Select Committee on European Scrutiny Sixteenth Report

7 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 22 March 2007
Previous Committee ReportHC 34-xxi (2005-06), para 5 (8 March 2006) and HC 34-xxxvii (2005-06), para 2 (11 October 2006)
To be discussed in CouncilApril and June JHA Councils
Committee's assessmentLegally and politically important
Committee's decisionCleared


7.1 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.

7.2 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

7.3 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.

7.4 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 the 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 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.

7.5 Article 4 deals with situations where the law applicable to the 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.

7.6 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.

7.7 Article 8 states that effect may be given to the mandatory rules of another country with which the contract has a close connection.[14]

7.8 When we last looked at this proposal in October 2006, we welcomed the Government's decision not to opt-in to this proposal and also agreed with the Government that the United Kingdom should nevertheless try to participate constructively in the framing of the proposed Regulation.

The Minister's letter

7.9 The Minister has now written to update us on developments since we last reported on this proposal. In her letter of 22 March 2007, the Parliamentary Under-Secretary of State at the Department for Constitutional Affairs (Baroness Ashton of Upholland) comments in particular on the latest Presidency text which was published on 2 March and the report by Dr Maria Berger MEP, former Rapporteur to the JURI Committee at the European Parliament.

7.10 The Minister writes as follows:

    "I am writing to update you on developments on Rome I, in particular the production of the latest presidency text which was published on 2 March and the report by Dr Maria Berger MEP, former Rapporteur to the JURI Committee of the European Parliament. I am sorry that I have not updated the Committee on this dossier since last July.

    "As you know, although the Government decided that the United Kingdom should not formally opt-in to the negotiations on Rome I, we have been actively participating in the negotiations in the Council Working Group and have maintained close links with the European Parliament as it discusses the draft Regulation.

    "Discussions in the Council Working Group have been progressing at a rapid pace. During the Finnish Presidency, three Working Group meetings were held, which completed the initial consideration of the Commission's proposal and produced a new Presidency text on 12 October 2006. This was based on discussions in the Working Group up to that point and also on written comments, including those of the UK, which Member States were asked to submit.

    "So far this year the German Presidency has held four Working Group meetings, one in January and two in February (which concluded initial consideration of a subsequent Finnish/German Presidency text of 12 December) and a further meeting in March. The outcome of the discussions in January and February resulted in the production of the new text dated 2 March, a copy of which is attached. A further Council Working Group has been scheduled to take place on 27/28 March and the Presidency has signalled its intention to put Rome I on the agenda for both the April and June Justice and Home Affairs Councils in order to get political agreement on a number of articles.

    "Our main concerns continue to centre on Article 8(3) which deals with the application of the mandatory rules of third countries, Article 5 (consumer contracts) and Article 13 (voluntary assignment and contractual subrogation). There is also a further issue relating to a Presidency proposal to consider the comprehensive coverage of insurance contracts within the Rome I proposal. My Department, in conjunction with the Treasury, are currently consulting on this and I attach a copy of the consultation document. The Council negotiations so far have met our concerns on some of these issues, notably Articles 4 and 7. However we are still some way off a position where we could consider opting in to the final Regulation.

    "I draw your attention to the following Articles in the new text:

    Article 3(5)

    "The Presidency proposed an amendment to this provision in light of comments made in relation to Article 5 and the protection provided by the Consumer Directives. The proposed rule appears to envisage the application of mandatory rules of Community law in a way that would both create legal uncertainty and restrict the application of the law chosen by the parties. This provision was discussed by the Working Group on 12 March, but was not supported by the majority of Member States. The Presidency agreed to retain the current rule which is in line with the equivalent provision in Rome II.

    Article 4 (the default rules)

    "We are encouraged by the main thrust of the Presidency text which generally meets UK concerns by introducing greater flexibility to the default rules. We are cautiously optimistic that we will obtain a satisfactory outcome in this important area.

    Article 4a (contracts of carriage)

    "The Presidency have proposed a new Article to cover contracts of carriage. In relation to contracts for the carriage of goods the proposed rule is becoming increasingly complex but any problems which this might cause should be strictly limited in practice because, as a general rule, commercial parties in this field tend to choose a specific applicable law. In relation to contracts for the carriage of passengers, the Presidency has opened up a wide area of debate with no less than four new options which are yet to be considered by the Working Group. These options reflect the desire among some Member States to establish a greater degree of consumer protection in this field than currently exists under the Rome Convention. My officials are currently consulting on this matter but initial views are that any option that removes party autonomy would be unwelcome and could pose significant difficulties for commercial operators.

    Article 5 (consumer contracts)

    "Business stakeholders have expressed concerns about Article 5 on the basis that it does not strike a satisfactory balance between the interests of business and consumers. The situation is further complicated by the fact that, whether or not the UK becomes a party to Rome I, it will be that instrument, and not the Convention, which will in the great majority of cases apply to British businesses in dispute with consumers living in the rest of the EU (except Denmark). It is clear, however, from discussions in the Working Group that it is unlikely that the main thrust of the proposed rule for consumer contracts will be altered.

    "We continue, however, to press for modifications particularly in relation to an exclusion for goods and services and a financial carve out for City Instruments. There is strong support for the latter provision within the Working Group and we have been encouraged by the recent Commission proposal in this area which was briefly presented to the Working Group on 12 March. The Commission's proposal is based on those financial instruments defined in EC Directive 2004/39. We are currently discussing this proposal with Treasury and commercial stakeholders.

    Article 5a (insurance)

    "This is a relatively new provision and one that the UK has so far indicated a general scepticism about. My Department, in conjunction with the Treasury, are currently consulting with the insurance industry to ascertain the advantages/disadvantages of such a provision and its impact, and to identify any issues which may be insurmountable. The formal UK position will be formulated after analysis of their views.

    Article 7 (agency)

    "This provision, particularly in relation to its application to third parties, was of concern to commercial stakeholders. We are encouraged by its deletion from the text and we are hopeful of a satisfactory outcome on this particular issue.

    Article 8(3) (mandatory rules of a third country)

    "The deletion of Article 8(3) would remove the single most objectionable aspect of the Commission's proposal. We had until recently been cautiously optimistic that it would be simply deleted from the text. However, several Member States have now spoken in favour of its retention and the Presidency have now agreed that there should be further discussion on the matter, including consideration of possible compromise solutions. We are consulting with City stakeholders as to which compromise would be acceptable.

    Article 13 (assignment)

    "Article 13(3) (the proposed rule to govern the priority of claims between competing assignees) is also of significant concern to commercial stakeholders. The UK has tabled an amendment, which proposes that priority issues should simply be subject to the law of the assigned debt under Article 13(2). This would be a straightforward and workable solution that would properly respect the principle of party autonomy and accord with the reasonable expectations of the parties. The initial response to this proposal in the Working Group was favourable. Member States are, however, currently considering it further with their own experts. If accepted by the majority it would resolve an area of significant difficulty for the UK.

    "The next meeting of the Council Working Group on 27/28 March will consider the new Presidency text, but in particular discussion will focus on those areas where there has been points of contention. The aim is to try and find a basis for compromise as the German Presidency aim to be in a position to take a package of measures to the Council in April for agreement.

    Discussions in the European Parliament

    "Discussions in the European Parliament have also continued. Dr Maria Berger presented her report to JURI Committee on 11 September 2006. A copy is attached. In our view, her report was broadly welcome in the light of our concerns. In particular, we welcomed her proposal to delete Article 8(3) of the Commission's proposal which deals with the application of the mandatory rules of third countries; this was the single most significant issue of concern to UK stakeholders. We also welcomed her proposal to re-draft Article 4 which would introduce a greater degree of flexibility for cases where there is no valid choice of law by the parties. However, the report proposed no substantial amendments to Article 5 (consumer contracts), Article 7 (agency) or Article 13 (voluntary assignment and contractual subrogation). We are continuing to engage with Cristian Dumitrescu, the new Rapporteur, and other interested MEPs on these issues and the draft Regulation as a whole as discussions in the European Parliament progress. I will, continue to keep the Scrutiny Committees informed about the progress of these discussions and those in the Council Working Group."


7.11 We thank the Minister for her comprehensive update on developments regarding this proposal. We have previously welcomed the Government's decision not to opt-in to this proposal and were likewise content to see the Government take a close interest in the negotiation of an instrument that will nonetheless affect the United Kingdom indirectly.

7.12 We are content to clear the document but wish to alert the Minister that we would expect to scrutinise any decision by the Government to opt-in at a later stage when we would expect to re-examine the matter afresh. For this reason and in any event, we ask the Minister to keep us informed as negotiations continue and approach their conclusion.

14   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.  Back

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