Select Committee on European Scrutiny Thirty-Seventh Report

2 Law applicable to contractual obligations



COM(05) 650

Draft Regulation on the law applicable to contractual obligations (Rome I)

Legal baseArticles 61(c) and 65 EC; co-decision; QMV
DepartmentConstitutional Affairs
Basis of considerationMinister's letter of 20 July 2006
Previous Committee ReportHC34-xxi (2005-06), para 5 (8 March 2006)
To be discussed in CouncilNot known
Committee's assessmentLegally and politically important
Committee's decisionNot cleared; further information requested


2.1 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.

2.2 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

2.3 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.

2.4 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.

2.5 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.

2.6 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.

2.7 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.

2.8 Article 8 states that effect may be given to the mandatory rules of another country with which the contract has a close connection.[5]

2.9 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 Minister's letter

2.10 In her letter of 20 July 2006 the Parliamentary Under-Secretary of State at the Department for Constitutional Affairs (Baroness Ashton of Upholland) informs us of recent developments concerning this proposal as follows:

"You will recall that the Government decided in May that the United Kingdom should not formally opt-in under our Protocol on Title IV measures to the negotiations on the Commission's proposed Regulation. However it also decided that we should nevertheless participate constructively in them. We are now doing so and attempting to persuade the Member States that in several significant respects the Commission's proposed Regulation should be amended. With the same intention we also intend to explain our concerns to the JURI Committee in the European Parliament. Our objective is to ensure that, provided we are successful in securing the necessary amendments to it, the United Kingdom will in due course be able to become a party to the Regulation.

"Discussions in the Council Working Group have got off to a good start under the Finnish Presidency and will continue with regular meetings in the autumn. Work has also just started in the JURI Committee. The Rapporteur, Dr Maria Berger, is due to produce her report in September and, following consideration of it by the Committee in the autumn, a First Reading by the European Parliament as a whole is likely to be completed early next year. It will then be for the Council to produce a Common Position in response to the Parliament's proposed amendments. I will continue to keep the Scrutiny Committees informed about the progress of the negotiations.

"Turning to the UK's negotiating positions I should emphasise the importance that the Government attaches to the views of stakeholders, and in particular their valuable assessments of the practical implications of the issues at stake here. These assessments have already alerted us to the potentially significant adverse consequences of some of the Commission's proposals. We will make sure that as negotiations progress stakeholders are kept properly informed of developments and are consulted in advance about any proposals which the UK intends to submit to the Working Group.

Article 1 (scope)

"The draft Regulation contains no limitation on its scope in terms of Article 65 of the EC Treaty and the reference there to the proper functioning of the internal market. As you will recall the UK consistently argued for an appropriate limitation in discussions on the Rome II Regulation. Despite our failure to persuade a sufficient number of Member States to agree such a limitation in that instrument the Government remains of the view that there should be some such limitation in this context and will continue to argue for one.

Article 3 (freedom of choice)

"The Commission has proposed that it should be open to parties to choose non-national laws to govern their contracts. Under the Rome Convention parties may only choose a national law. The Government is opposed to this proposal on the basis that it would create legal uncertainty and is not supported by any demand for change by commercial operators. If the parties wish to give effect to particular rules of contract which are not part of any national law it is open to them to include those rules in their contracts. The option of arbitration is also available to them.

"The Commission's proposal in this area also has implications for the Government's position in relation to the European Commission's work on European contract law where, as you will know, we have significant reservations about a so-called 'optional instrument' which would in effect represent a 26th contract law [system[6]]. The Commission has identified the optional instrument as an instrument that could be chosen.

Article 4 (applicable law in the absence of choice)

"Many stakeholders have expressed concern about the lack of flexibility in the proposed choice of law rules that are designed to select an applicable law in the absence of a specific choice by the parties. The Government is seeking to secure the amendment of this article so that it would operate with sufficient flexibility to deal appropriately with three types of case where it would not do so in its current form.

"The first type of case involves transactions which consist of several linked contracts. These should be subject to a single applicable law and not have imposed on them different applicable laws in relation to each component contract. The second type of case is a 'mixed' contract where the subject-matter covers more than one of the topics referred to in the list of specific types of contract set out in paragraph (1), for example a franchise contract which involves the licence of an intellectual property right. The final type of case is one where exceptionally it is more appropriate to apply the law of the country where the contract is to be performed than to apply one of the laws selected under the Commission's proposal.

Article 5 (consumer contracts)

"The Commission's proposed rules in this area are significantly more favourable to consumers than the equivalent rules in the Rome Convention. Commercial stakeholders are concerned about this and fears have been expressed that a particular burden may be imposed on e-Commerce operators. There is even some concern that these rules might impede the operation of the internal market. The Government considers that the extent of the Commission's move away from the carefully balanced solution in the Convention has not been properly justified. It is proposing that that solution should be reinstated.

Article 7 (agency)

"This is a complex area of considerable commercial importance. The Commission has failed both to consult properly on the issues at stake and to carry out an impact assessment. The case for creating rules of Community law that would go beyond what is already covered by the Convention has not been made out. In the light of this and the detailed technical criticisms made by stakeholders the Government is arguing that the limited coverage of this topic under the Convention is adequate and that no further provision should be made.

Article 8(3) (application of the mandatory rules of third countries)

"The legal uncertainty that would be created by the proposal in paragraph (3) has been much criticised by commercial operators. The potentially significant adverse economic consequences of this constituted the greatest single reason behind the Governments decision not to opt-in under our Protocol. The deletion of this paragraph is clearly a major negotiating objective.

Article 13 (voluntary assignment and contractual subrogation)

"As with agency this is another technical area of commercial importance where once again the Commission has both failed to consult adequately and to analyse the issues in sufficient depth. In view of this and the technical criticisms of paragraph (3) in particular which have been made by commercial operators the Government is arguing that the solution for this topic laid down in the Convention remains adequate and that the case for more extensive coverage by Community law has not been made out.

Article 21 (States with more than one legal system)

"The Commission has failed to make any provision that would allow Member States which, like the UK, consist of several jurisdictions to decide for themselves whether in effect to extend under their national law the rules of the Regulation to purely internal cases. Such provision is available under the Convention and in the Rome II Regulation. The Government considers that it should be made available here as well both in order to achieve consistency and to respect properly the principle of subsidiarity."


2.11 We thank the Minister for her comprehensive update on developments regarding this proposal. We welcome the Government's decision not to opt into this proposal. We also agree with the Government that notwithstanding this decision the United Kingdom should try to participate constructively in the framing of the proposed legal instrument. We ask the Minister to keep us informed as negotiations continue.

5   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

6   i.e. a system of law which would operate alongside the national laws of the 25 Member States. Back

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Prepared 26 October 2006