The basic principle of Rome II is that the applicable law for the resolution of non-contractual disputes, for example in tortious claims, will be the law of the country in which the damage occurs, wherever that might be.

Non-contractual obligations do arise in banking transactions:

  • Arrangers owe a duty of care to syndicate banks – in Sumitomo Bank v Banque Bruxelles Lambert S.A. [1997], the arranger was held to be under a duty to the banks to take reasonable care in disclosing information to an insurer of a mortgage indemnity guarantee policy. This duty arose before the conclusion of the facility and the appointment of the arranger as facility agent.
  • A bank was held liable for negligent misrepresentation to a security provider – in National Westminster Bank v Angeli Luki Kotonou [2006], the bank was found to have made a negligent misrepresentation by not pointing out that changes in circumstances meant that a representation made earlier in the negotiations was no longer true. As a result, the bank could not rely on the guarantee entered into resulting from those negotiations.
  • It was held in National Westminster Bank v Rabobank Nederland [2007] that a very limited duty of disclosure is owed between co-banks in a workout.

Coupled with the frequency of cross-border elements in finance transactions, now is therefore the time to take advantage of the provisions of Rome II, which allows parties (subject as always to some limitations) to agree in advance the law they want applied to non-contractual obligations.

What is Rome II?

Rome II will apply to non-contractual obligations in civil and commercial matters. Its aim is to achieve greater certainty in the courts of the European Union about which country's law will apply to a non-contractual dispute. It does not change the actual law of member states.

When will it come into force?

Rome II will apply in all EU member states (except Denmark) from 11 January 2009. It will only apply to events giving rise to damage which occur after it comes into force.

Where will it apply?

Rome II will apply in English courts whether the parties are domiciled in the EU or not. Any law specified by Rome II shall be applied, whether or not it is the law of a member state.

What will Rome II cover?

As well as covering the law applicable to a non-contractual obligation arising out of a tort, there are special rules for product liability, unfair competition, acts restraining free competition, environmental damage, intellectual property rights and industrial action as well as unjust enrichment, agency without authority and pre-contractual situations.

What will be the scope of Rome II?

The applicable law under Rome II will govern, amongst other things, the basis and extent of liability; exemption from liability, limitation of liability and any division of liability; as well as the existence, nature and assessment of damage or the remedy claimed.

What will be excluded?

Revenue, customs and administrative matters or the liability of the State for acts and omissions in the exercise of State authority will be excluded. Non-contractual obligations arising out of family relationships; matrimonial property regimes; wills and succession; bills of exchange; cheques and promissory notes and other negotiable instruments; the law of companies; trusts; nuclear damage; and defamation will also be excluded. 

Which law will apply to a non-contractual obligation arising out of a tort?

The current position is that virtually all member states apply the principle that the applicable law is that of the place where the harmful act was committed.

The basic change which Rome II will introduce is that the applicable law for the resolution of non-contractual disputes should be determined on the basis of where the damage occurs, regardless of the country in which the event giving rise to the damage occurred, and irrespective of the country where the indirect consequences of that event occur.

There are, however, some exceptions:

  • Where the claimant and defendant have their habitual residence in the same country when the damage occurs, the law of that country will apply.
  • Where it is clear from all the circumstances of the case that the tort is manifestly more closely connected with the law of another country other than indicated above, the law of that other country will apply. Such a connection might be based on a pre-existing relationship between the parties, for example, and as will often be the case, a contract that is closely connected with the tort.

Freedom of choice

Parties may avoid the potentially adverse effects of Rome II by agreeing to submit non-contractual obligations to the law of their choice. This can be done: 

  • Where all the parties are pursuing a commercial activity, by an agreement which has been freely negotiated before the event giving rise to the damage occurred; or
  • By an agreement entered into after the event giving rise to the damage occurred. The choice will need to be expressed or demonstrated with reasonable certainty by the circumstances of the case.

Before the event

Commercial parties (not consumers) may enter into such agreements before the relevant event occurs provided they are freely negotiated. This is likely to see the immediate introduction of governing law clauses in relation to non-contractual obligations into contracts.

Questions about whether a particular agreement is "freely negotiated" and what constitutes a "commercial activity" may provide fertile ground for debate. For instance, are the terms of a bond “freely negotiated” vis-à-vis the bondholders?

After the event

Parties to a non-contractual dispute can agree which law will govern the dispute after the event giving rise to the damage has occurred. Such an agreement is only likely to be entered into if the law which would ordinarily apply is disadvantageous to the parties.

Qualifications to choice of law agreements

Choice of law agreements are subject to qualifications:

  • They will not apply to non-contractual obligations arising out of unfair competition or acts restricting free competition, or the infringement of intellectual property rights.
  • Any mandatory laws of a country which is solely connected to the dispute at the time when the event giving rise to the damage occurs must be adhered to.
  • Any mandatory EC laws of a member state whose tribunal is determining the dispute must be adhered to if one or more member states are solely connected to the dispute at the time when the event giving rise to the damage occurs.

Overriding mandatory provisions/public policy of the forum

Nothing in Rome II restricts the operation of mandatory laws of the place hearing the dispute irrespective of the law that applies to the non-contractual obligation.

However, the application of a provision of the law of any country specified by Rome II may be refused only if such application is manifestly incompatible with the public policy of the forum.

The assessment of damages

English law regards the quantification of damages as a procedural matter for the law of the forum. At first sight, this rule appears to be untouched by Rome II which recognises that it will not apply to questions of evidence and procedure.

However, contrary to the above, Rome II also makes clear that the applicable law will govern the existence, nature and assessment of damage or the remedy claimed. If interpreted to apply to the quantification of damages (there is some uncertainty about what approach the English courts will take) this is a serious difference requiring a significant change of approach to issues concerning damages.

Such a change will give rise to interesting questions likely to be argued before the English courts, particularly where a foreign law requires a minimum level of award above the level available under English law. If English courts are obliged to hear evidence of the level of awards made by foreign courts this is likely to be a time consuming, costly and potentially controversial exercise, particularly where awards by foreign juries are involved.

The best you can do therefore is to provide as much certainty as possible by drafting appropriate choice of law clauses now. Find out more about the action you can take to prepare.

  • Commercial parties should consider using a more sophisticated choice of law agreements to reduce the potentially adverse impacts of Rome II. For example, a governing law clause may say: "This Agreement, and any issues or disputes arising out of or in connection with it (whether such disputes are contractual or non-contractual in nature, such as claims in tort, for breach of statute or regulation, or otherwise) is governed by, and shall be construed in accordance with, English law".
  • Businesses engaged in cross-border transactions should review their positions well in advance of January 2009.
  • Any clause governing non-contractual obligations should be considered in conjunction with the choice of jurisdiction selected. It is possible for the courts of England & Wales to have jurisdiction to hear a dispute but apply the laws of France if that is the law selected by the parties. Such instances are likely to add to the costs of any legal proceedings as well as uncertainty as to the eventual outcome. Aligning the choice of law and jurisdiction clauses is usually preferable.
  • Carefully consider what law you want applied before agreeing the governing law clause covering non-contractual obligations. This step is now even more important as it appears that under Rome II the amount of damages will be determined by the applicable law.

However, please note that certain finance transactions are not affected by Rome II. These include:

  • Non-contractual obligations arising under bills of exchange, cheques and promissory notes and other negotiable instruments (to the extent the obligations under such other instruments arise out of their negotiable character). Eurobonds are a good example;
  • Non-contractual disputes arising out of the law relating to companies or other bodies corporate or unincorporated, such as winding up, personal liability of officers, and personal liability for auditors;
  • Non-contractual disputes arising out of the relations between the trustees, beneficiaries and settlor of trusts established voluntarily, such as those between a bondholder and the trustee of the bond issue, or those between a security trustee and the banks.