5 Law applicable to contractual obligations
| (27200)
5203/06
COM(05) 650
| Draft Regulation on the law applicable to contractual obligations (Rome I)
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| Legal base | Articles 61(c) and 65 EC; co-decision; QMV
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| Document originated | 15 December 2005
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| Deposited in Parliament | 18 January 2006
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| Department | Constitutional Affairs
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| Basis of consideration</TD> | EM of 8 February 2006
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| Previous Committee Report | None
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| To be discussed in Council | Not known
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| Committee's assessment | Legally and politically important
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| Committee's decision | Not cleared; further information requested
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Background
5.1 In 1980 the then Member States adopted the Rome Convention
of the law applicable to contractual relations. The Convention
sets out a number of rules for determining which system of law
is to apply to contractual obligations where there is an international
element (such as the case where a contract made in one Member
State falls to be performed in another). The Convention is of
a universal nature: that is, the choice of law rules which it
contains may lead to the application of the law of any country
including that of non- Member States. The United Kingdom is a
party to the Convention together with all other EU Member States.
5.2 The 1980 Rome Convention has been ratified by
the United Kingdom following the enactment of the Contracts (Applicable
Law) Act 1990. A protocol to that Convention confers jurisdiction
of the Court of Justice of the European Communities to interpret
the Convention.
The Document
5.3 The proposal follows from an earlier Commission
Green Paper and subsequent consultation exercise in 2003 and is
designed to replace the 1980 Rome Convention ("the Rome Convention")
to which the Member States of the EU, including the United Kingdom,
are parties.
5.4 The format of the proposed Regulation closely
follows that of the Rome Convention and so do many of its substantive
provisions. The proposal would nonetheless introduce a number
of significant changes from the Convention. Articles 1 and 2,
which define the scope of the Regulation, remain largely unchanged
from the Rome Convention. However, Article 3, which deals with
the parties' freedom of choice, provides that, without prejudice
to provisions in the Regulation designed to protect weaker parties,
a contract shall be governed by the law chosen by the parties.
The choice must be expressed or demonstrated with reasonable certainty.
If the parties have agreed to confer jurisdiction on the courts
or tribunals of a particular Member State, then they are also
presumed to have chosen the law of that Member State. This presumption
is a departure from the Rome Convention, which does not contain
an equivalent provision. Article 3 also differs from the Rome
Convention in that it provides that the parties can choose a system
of law other than a national law to govern their contracts.
5.5 Article 4 deals with situations where the law
applicable to a contract has not been chosen by the parties in
accordance with Article 3. It provides default rules to cover
these situations. Eight specific choice of law rules are proposed
for particular categories of contracts. For example, a contract
for the provision of services is to be governed by the law of
the country in which the service provider has his habitual residence.
For contracts not falling within one of these specific categories,
there is a fallback rule that is generally based on the law of
the country where the party whose performance is characteristic
of the contract is habitually resident. Article 4 differs considerably
from the equivalent rule in the Rome Convention. The latter provides
that in the absence of a choice by the parties, a contract should
be governed by the law of the country to which the contract is
most closely connected. This test is supplemented by a number
of presumptions about what constitutes such a "close connection",
in particular by reference to the country where the party, whose
performance is characteristic of a contract, is habitually resident.
5.6 Article 5 provides that consumer contracts shall
generally be governed by the law of the Member State in which
the consumer has his habitual residence. This provision is both
broader and simpler than the rule contained in the Rome Convention,
which focuses on preserving the mandatory rules of the country
where a consumer is habitually resident.
5.7 Article 7 provides that, in the absence of a
choice in accordance with Article 3, a contract between principal
and agent shall be governed by the law of the country where the
agent has his habitual residence unless the agent exercises his
main activity in the country where the principal has his habitual
residence, in which case, the law of that country shall apply.
Article 7 also lays down a rule to govern situations where an
agent has acted in excess of his powers or without powers. Article
7 has no equivalent in the Rome Convention.
5.8 Article 8 states that effect may be given to
the mandatory rules of another country with which the contract
has a close connection.[16]
5.9 Articles 15 and 16 are new rules with no equivalents
in the Rome Convention, which deal with issues arising from multiple
liability and statutory offsetting.
The Government's view
5.10 In her Explanatory Memorandum of 8 February
2006 the Parliamentary Under-Secretary of State in the Department
for Constitutional Affairs (Baroness Ashton of Upholland) outlines
the Government's reaction to the proposal as follows:
"This topic has significant commercial implications
for the UK particularly given the amount of international commercial
litigation which is conducted in London. We are considering the
proposal in more detail and are consulting with stakeholders,
including the judiciary, practitioners and academics in order
to gain a comprehensive view in readiness for the forthcoming
negotiations in the Council Working Group. These consultations
will continue throughout the negotiations."
5.11 The Minister then proceeds to address those
"areas where consultation will be of particular importance
to the position adopted by the Government":
In relation to Article 3 she points out that
unlike the Rome Convention, the proposed Regulation would allow
parties to "choose a system of law other than national law
to govern their contract. Such examples could include the UNIDROIT
principles, PECL (Principles of European Contract Law) or the
Vienna Convention on the International Sale of Goods".
In relation to Article 4 the Minister says that
"the Commission's proposal appears to be significantly less
flexible than the equivalent provision in the Rome Convention,
although it would also provide greater predictability. This may
well be the most significant area of difference between the Convention
and the Commission's proposal and will require the most careful
consideration."
5.12 The Minister adds that the Government is also
still evaluating the possible repercussions of Articles 7, 8 and
15 and 16 on the grounds of their either having no equivalent
in the Rome Convention or being likely to increase legal uncertainty.
5.13 In relation to the legal base, the Minster informs
us that the Government is satisfied that "choice of law rules
in contractual matters are, in principle, appropriately settled
at Community rather [than] Member State level". She adds
that adoption and implementation of the Regulation would, however,
necessitate the repeal or substantial amendment of the Contracts
(Applicable Law) Act 1990 which allows the Rome Convention to
take effect in UK law.
5.14 Finally, the Minister states that the UK need
not participate in the adoption of the proposed Regulation unless
it opts in. The Minister adds that the Government has not yet
decided whether to do so.
Conclusion
5.15 We thank the Minister for her helpful summary
of the proposal and outline of the Government's view. We understand
that the Government will have to decide by April whether to "opt
in". We ask the Minister if the Government intends to do
so and, if so, to explain why the advantages of the proposal both
outweigh its potential disadvantages as well as the benefits the
UK enjoys under the present regime of the Rome Convention.
5.16 We also ask the Minister if the Government
thinks the proposed Regulation may still be "necessary"
within the meaning of Article 65 EC at a time when the present
rules under the Rome Convention are clearly not manifestly inadequate.
5.17 Finally, we ask the Minister to explain if
the Government is happy for the proposed measure to apply to contracts
between a party in a Member State and a non-EU party and, if so,
why such universal application falls within the meaning of the
"cross-border" requirement of Article 65 EC.
16 Article 8(1) defines mandatory rules as "rules
the respect for which is regarded as crucial by a country for
safeguarding its political, social or economic organisation to
such an extent that they are applicable to any situation falling
within their scope, irrespective of the law otherwise applicable
to the contract under this Regulation." Back
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