What is choice of law?
Choice of law determines which body of law should apply to a case with an international dimension. For example, a court may have to decide which law applies to a contract made between an English company and a French company for the construction of a power plant in France or Nigeria. The law to which a contract is subject determines its meaning and effect.
The Rome Convention v The Rome Regulation (Rome 1)
The Rome Convention (enacted in the UK by the Contracts (Applicable Law) Act 1990) has harmonised the rules for establishing the law applicable to contracts. The Convention applies to contractual obligations in any situation involving a choice between the laws of different countries. A court within the European Union must apply the Convention whenever it has to determine which law applies to a contract.
In December 2005, the European Commission published its proposal to replace the Convention with a Regulation, Rome 1. The UK took part in the negotiations but decided not to opt in to the proposal on the basis that it would not have been in the interests of UK businesses. It was feared that Rome 1 would introduce significant legal uncertainty into complex, multi-party international contracts and would lead to less favourable outcomes than under the Convention.
Where are we now?
Rome 1 will apply in all EU member states (except Denmark) from 17 December 2009 to all contracts concluded after that date. As matters currently stand, it will not apply to the UK but it is expected to in the future as the UK is seeking permission from the European Commission for Rome 1 to apply here.
Why has the UK changed its position?
There have been sufficient amendments and revisions made to Rome 1 which have alleviated many of the concerns held by the government.
Equally, the government noted that a decision not to opt in would not prevent the application of Rome 1 in other member states. As a result, a decision to remain out of Rome 1 would result in the creation of two systems, one for the UK and another for the rest of the European Union (except Denmark). UK businesses would therefore be required to adapt to the operation of two systems, which it was felt would serve only to increase cost and complexity.
What is the rationale behind Rome 1?
The rationale behind Rome 1 is to standardise the rules by which the governing law is determined. It will not harmonise the actual law of member states that applies to contractual obligations.
It is envisaged that standardisation will also reduce the risk of forum shopping by ensuring the rules that determine what law applies to contractual disputes are applied uniformly by courts in the European Union.
What are some of the difference between the Rome Convention and Rome 1?
Rome 1 is very similar to the Convention. Freedom for the parties to choose the applicable law in most circumstances remains a paramount concern as does ensuring weaker parties, such as consumers, are protected. However, Rome I improves upon the Convention in a number of ways, including improved drafting as a result of experience gained under the Convention.
Freedom of choice
In relation to freedom to choose a particular law, Rome 1 contains two useful clarifications. Firstly, a choice of law by the parties need not be made only in express terms. It is now deemed sufficient if the choice is clearly demonstrated by the parties by reference to the terms of the contract or the circumstances of the case. The current position under the Convention is not entirely clear on this point. Secondly, one of the factors to be taken into account in determining whether a choice of law has been clearly demonstrated is an agreement by the parties to confer on one or more courts or tribunals of a member state exclusive jurisdiction to determine disputes under the contract.
Absence of choice
In the absence of party choice, Rome I seeks to enhance certainty as to the applicable law by converting mere presumptions into fixed rules. For example:
- A contract for the sale of goods shall be governed by the law of the country where the seller has his habitual residence
- A contract for the provision of services shall be governed by the law of the country where the service provider has his habitual residence
- A distribution contract shall be governed by the law of the country where the distributor has his habitual residence.
Where these fixed rules are inconclusive, there is a further general rule that will be applied followed by further displacement rules. It is intended that a combination of specific rules, coupled with rules of displacement will provide certainty together with an appropriate degree of flexibility.
In cases relating to particular types of contract, for example consumer contracts or contracts of carriage, specific provisions have been put in place in Rome 1 to deal with choice of law in these instances.
Another important change that will be introduced by Rome 1 relates to Article 7(1) of the Convention. This article provides that the mandatory rules (those rules the respect for which is regarded as crucial by a country for safeguarding its public interests such as its political, social or economic organisation) of another country (that is a country other than the forum) with which the situation has a close connection may also be given effect to. The UK decided not to apply this rule on the basis that it would give rise to too much uncertainty. Rome 1 does not, however, allow such an opt out. This contributed to the UK's decision not to opt in to Rome 1 on the basis that it would give rise to legal uncertainty and undermine freedom of choice.
After much discussion, negotiations have resulted in Article 9(3) of Rome 1. This article focuses on the discretionary application of certain mandatory rules of the country where the contract is to be, or has been performed, which render the contractual performance unlawful. The government's initial assessment of Article 9(3) is that it represents a satisfactory outcome to the negotiations and constitutes an improvement in terms of legal certainty. It is an intermediate point between the mandatory rules expressed in the Convention and the uncertain rules that prevailed in the UK as a result of the UK reservation to the Convention.
- Don't forget to include a choice of law clause in your agreement. It may sound simple but people do! A choice of law clause will assist in preventing the choice of law from being taken out of the hands of the parties and given to the courts – the last thing any contracting party wants. An express choice of law is the easiest way of providing certainty in a contractual relationship. A contract without such a clause can create a lack of uncertainty about interpretation, performance and enforcement of the contract. In the event of a dispute, it can add to expense, delay and frustration.
- Carefully consider the law you want applied before agreeing the choice of law clause. This should be done before beginning to draft an agreement since, if it is not to be English law, a lawyer qualified in the relevant jurisdiction will need to advise upon or draft the agreement.
- Consider whether there are any mandatory rules of another country that might apply to the dispute and if so, whether these will impact on your choice of law.
- Any choice of law clause 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 both to the costs of any legal proceedings as well as uncertainty as to the eventual outcome. Aligning the choice of law and jurisdiction clause is usually preferable.