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, among 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 arising out of a tort should be determined on the basis of where the damage occurs, or is likely to occur. This is regardless of the country or countries in which the event giving rise to the damage occurred, and irrespective of the country or countries 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.

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. Here are some practical steps you can take.

Simple choice of law clauses in commercial contracts often set out what law should be applied by the courts when interpreting the contract. That law will usually apply to the resolution of contractual disputes. If you don't agree what law is to apply to non-contractual obligations, the Rome II Regulation, which comes into force in January 2009, will impose a particular law upon you. Now is 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.

  • Commercial parties should consider using more sophisticated choice of law agreements to reduce the potentially adverse impacts of Rome II. For example, a precedent wording might be: "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) shall be governed by and construed in accordance with English law".
  • Businesses engaged in cross-border transactions should review their positions well in advance of January 2009.
  • Any choice of law 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 both to the costs of any legal proceedings as well as uncertainty as to the eventual outcome. However, aligning the choice of law and jurisdiction clauses is usually preferable.
  • Carefully consider the 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.