2 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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| Department | Constitutional Affairs
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| Basis of consideration | Minister's letter of 20 July 2006
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| Previous Committee Report | HC34-xxi (2005-06), para 5 (8 March 2006)
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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
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."
Conclusion
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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