Choice of law without borders
The third approach to party autonomy requires no substantive connection between the contract and the governing law. In the EU, choice of law in contracts is regulated by the Rome I Regulation on the Law Applicable to Contractual Obligations. Rome I entered into force in 2008. It was preceded by the Convention on the Law Applicable to Contractual Obligations (known as the Rome Convention), which entered into force in 1991. The Rome Convention was signed by the then Member States of the European Community. On accession of new Member States adhesion treaties to the Rome Convention were concluded. Partly due to the cumbersome nature of this process the decision was made to convert the Convention into a Regulation.
The UK was not automatically a party to Rome I, but it opted in. Denmark decided not to opt into the Rome I Regulation and the Rome
Convention is therefore still applicable in Denmark. All other EU member states and their overseas territories automatically became parties to the Regulation. Rome I is applicable to all contracts concluded on or after 17 December 2009.
The Rome I Regulation favours party autonomy:
(11) The parties’ freedom to choose the applicable law should be one of the cornerstones of the system of conflict-of-law rules in matters of contractual obligations.
Rome I does not cover all aspects of the contract and excludes several important areas from its scope such as legal capacity, obligations arising out of family relations, obligations arising out of matrimonial property regimes, obligations arising out of negotiable instruments, obligations arising out of arbitration, obligations arising out of company law, power of agency, obligations arising out of trusts, pre-contractual obligations, obligations arising out of specific insurance contracts, and evidence and procedure.
Article 3 is the primary article that concerns choice of law:
A contract shall be governed by the law chosen by the parties. The choice shall be made expressly or clearly demonstrated by the terms of the contract or the circumstances of the case. By their choice the parties can select the law applicable to the whole or to part only of the contract. The chosen law does not need to have a substantive relationship to the contract.
As can be seen from this paragraph dépeçage is allowed. This enhances the freedom of the parties further. The second section of Article 3 allows parties to change the applicable law if this does not affect the formal validity of the contract or the rights of third parties.
The third and fourth paragraph place some limits on the effects of the chosen law. Paragraph 3 states that mandatory provisions of the putative applicable law cannot be derogated from.[1] Paragraph 4 states that mandatory provisions of community law cannot be derogated from if the putative applicable law is that of a Member State. Article 9 specifics that mandatory laws of the forum shall be applied and that mandatory laws of the country where the contract is executed may be applied. Finally, article 21 states that the public policy concerns of the forum can override the applicable law.
These constraints do not limit the choice of the parties but can limit the effects of that choice.
The Regulation imposes special conditions on choice of law in consumer and employment contracts. In those cases, the choice cannot be made to deprive the consumer or employee from any mandatory provisions of the otherwise applicable law.[2] There arc also special provisions for insurance and carriage of passenger’s contracts whereby only a limited number of laws constitute an acceptable choice. Therefore, Rome I limits the freedom of choice in specific cases for protectionist reasons, but in commercial contracts the choice of law is not limited by such constraints.
The above concerns the choice for a state law. Would it be possible for parties to choose non-state rules as the applicable law to the contract? Article 3 does not mention the word state at all. However, if one combines this with Article 1 of the preceding Rome Convention: ‘The rules of this Convention shall apply to contractual obligations in any situation involving a choice between the laws of different countries, ’ it seems as if a choice of law for non-state rules is not allowed. This was confirmed in court. This has not been without controversy. This ‘strange positivistic feature, a throwback to an earlier age, is at odds with current commercial and judicial practice.'^
In the Bank Shamil of Bahrain v. Beximco the choice of law clause stated that the contract was subject to the Sharia and would be governed in accordance with English law. Both the trial court and the Court of Appeal ruled that English law was the applicable law. The Court of Appeal stated that under the Rome Convention only a choice for the law of a country is permissible.
When the Rome I regulation was drafted the proposed Article 3 (2) read: ‘Parties shall be allowed to choose as the applicable law the principles and rules recognised internationally or in the community.’"9 According to the accompanying explanatory memorandum, this wording meant to authorise a choice for the UPICC, PECL, or a possible future Community instrument. It excluded the lex mercatoria, which is not precise enough and private codifications that arc not adequately recognised by the international community.[3] The latter refers to standard terms and conditions elaborated by trade associations. It is interesting that the authors made a distinction between the lex mercatoria and codified non-state rules and did not assimilate the two. This proposal would have given parties considerable freedom to choose non-state rules as the applicable law. The final version of the Rome I Regulation did not include this proposed text, as it was not supported by the Council and European Parliament. So, would parties have any possibility to use non-state rules in the final version of Rome I?
The first paragraph of Article 3 does not give any context to the word law. Based on this paragraph it could be argued that a choice for non-state rules is acceptable. However, if one reads the entire Regulation the grounds for this position are not firm. The Preamble at different points refers to the law of a country. Nowhere does the Preamble specifically state that the choice is limited to the law of a country, but by regularly using this wording it is apparent that this is what is meant with the word law. This becomes even more obvious further on in article 3. Paragraph 3 reads:
Where all other elements relevant to the situation at the time of the choice are located in a country other than the country whose law has been chosen, the choice of the parties shall not prejudice the application of provisions of the law of that other country which cannot be derogated from by agreement.
This implies that what is meant in the first paragraph by law is the law of a country. Consequently, this would exclude a choice for non-state rules as the law of the contract.
The Preamble states this Regulation does not preclude parties from incorporating by reference into their contract a non-state body of law or an international convention. Parties can thus incorporate non-state rules, but they cannot choose these as the applicable law. An exception is made for an eventual future EU contract law instrument. The now defunct CESL would
Party autonomy 115 have been such an instrument. It is not clear what the exact scope of this statement in the Preamble is. It is not an article in the Regulation. It is not clear from the text what is meant by a non-state body of law. This should be interpreted wider than the text of the proposed article 3 which allowed a choice for non-state rules but excluded for instance the lex mercatoria.[4] At the same time the exact legislative authority of this statement is not explicit. Is it so that the non-state rules would be simple contractual rules when applied by reference or would they be considered an applicable law (just not the sole applicable law)? It is also not evident whether the incorporated non-state rules should be interpreted in light of the applicable state law. The exact weight that should be accorded to non-state rules incorporated by reference is not clarified and is left to the interpretation of the courts of the EU Member States. In a 2005 Italian case the court stated that a reference to ‘the laws and regulations of the international chamber of commerce, Paris, France’ as the applicable law was not valid.l2ih was too vague and Italian private international law does not permit a choice for non-state rules. Although the Rome I Regulation makes it clear that if included in the contract non-state rules should be applied by reference it does not specify what the court should do if the contract states that non-state rules arc the governing law. A reference to non-state rules as the governing law could lead to these being applied to the extent that they do not conflict with the mandatory rules of the applicable state law, they could also be applied in a more restrictive way to interpret the contract, they could be used as implied terms of the contract, or the choice could even be ignored.
Under the Rome I Regulation, the general rule when the parties have not made a choice is that the applicable law is that of the country where the party that performs the characteristic performance has his habitual residence (article 4.2). The characteristic performance is usually the non-pccuniary performance. Article 4.1 lists special type contracts. In the case of a sales contract the law of the country where the seller has his habitual residence is the applicable law. Article 4.3 furthermore states that if another country has a closer connection to the contract, then that law shall be the applicable law. Article 4.4 states that if the applicable law cannot be found under paragraphs 1 and 2 then this shall be law of the country with which the contract has the closest connection. It becomes clear from reading article 4 as well as article 5 (the law applicable to contracts of carriage), article 6 (consumer contracts), article 7 (insurance contracts), and article 8 (individual employment contracts) that the otherwise applicable law under Rome
I always refers to the law of a country. In absence of a choice of law clause the Rome I Regulation can thus only lead to the application of the law of a country. It is interesting to note that Article 3 does not refer as explicitly to the law of a country and that there is thus a clear distinction between the two Articles. This seems to leave some small scope to claim that the omission of the word ‘country’ from Article 3 was intended to convey a larger concept of the word law, even if a more holistic reading of the Regulation seems to counter that claim and disallows for non-state rules as the applicable law.
- [1] 3. Where all other elements relevant to the situation at the time of the choice are located in a country other than the country whose law has been chosen, the choice of the parties shall not prejudice the application of provisions of the law of that other country which cannot be derogated from by agreement. 2 4. Where all other elements relevant to the situation at the time of the choice are located in one or more Member States, the parties’ choice of applicable law other than that of a Member State shall not prejudice the application of provisions of Community law, where appropriate as implemented in the Member State of the forum, which cannot be derogated from by agreement. 3 22 The application of a provision of the law of any country specified by this Regulation may be refused only if such application is manifestly incompatible with the public policy (ordre public) of the forum.
- [2] See article 6 consumer contracts and article 8 individual employment contracts. 2 See article 7 Insurance Contracts and Article 5(2) for the carriage of passengers. 3 An example would be Halpern i> Halpern [2007] EWCA Civ 291 This case concerned inheritance issues whereby the parties had agreed on Jewish law as the applicable law. Lord Justice Waller of the Court of Appeal stated: ‘the starting point for the Rome Convention was a point accepted by all countries party to that convention, that laws could not exist in a vacuum; by ‘laws’ were meant laws enforceable in the courts of countries whether parties to the Convention or other states’ And (quoting Dicey, Morris & Collins, the Conflicts of Law, 14,h Edition (Sweet & Maxwell 2006) ‘Article 1(1) of the Rome Convention makes it clear that the reference to the parties’ choice of the law to govern a contract is a reference to the law of a country. It does not sanction the choice or application of a non-national system of law, such as the lex mercatoria or general principles of law’ For the full text see: http://www.nadr.co.uk/articles/published/Arbit LRe/Halpern% 20v%20Halpern%202007.pdf. 4 Friedrich K Juenger, 'The Inter-American Convention on the Law Applicable to International Contracts Some Highlights and Comparisons’ (1994) 42 American Journal of Comparative Law 381,384. 5 Shamil Rank of Bahrain EC v Beximco and others [2004] EWCA Civ 19, English Court of Appeal; See for more on this case for instance: Jason C T Chuah, ‘Impact of Islamic Law on Commercial Sale Contracts - A Private International Law Dimension in Europe’ (2010) 4 European Journal of Commercial Contract Law 191.
- [3] Proposal for a Regulation of the European Parliament and the Council on the law applicable to contractual obligations (Rome I) COM (2005) 650 final), http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2005:0650:FIN:E N:PDF. 2 Comments on the European Commission’s Proposal for a Regulation of the European Parliament and the Council on the law applicable to contractual obligations (Rome I) -Max Planck Institute for Comparative and International Private Law (2007) 226, 230 http://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=2612&context=facul ty_scholarship. 3 (14) Should the Community adopt, in an appropriate legal instrument, rules of substantive contract law, including standard terms and conditions, such instrument may provide that the parties may choose to apply those rules.
- [4] Jason C T Chuah, ‘Impact of Islamic Law on Commercial Sale Contracts - A Private International Law Dimension in Europe’ (2010) 4 European Journal of Commercial Contract Law 191, 195. 2 Olugbenga Bamodu, 'The Rome I Regulation and the Relevance of Non-State Law’ in Peter Stone and Youseph Farah ( Editors), Research Handbook in EUPrivate International Law (2015 Edward Elgar Publishing) 221/222. 3 Tribunale Padova - Sez. Este, 11 January 2005. Available at: http://www.unilex.info/principles/case/1004.
