Select Committee on European Union Fortieth Report


Letter from the Chairman to Rt Hon Baroness Ashton of Upholland, Parliamentary Under Secretary of State, Department for Constitutional Affairs

  The proposed Regulation was subject to a preliminary examination by Sub-Committee E (Law and Institutions) at its meeting on 8 March. The Committee decided to retain the proposal under scrutiny and to raise with you the following preliminary issues.


  First, you say, the United Kingdom need not participate in the adoption of the proposed Regulation unless it opts-in. You say that no decision has yet been reached on this. You also say the matter has significant commercial implications for the UK. We agree and would therefore be grateful if you could identify the advantages and disadvantages of opting-in to the proposed Regulation and where, and for what reasons, you see the balance of advantage lies.


  Second, there is the question of vires. As you will recall from our discussion of Rome II and a number of other measures relating to harmonisation of the civil law under Title IV TEC, we believe that there are restrictions on the Community's law-making powers. You refer to Article 61(c). This in turn refers to Article 65. We would be grateful for your analysis as to how the requirements of these provisions are met in the present case, including why the provision is "necessary" when there already exists an operative body of rules in the Union, that is the Rome Convention, which is generally considered to be working well.


  Finally, there is the question of scope of application. We understand that the Commission's proposal would not be restricted to contracts which have cross-border implications and would include, for example, a contract made between a party in the United Kingdom and another in Australia. Do you agree that the Regulation should have such universal scope of application and, if so, how is this justified in terms of Article 65 TEC?

9 March 2006

Letter from Rt Hon Baroness Ashton of Upholland to the Chairman

  Thank you for your letter of 9 March. We have received a number of responses from City stakeholders, detailing concerns about the Rome I proposal, not least in relation to article 8(3). We are conscious that the potential legal uncertainty which may arise from that article, as currently drafted, could have very significant consequences in situations where the parties have expressly chosen English law to govern their contracts. A number of meetings with interests in the City are planned for the next few days in order to assess these issues.

  With other Government Departments, we are working to investigate as fully as the timetable for the opt-in decision allows the reality of these concerns. We will then be able to set out more fully the information you request on the relative advantages and disadvantages of opting in to the proposal.

  I will, of couse, write to you again with any further updates.

30 March 2006

Letter from the Chairman to Rt Hon Baroness Ashton of Upholland

  Thank you for your letter of 30 March which was considered by Sub-Committee E (Law and Institutions) at its meeting on 26 April. In addition the Committee had the advantage of written submissions from a number of interested parties, including legal practitioners and academics. We have also received the legal assessment prepared by the Financial Markets Law Committee (FMLC Issue 121).

  It is clear that Rome I raises a number of concerns and that at least one of these (Article 8(3)—application of mandatory rules of third State) causes the most serious doubts as to whether it would be in the interest of the UK to opt-in to this proposal at this stage. There are clearly important financial and commercial interests at stake and we are not persuaded that the balance of advantage lies in the UK opting-in at this stage.

  The Committee decided to retain the proposal under scrutiny.

27 April 2006

Letter from Rt Hon Baroness Ashton of Upholland to the Chairman

  Thank you for your letter of 27 April regarding the above proposal. As you may know, the United Kingdom has now decided not to opt in to Rome I. Notwithstanding this decision, we intend to participate fully in the negotiations in the Council and the Council Working Group. If our concerns can be met, there is every possibility that we will seek to opt in to the adopted instrument with the agreement of the Commission.

  We made our decision after consulting a wide range of UK stakeholders, including the Financial Markets Law Committee. They identified several serious issues with the proposed regulation. These could have significant economic consequences by making the EU as a whole—and the UK in particular—a much less attractive place to do business. The Commission failed to identify these consequences as it assumed that there were no significant differences between the 1980 Rome Convention and the Rome I proposal. On this basis, it decided not to carry out an impact assessment. I believe that had such an assessment been properly carried out, many of the problems with the proposal would have been avoided. I intend to urge the Commission, in particular the JHA Directorate, to ensure that in future such assessments are routinely made before proposals are issued.

  As you have already identified, the principal concern is article 8(3). It introduces an unacceptable degree of legal uncertainty. In addition to increased legal costs and litigation, it could lead to the loss to other jurisdictions, probably New York, of significant volumes of international contract business, such as commercial and governmental securitisations. The UK and six other Member States have, of course, a reservation on the equivalent article in the 1980 Rome Convention.

  Other significant stakeholder concerns relate to aspects of the proposed provisions that appear much less satisfactory than the equivalent provisions in the 1980 Convention. These include article 4 (rules applicable in the absence of a specific choice of law by the parties); article 7 (contracts concluded by agents); and article 13 (voluntary assignments). There are also concerns about the effect on business of the proposed article 5 (consumer contracts). The uncertainty as to the meaning and effect of these and other provisions suggests that considerable further work will be required to ensure that the adopted regulation will not have adverse economic consequences. The 1980 Rome Convention may not be perfect, but it has generally worked well in practice. The Commission's proposal, in its present form, would not be an improvement on it.

  These considerations underline the importance of effective consultation and the need for genuine impact assessments before draft Community legislation is proposed. Rome I illustrates all too clearly that even apparently technical changes in the law can have widespread economic and social consequences.

  Finally, I should stress that the decision not to opt in to Rome I does not in any way weaken the commitment of the UK to the development of a single area of freedom, justice and security. We are committed to increasing the benefits of civil judicial co-operation for all our citizens and businesses. For this reason, as I mentioned, the UK intends to play a full part in the forthcoming negotiations. I will keep the Scrutiny Committees fully informed of our progress.

16 May 2007

Letter from the Chairman to Rt Hon Baroness Ashton of Upholland

  Thank you for your letter of 16 May which was considered by Sub-Committee E (Law and Institutions) at its meeting of 7 June. We are pleased to note that the Government have now decided that the United Kingdom should not opt-in to Rome I.

  We also note that you and your officials will participate fully in the forthcoming negotiations. Clearly the UK has an interest in any Regulation which succeeds the Rome Convention being a good Regulation. But as you indicate there are a number of articles which will require substantial amendment.

  As regards the Commission's failure to carry out an impact assessment in advance of adopting its Rome I proposal, we support the line you propose to take with the Commission. As the Rome I proposal clearly indicates, matters which appear at first sight to be "lawyers' law" may have substantial implications for commerce, industry and consumers.

  The Committee decided to retain the proposal under scrutiny and is grateful for your assurance to keep the Scrutiny Committees fully informed of the progress of the negotiations.

8 June 2006

Letter from Rt Hon Baroness Ashton of Upholland to the Chairman

  Thank you for your letter of 8 June regarding the UK's decision not to opt in to Rome I. I am writing to you again in order to update you on the current situation on this dossier and to outline the United Kingdom's main negotiating positions. These are currently being deployed in discussions with other Member States in the Council Working Group.

  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.


  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.


  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 support. The Commission has identified the optional instrument as an instrument that could be chosen.


  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.


  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.


  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.


  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 Government's decision not to opt-in under our Protocol. The deletion of this paragraph is clearly a major negotiating objective.


  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.


  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.

20 July 2006

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