7 Law applicable to contractual obligations
|Draft Regulation on the law applicable to contractual obligations (Rome I)
|Legal base||Articles 61(c) and 65 EC; co-decision; QMV
|Basis of consideration||Minister's letter of 22 March 2007
|Previous Committee Report||HC 34-xxi (2005-06), para 5 (8 March 2006) and HC 34-xxxvii (2005-06), para 2 (11 October 2006)
|To be discussed in Council||April and June JHA Councils
|Committee's assessment||Legally and politically important
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
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,
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.
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:
"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.
"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.
"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
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(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
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