European Union: Choosing The Law: Rome II

Last Updated: 27 January 2009
Article by Barlow Lyde & Gilbert LLP

The Rome II Regulation was applicable from 11 January 2009, harmonising the choice of law rules that apply to non-contractual obligations (including torts) in the European Union. Although Rome II may introduce greater legal certainty within the EU, it is not without its problems. In light of this, businesses would be well advised to take steps now to ensure that there are no expensive nasty surprises in the event of claims materialising.

Conflict of law questions, which arise in the context of multi-national disputes, have to be dealt with in two stages:

  • The first is to determine the jurisdiction in which a dispute will be heard, i.e. which country's courts have the power to hear the dispute. In the European context, that question is primarily dealt with by applying the Brussels Regulation1 and is not addressed in this note.
  • The second stage is for the court hearing the dispute to determine which national law (known either as the "applicable law" or the "governing law") the dispute is subject to. The answer to the first question can be different from the second: for example an English court may have jurisdiction but have to apply French law.

Until now, the rules for determining the applicable law of contractual disputes have been codified within the EU2, but there has been no codification of the conflict of law rules regarding non-contractual disputes (including torts and resitutionary claims). The courts of each Member State have, therefore, used their own conflict of law rules to determine which law to apply in non-contractual disputes.

That has now changed, as a result of the Rome II Regulation (864/2007/EC) which applies from 11 January 2009 throughout the whole of the EU, except Denmark, introducing a new standardised set of rules to determine the applicable law for non-contractual disputes.

Until now, the relevant conflict of law rules in England provided that the applicable law for non-contractual obligations is generally the law of the country in which the events constituting the tort occur3. That, and other important features of the English conflict rules, such as the uncertainty about whether parties can agree in advance which law will govern their future non-contractual relations, have now been changed by Rome II.

The General Rule

The general rule under Rome II is that the governing law of a non-contractual obligation in a civil and commercial matter is the law of the country in which the damage occurs (or is likely to occur), irrespective of the country in which the event giving rise to the damage occurred (or is likely to occur) and irrespective of the country or countries in which the indirect consequences of that event occur (Article 4). As explained above, this is different from the previous position under English law, which applied the law of the country in which the event occurred.

It should be noted in this context that Rome II may determine that the law applicable is that of a country outside the EU.

The general rule under Rome II is modified in certain instances:

  • Where the proposed claimant and defendant both have their habitual residence in the same country at the time the damage occurs then the law of that country will apply (Article 4.2).
  • Where the tort is manifestly more closely connected with a country other than that indicated by Articles 4.1 and 4.2, then the law of that other country will apply. This might be based in particular on a pre-existing relationship such as a contract closely connected with the tort in question (Article 4.3).
  • Rome II lays down specific rules for certain types of claim and types of loss: for example, product liability claims or infringement of intellectual property rights.
  • Some matters are expressly excluded, for example revenue, customs and administrative matters, and a list of specific matters such as violations of privacy and defamation, non-contractual obligations arising under bills of exchange, cheques, promissory notes and certain other negotiable instruments, and non-contractual disputes arising from company law regarding matters such as winding up, the personal liability of officers and members and the liability of statutory auditors.

Extended Scope Of Applicable Law

Under Rome II, the applicable law will be used to determine not only the question of liability, but also other matters such as the existence, nature and assessment of damages. That is an important development because, until now, English law has considered the rules relating to assessment of damages to be procedural rules determined by the law of the forum where the matter is heard, rather than by the applicable law4. Previously, an English court applying foreign law would, therefore, revert to English law when considering the question of how damages should be assessed (and, therefore, the quantum of damages that the successful party would receive). Under Article 15(c) of Rome II, the English court will now, however, arguably be required to apply the applicable foreign law to assess damages, meaning that a party may not receive what they expected. This is subject to some qualification as the English court may consider that Article 1(3) of Rome II, which provides that matters of evidence and procedure are exempted from Rome II, encompasses the assessment of damages. The court's view on this issue is, therefore, awaited with interest (although a ruling would be required from the European Court of Justice to decide the point with certainty).

Express Choice Of Law

Whilst parties who have entered into a contract are likely to bring claims against each other arising out of their contractual obligations, non-contractual obligations may also exist, for example arising from the period before a subsequent contract was entered into (such as claims for misrepresentation) and duties additional to their contractual duties (such as duties arising from negligent misstatements). To what extent is it possible for the parties to agree in advance which national law may apply to future disputes between them? Whilst it has long been possible for parties to most contracts to agree which law will govern their contractual relations, the position regarding non-contractual obligations has, until now, been much less clear under the English conflict rules.

That has now changed because Article 14 of Rome II provides that the parties will be able to agree contractually on the law which will govern their future non-contractual obligations - provided that both parties are pursuing commercial activities by an agreement which was "freely negotiated".5

Note, however, that Rome II does not define "commercial activity" and, if the parties are not pursuing commercial activity or the agreement has not been freely negotiated (perhaps if one party has contracted on the other's standard terms with no opportunity for negotiation), then any choice of law clause will not apply.

Pre-Contractual Dealings

Rome II also applies to non-contractual claims arising from pre-contractual dealings (Article 12) regardless of whether a contract was eventually concluded, and states that the law that applies or would have applied to the contract is applicable (unless that cannot be determined, in which case the same principles as those set out above apply).

Again, this is potentially important because of the differences between national laws regarding the status of pre-contractual negotiations. Under English law, pre-contractual negotiations and draft agreements are generally non-binding, and are therefore likely to be irrelevant whether or not a contractual agreement is eventually reached. However, in other EU jurisdictions pre-contractual dealings may give rise to legal obligations, such as an obligation to negotiate in good faith.

In the light of Rome II, parties to a negotiation should, therefore, check the proposed governing law provisions at an early stage of the negotiations - and may wish to choose English law if they are seeking to minimise the risk of obligations arising out of the negotiations themselves.

Some Potential Problem Areas

Rome II should provide greater certainty as to the law that will apply to a non-contractual dispute brought in the EU. However, there are difficulties. For example, it is not clear from the wording of Rome II whether it applies to events giving rise to damage occurring after 19/20 August 2007 (20 days after Rome II was published in the Official Journal of the EU) or events occurring on or after 11 January 2009.

There are also various other provisions which lack clarity and give rise to issues which are likely to be tested in the courts. For example, it may be difficult to answer the fundamental question of where damage actually occurred (for example, did it occur where and when negligent advice was relied on, or where and when financial loss was in fact suffered?).

Practical Points

  • If they have not already done so, businesses engaged in cross-border transactions should review the provisions in their contracts and ensure that they have clear and appropriately worded clauses covering both the jurisdiction in which claims will be decided and the choice of law for contractual and non-contractual claims.
  • It is likely that a business will wish contractual claims and non-contractual claims to be governed by the same law and to be decided in the jurisdiction corresponding to that law.
  • Parties should also remember that the applicable law will now determine more elements of the claim (for example the assessment of damages) than was previously the case under the English conflict rules.
  • Where parties enter into contractual negotiations with a cross-border element they would do well to consider and make clear at an early stage which governing law they wish to apply to the contract, to try to ensure that the same law applies to the negotiations.

Footnotes

1. Regulation 44/2001/EC.

2. By the Rome Convention on the Law Applicable to Contractual Obligations 1980. This will be replaced by Regulation 593/2008/EC ("Rome I") which will apply from 17 December 2009.

3. Section 11 of The Private International Law (Miscellaneous Provisions) Act 1995

4. Harding v Wealands [2004] EWCA Civ. 1735

5. Subject to some exceptions, for example certain types of agreement are excluded and the choice does not override the mandatory rules of the country in which the damage occurs.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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