some restrictions on freedom of choice
It remains best practice to try to agree which law is to govern a contract. The law chosen by the parties to apply to a contract (or part of it) will be respected. There is a limited range of situations where the chosen law will be overridden. These rules apply to all contracts, but in practice these situations are unlikely to arise often. They include:
• Where all the other elements of the contract are located in a country other than that of the chosen law, and that other country has laws which cannot be contracted out of, then those overriding laws must be applied
• Where a non EU law is chosen and all other elements are located in one or more EU States then mandatory EU law must apply
• There is a separate concept of "overriding mandatory provisions" which are crucial for safeguarding a country's public interest. Mandatory provisions of the country where the obligations are to be performed must be applied if they render contractual performance unlawful
• If the public policy of the forum where the claim is heard is incompatible with the chosen law, the chosen law can be overriden.
There are special rules which can limit the ability of the parties to choose the governing law of the contract in the following:
• contracts of carriage
• consumer contracts (usually the law of the country where the consumer has his habitual residence, but you cannot deprive a consumer of protections which cannot be contracted out of)
• insurance contracts (which do not cover reinsurance)
• employment contracts
If there is no agreement on the choice of law, there are rules to determine which law applies. The first step is to see if the contract falls within a list set out in the Regulation which prescribes which law applies to that type of contract. Examples from the list are: sale of goods and services, real estate, franchise agreements, distribution contracts, and auctions.
If the contract is not one of the type in the list the law of the habitual residence of the party carrying out the "characteristic" performance of the contract will apply. However, this rule can itself be overridden unless the contract is manifestly more closely connected to another country.
Rome I applies to England and Wales, Scotland, Northern Ireland and Gibraltar. It also applies between each of those jurisdictions.Comment
Much of Rome I continues the provisions of the Rome Convention 1980 (applied to the UK by the Contracts Applicable Law Act 1990). However, important new provisions are:
1 The restriction on applying non EU law where there are mandatory EU rules and all the other elements are located in EU States; the concept of "overriding mandatory provisions" and the application of mandatory provisions of the country where contractual obligations are to be performed may catch the unwary. They should be borne in mind by those drafting contracts. Particular overriding rules to watch out for may include the Unfair Terms in Consumer Contracts Regulations and the Commercial Agents Regulations.
2 The new rules on ascertaining the applicable law in the absence of choice are also rather more complex than the previous rules: these can be avoided by ensuring that all contracts have an express choice of law (but of course taking into account any mandatory provisions).