A new EU Regulation will apply from 11 January 2009 which will change the rules that determine the law applicable to a range of non-contractual obligations. Significantly, the Regulation provides for commercial parties, in certain circumstances, to choose the law that will apply to regulate certain non-contractual disputes. The new Regulation is relevant to agent banks, arrangers and lenders because disputes based on non-contractual obligations (e.g. tort) may arise out of commercial lending arrangements and, currently, documentation is likely only to specify the governing law relating to contractual obligations.

For non-contractual claims arising after 11 January 2009, the English courts will (in certain circumstances) apply English law, if the underlying contract specifies English law as applying to such claims.

Although such a choice of law to govern non-contractual obligations may not be upheld until after 11 January 2009, there is no down side in providing for this in contracts being entered into now, and we recommend doing this where English law is the preferred choice of law. A minor drafting change is all that is required.

Introduction

EU Council Regulation (EC) No. 864/2007 on the law applicable to non-contractual obligations (known as Rome II) was published in July 2007 and will apply in all Member States, other than Denmark, from 11 January 2009. It will apply to civil and commercial disputes heard by the English courts (or the courts of another Member State, other than Denmark) which arise from certain non-contractual obligations where there is a foreign element.

Key Issues

At present, the question of which substantive law applies to non-contractual obligations, notably tort claims e.g. negligence and misrepresentation, is not subject to EU rules. Under English law, the applicable law for tort claims is generally the law of the country in which the events constituting the tort occur.

From 11 January next year, this will change due to Rome II. Rome II introduces choice of law rules relating to a range of non-contractual obligations, including torts and delicts[1]. Under Rome II, the general rule in relation to torts is that the applicable law will (where no choice has been made and subject to some exceptions) be determined on the basis of where the damage occurs, rather than where the events constituting the tort took place.

Also, commercial parties will, in certain circumstances, be able to choose the law which will apply to non-contractual obligations before the event giving rise to the damage occurs. 

Timing 

The new rules under Rome II will apply to events giving rise to damage which occur after 20 August 2007 (the date it came into force), provided the claim is brought on or after 11 January 2009. This means that if a choice of law to govern non-contractual obligations is included in a contract now, it may not be upheld by the English courts until after 11 January 2009. However, assuming English law is the parties preferred choice, we can see no down side in providing for this now.

Action

It is easy to anticipate that in a typical finance transaction, with parties often being in different countries, some very difficult questions may arise as to which law will apply if no express choice is made. Therefore, lenders should consider now whether to take advantage of Rome II and choose the law that will apply to non-contractual obligations where it is possible and appropriate to do so.