Regulation 593/2008/EC on the law applicable to contractual obligations, which harmonises the way in which the EU Member States determine what law is to apply to contractual disputes, is due to take effect in the United Kingdom from 17 December 2009. Although creating more certainty, it preserves the rule that in the absence of a clause on the choice of law, the applicable law is that of the place of residence of the person performing the contract.

SCOPE AND BASIC RULES

The Regulation covers any civil or commercial contractual obligations. It sets out a series of exclusions, including obligations arising out of, inter alia, revenue, customs and administrative matters. Where parties have chosen a law, either expressly or where “clearly demonstrated” by the contract, then that law shall apply. The chosen law may apply to the whole, or a specified part of the contract.

The parties cannot derogate from the rule that where “all other elements relevant to the situation at the time of the choice” are located in a country other than the country that has been chosen, then the laws of that country shall prevail.

LAW APPLICABLE IN THE ABSENCE OF CHOICE

Where the parties have not specified contractually a choice of law, the Regulation specifies what law shall apply. For example, under Article 4, a contract for the sale of goods shall be governed by the law of the country in which the seller is habitually resident. Similar provisions apply to other contracts, including contracts for the provision of services.

Where the contract is “manifestly more closely connected” to a country other than the country specified in the above provisions, then the law of the connected country shall apply. If the correct law cannot be determined in accordance with Article 4, then the law shall be that of the country with which the contract is most closely connected. The Regulation further imposes additional rules and conditions for certain specialist types of contracts.

Unsurprisingly, consumer contracts are governed by the laws of the country in which the consumer is habitually resident, provided that the business party pursues his commercial activities in, or directs such activities to that country. Any other election as to the applicable law must not deprive a consumer of protection which the business party could not avoid contractually under the law which would have normally applied to the contract.

COMMENT

Although parties remain largely free to choose the law that is to apply to their contracts, this freedom is curtailed in specified situations. The Regulation does not, for example, permit parties to consumer contracts to choose a law in order to avoid mandatory obligations that are contained in the national legislation normally applicable.

It can only be good news for UK businesses that the UK rules determining the law governing a contract are now consistent with the rest of Europe, as inconsistency was one of the main weaknesses of the previous regime.