Rome II - Cross Border Contracts and International Litigation

18 February 2009

Carolyn Greene, Charles Proctor

Introduction

Regulation (EC) No.864/2007, or “Rome II”, came into force on 11 January 2009 and has direct effect in all EU Member States (except Denmark). 

Under Rome II, all EU Member States will have to apply the same set of rules in determining the law that governs non-contractual obligations between them.  For those operating in the UK, ‘non-contractual obligations’ principally means tortious obligations and unjust enrichment. 

The aim of Rome II is to increase legal certainty, reduce forum shopping and facilitate mutual recognition of judgments.  Its effects are wide ranging and could result in significant savings in both time and costs in the event of a dispute arising. It is, therefore, important to be familiar with its basic provisions. 

Note that Rome I, which will reformulate the law applicable to contractual obligations (presently governed by the Rome Convention), is due to come into force in December 2009.

Scope

Rome II applies to non-contractual obligations arising in "civil and commercial matters" between parties.

There are a number of exclusions to the scope of Rome II, including non-contractual obligations arising from liability of the State and Public Authorities, relations between trustees and beneficiaries of voluntary trusts, privacy rights and defamation, bills of exchange, cheques and promissory notes.

Rome II will apply to events giving rise to damage which occur after 20 August 2007 where the proceedings are brought on or after 11 January 2009.

Rules

General Rule

The starting point is that the law applicable to non-contractual obligations will be the law of the country in which the damage occurs, or is likely to occur (Article 4(1)).

This is a fundamental change from the present English law position where the starting point is the place in which the wrongful event occurred.

Exceptions

There are a number of exceptions to the general rule, including circumstances where: 


  1. Both parties have their habitual residence in the same country (Article 4(2)); 

  2. The tort is "manifestly more closely connected" with another country (Article 4(3)). In those circumstances the law of that other country will apply to the parties’ non-contractual obligations.

In addition, Rome II allows parties to deviate from the general rule in the following circumstances:


  1. The non-contractual obligation arises out of damage caused by a product - in which case, as a starting point, the law of the country in which the person who suffered the damage is domiciled shall apply (Article 5);

  2. The non-contractual obligation arises out of damage caused by unfair competition – in which case, the law of the country in which competition is likely to be effected shall apply (Article 6); 

  3. The non-contractual obligation arises out of damage caused by intellectual property infringement – in which case, the law of the country for which protection is claimed shall apply or, in the case of infringement of a unitary Community intellectual property, the law of the country where the infringing act was committed (Article 8); 

  4. The non-contractual obligation arises out of pre-contractual dealings (e.g. misrepresentation and breach of confidentiality) regardless of whether the contract was then concluded - in which case the law of the contract, had it been completed, will apply (Article 12); 

  5. There are overriding mandatory rules of forum (Article 16); 

  6. The application of a provision of the law of any country specified by the Regulations is "manifestly incompatible" with the public policy of that forum (Article 26).

Right of parties to select

In addition to the above exceptions, Rome II allows parties to sidestep the general rule by agreeing up front in the contract on the law that will govern their non-contractual obligations (Article 14). 

Where parties are engaged in “commercial activity” (by which it is presumed to mean are contracting as businesses and not as consumers) and have negotiated freely, they may choose an applicable law before the event giving rise to the damage occurs.  All parties (business or consumer) may agree a choice of law after a dispute has arisen.

Note that in the case of infringement of an intellectual property right or a non-contractual obligation arising from unfair competition, the parties cannot side step the provisions of Articles 6 and 8 through the exercise of party selection. 

Any choice of law must be demonstrated with reasonable certainty. Note that Rome II requires a choice of law to be adhered to, even if the parties have selected a non-EU system of law.

Practical considerations 

Selecting the same law (and jurisdiction) to apply to a party’s contractual and non-contractual obligations alike, will significantly reduce the likelihood of facing parallel proceedings under different laws and jurisdictions arising out of similar subject matter. This is likely to result in important savings in time and costs. 

  • Once a law has been applied, it will govern not only issues of liability but also related issues such as limitation of liability, the nature and assessment of damages and other available remedies. 

  • Care should be taken during cross-border negotiations to ensure that foreign law does not give rise to unexpected binding non-contractual obligations, for example duties of good faith in negotiations which do not exist under English law. 

  • Whilst there are clear advantages to the certainty of choosing the applicable law up front, the parties will be bound by that choice even if, when a dispute arises, the choice of law arrived at under the application of the rules would have been more favourable.

  • If the parties wish to make an election in relation to non-contractual obligations, ensure that the drafting expressly refers to non-contractual obligations.  There is a risk that a standard form choice of law clause would be unlikely to be taken to extend to non-contractual obligations without expressly stating so.

If you have any queries on any of the issues noted in this Briefing, please contact Carolyn Greene or Charles Proctor on +44 (0)20 7415 6000 or carolyn.greene@twobirds.com / charles.proctor@twobirds.com