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The European Union's Conflict of Law Rules Governing Contract Law - A Re-Evaluation
| Author: |
Murat Metin Hakki
LLM Candidate, London School of Economics and Political Science
|
| Issue: |
Volume 10, Number 1 (March 2003)
|
Contents:
Dedication: I would like to dedicate this article to Mr. Mike Newark, a lecturer at the University of Southampton (UK).
Note: Those wishing to learn more about the subject
matter may find it useful to consult the Green Paper published by the
European Commission on 14 January 2003. The document is available
online on:
http://europa.eu.int/comm/justice_home/news/intro/wai/news_160103_2_en.htm
- Until 1991 the United Kingdom rules for choice of law in
respect of contractual obligations were a matter of common law, but the
question is now[1]
substantially governed by the Rome Convention on the applicable law to
contractual obligations 1980, as enacted by the Contracts (Applicable
Law) Act 1990.
"I regard this Bill as unfortunate and unnecessary.
It brings into English law the effect of a European Convention in an
area that in English law is perfectly satisfactory, has been controlled
by the judges and is now to be set into the cement of statutory
legislation."[2]
"... This Bill will preserve the principles of our complex rules for
contract, and the convention will create a harmonious set of such rules
throughout the European Community; in other words, the other member
states which ratify the convention will have the benefit of the same
principles as those which the courts of this country have worked
out...over the years."[3]
- These contrasting viewpoints were the differing
receptions, which have greeted the coming into force of the EC
Convention on the Law Applicable to Contractual Obligations (the ''Rome
Convention'')[4]
on 1 April 1991. The focus of this paper is to ask whether sceptics like Dr. Mann[5]
are right to say that that day is in fact a day which many lawyers and
traders will remember with sadness and resignation so as to render a
tribute in the nature of obituary appropriate.
- In examining the provisions of the Convention it ought
to be borne in mind that resort to choice of law rules in international
contracts arises in two main contexts.[6]
First it arises in the context of the resolution of disputes that have
in fact arisen. Here courts and the parties' legal advisers will need
to consider conflicts principles, the former to resolve a case, the
latter to predict how the court seized of the dispute might do so.
- The second context is what has been called conflict
avoidance. Here we are squarely concerned with the parties, or rather
their legal advisers, who have to assess in advance, amongst other
things, the likely impact of the potentially relevant laws, be they
rules of private international law or domestic law, on the particular
agreement with which they are dealing in order to avoid litigation as
far as possible.
- In an ideal world a satisfactory set of choice of law
rules for contracts should appeal to the participants in each context.
Although the interests and purposes of these participants are not
identical, it is submitted that they all demand a satisfactory choice
of law rules based on the principles of clarity, uniformity, protection
of weak parties, effectiveness and commercial convenience.[7]
One cannot avoid asking whether the present Convention does in fact satisfy those demands.
[1]If we now
turn to the substance of the Convention, it is divided into three
titles. Title One is concerned with the scope of the Convention. It
provides that the rules laid down by the Convention shall apply to
contractual obligations in any situation involving a choice between the
laws of different legal systems (Article 1).[8]
This raises two principal questions:
i. What is meant by the words "contractual obligations''? And
ii. When does a situation involve a choice between the laws of different countries?
- Under the Convention, the question as to whether a
relationship is contractual in nature is to be determined by the law,
which would be applicable under the Convention if it were a valid
contract (Art.8 (1)). However, this still leaves the problem of
classification. One Contracting State may classify an obligation as
being contractual where another State would classify it as being
tortious.
- This problem can probably be avoided if the European
Court gives a community meaning to the concept of a contractual
obligation. Nevertheless, the Court's guidance on this has not been
particularly illuminating.[9]
Besides, there is uncertainty as to whether the definition of 'contract' enshrined in the new Council Regulation (EC) 44/2001[10]
that concerns special jurisdiction over defendants in civil or commercial matters can be relied on to resolve this ambiguity.[11]
Until this problem is overcome, it is difficult to talk about uniform
and effective choice of law rules for contractual obligations
throughout the Community.
- Secondly, since by Article 1 (1) the provisions of the
Convention are invoked in "any situation involving a choice between the
laws of different countries'', the question arises as to when a
situation involves such a choice. It would appear that where a contract
is, as regards all its constituent elements, connected with one country
alone, there can be no question of a "choice'' arising. Yet, how slight
the variation on this postulate needs to be in order to invoke the
Convention is not clear.
- To these general propositions, a number of exceptions
are laid down in Article 1(2) in that a variety of contractual matters
are excluded from the Convention. Some of the most significant of these
are questions of the capacity of natural persons, contractual
obligations relating to wills and succession, evidence and procedure,
insurance and certain aspects of agency and matters of family law,
company law and of the law of trusts.
- Similarly excluded are "obligations arising from bills
of exchange, cheques and promissory notes and other negotiable
instruments to the extent that the obligations under such instruments
arise out of their negotiable character''. It is unfortunate that the
Convention provides no definition of "negotiability'' and "negotiable
character''[12]
and leaves open the possibility of divergent definitions in an area, which is extremely important in international trade.[13]
- The issue that produced the greatest debate and which
ultimately was excluded from the Convention in Article 1(2)(d) was that
of arbitration agreements. The existing international conventions are
not apt to deal adequately with the matter, and in any event, accession
to such treaties is not uniform amongst Member States.[14]
In the absence of a Protocol to the Convention on this issue, the
Community is only partially successful in achieving uniformity.
- It is in Title Two that the heart of the Convention is
to be found, namely the uniform choice of law rules. Party autonomy is
embodied in Article 3 (1) which provides the parties with freedom to
choose the applicable law either expressly or in such a way as can be
demonstrated with reasonable certainty from the terms of the contract
or the circumstances of the case.
- The Convention can be applauded for codifying such a
freedom that is 'an almost indispensable precondition to achievement of
the orderliness and predictability essential to any business
transaction'.[15]
Still, the last sentence of the said provision that allows for explicit or implicit depecage[16]
has been considered as being highly unusual and most inconvenient for dispute resolution.[17]
Although it allowed for freedom to choose the proper law of a contract,
the common law was reluctant to permit two laws to govern separate
parts of the contract, no doubt to avoid the untidiness and possible
irreconcilability which might well arise from allowing it.[18]
- Article 3 (2) gives the parties the power to alter the
previously chosen law, or to choose one where they had failed to do so
at the time of contracting, but it is not clear which law determines
whether a purported variation was effective, or conformed to any
conditions which the parties may have imposed on the exercise of this
choice.[19]
This is subject to the limitation that the subsequent choice must not
adversely affect the rights of third parties. This view has not gone
unquestioned, largely on conceptual grounds. Nevertheless, there are
considerable practical advantages in its adoption.[20]
- Primarily, it continues to further commercial
convenience, particularly in cases where the new choice is resorted to
because of difficulties in the application of the original governing
law or because the identity of the original applicable law is
uncertain. It dispenses with the rigidity of the common law that
suggested that, once a proper law had been determined, it was
unchangeable.[21]
- Unfortunately, even if one accepts the desirability of
a power in the parties to change the proper law, further difficulties
remain, thus diluting the clarity of the provision. First, what if the
original applicable law invalidates the contract, whereas the newly
selected law validates it? Secondly, what of the situation where the
original applicable law would uphold the contract but the newly chosen
would invalidate it?
- Article 3 (3) states that, where all the other
elements relevant to the situation at the time of the choice are
connected to one country only, a choice of law by the parties cannot
prejudice the application of the rules of that country that cannot be
derogated from by contract (mandatory rules). This provision may be
justified on the ground that it promotes consistency regardless of
choice of forum within the Community.[22]
However, this does not prevent a claimant from seeking a forum
elsewhere; the policy of rules of other states may be difficult to
ascertain; nor may it always be obvious what "elements'' are "relevant
to the situation''.
- As already mentioned, Article 3 (1) states that the
choice must be either "express'' or "demonstrated with reasonable
certainty'' by the terms of the contract or the circumstances of the
case. If either of these requirements is not fulfilled, then resort is
had to the provisions of Article 4 (1), i.e. the law of the country
with which the contact is most closely connected.[23]
This is broadly similar to the approach under common law.
- The parties may agree, either in express terms or in
terms, which can be inferred, to submit themselves to a particular
system of law.[24]
If they have not done this, then governing law will be that by
reference to which contract was made or that with which the transaction
had its closest and most real connection.[25]
- Yet, under English law there is probably no requirement
that an implied choice must be demonstrated with "reasonable
certainty''. In fact, the courts often go to great lengths to find an
implied choice in an attempt to impart business efficacy to the
contract. This tends to result in the implied choice/closest connection
distinction being merged into a presumed intention test.[26]
- I submit that the "reasonable certainty'' requirement
enshrined in Art.3 (1) may have the benefit of preventing attempts to
deduce an implied choice from minor indications, the presence of which
cannot really be attributed to a real, but unexpected, choice.[27]
On the other hand, when an implied choice can be demonstrated with reasonable certainty needs further clarification.
- The second sentence of Article 4 (1) makes a reference
to depecage in particular circumstances. The idea encapsulated there
raises difficult questions. Although the courts are encouraged to
exercise the discretion to sever as little as possible, there are no
guidelines on how and when the court is to exercise this discretion.
This can make the judicial process more complex.[28]
- The Article diverges from the practice of Member States
in general in the adoption of presumptions in paragraphs (2) (3) and
(4) by virtue of which the law is to be found. Still, none of these
presumptions is conclusive. For, according to Article 4 (5), the
presumptions are to be disregarded if it appears from the circumstances
as a whole that the contract is more closely connected with another
country (one resorts back to Art.4 (1)).
- Paragraph (2) sets out the 'general' presumption for
localising the agreement. It falls into two parts. One starts by
determining the performance that is characteristic of the contract and,
having decided that, the law of the habitual residence of the party who
is to affect this performance is applied. 'Characteristic performance'
is thus a subsidiary connecting factor, the determination of which will
lead to the discovery of the governing law.
- The inclusion of this subsidiary connecting factor has
proved to be one of the most controversial features of the Convention.
The Treaty gives no indication as to what is to be considered as the
characteristic performance. The Giuliano-Lagarde Report states[29]
that it is usually the performance for which payment is due. Nonetheless, things are not as simple as they might appear.
- Apart from the difficulty of applying the concept to
agreements that do not involve the payment of money, there is, in any
event, an air of unreality about such an analysis. Take, for example, a
loan contract. Can it really be said with any confidence that the
provision of the loan and not its repayment constitutes the centre of
gravity and the socio-economic function of the transaction? [30]
- Even where characteristic performance can be
discovered, it is not the place of that performance that is to supply
the prevailing law. Instead, reference is made to the 'personal law' of
the characteristic performer.[31]
It is submitted that, that is not only inappropriate in the context of commercial contracts,[32]
but quite often difficult to ascertain as well.[33]
- Unless a presumption is easy to apply it will not
produce the certainty in determining the objective applicable law that
is its raison d'etre. Unfortunately, the combined effect of its two
limbs is that the one in paragraph 2 is a complex one, involving
considerable definitional problems.[34]
For this reason, it will quite often be deemed to be inapplicable by
the courts that will reach a decision after a careful consideration of
the facts of each case in accordance with Art.4 (5).[35]
- There are 'special' presumptions for certain contracts,
which are more conductive to certainty or uniformity. Where the subject
matter is a right in or a right to use immovable property, then the
applicable law will be lex situs (Art.4 (3)). In the case of carriage
of goods, the applicable law will be deemed to be that of the carrier's
place of business where this is also either the place of loading, the
place of discharge, or the principal place of business of the consignor
(Art.4 (4)).
- Article 5 of the Rome Convention provides that in
contracts for the supply of goods and services a consumer is protected
by the mandatory rules of the country in which he has habitual
residence, provided that he has been sought out in that country by the
supplier with whom he is dealing. Article 5 (2) describes how the
consumer must have been addressed and have acted in order for the rules
to apply.
- Article 6 (2) lays down that an employee who is a
party to an individual employment contract is protected by the
mandatory rules of the law of the State in which the employee
habitually carries out his work or, if the employee does not habitually
carry out his work in any one country, the law of the country in which
the place of business through which he was engaged is situated.
- I submit that the Rome Convention is only partially successful in achieving its objective of protecting the weak party:
- The Convention text does not deal satisfactorily
with the situation that can obtain in which the law chosen by the
parties in fact offers better protection to the weaker than the law
apparently excluded by the treaty provisions. [36]
-
It is often difficult for a court in one State to determine which rules
of foreign law are mandatory. Furthermore, the arguments against the
depecage of a contract apply also to the isolated application of
mandatory rules or rules expressing a fundamental policy.
Seen in this light, the weak party will be more safely protected
if the otherwise applicable law governs the entire agreement. This
seems to be the solution of the Swiss Draft Private International Law
of 1982, which without qualification excludes the parties' choice of
law in consumer contracts and which, also without qualification,
restricts the parties' choice of law in employment contracts.
- The artisan, the small farmer and fisherman, and the
non-professional party who is not a consumer, are not afforded the
protection provided in Article 5, nor is the weak "professional'' party
to a lease of immovable property, a life injury insurance, and other
agreements tainted with dirigisme. The only remaining means to protect
the people in such categories is by application of Article 7. Yet, as
Article 7 appears it may not be effective in remedying this
deficiency''.[37]
- Article 7 has, like the concept of "characteristic
performance'' in Article 4, has caused anxieties in the Member States
during the period of negotiation of the Treaty. It brings in two
further contexts in which mandatory rules can be considered.
- Art.7 (2) is unobjectionable for it merely preserves
the power of the forum to apply its own rules irrespective of the law
otherwise applicable. However, under Article 7 (1) effect may be given
to the mandatory rules of the law of any State with which the situation
has a[38]
close connection even though that law is not the law of the forum, the
chosen proper law or the law of the place of 'main' performance. The
application of such rules is discretionary and in deciding whether to
apply them the court must have regard to their nature and purpose and
to the consequences of their application or non-application.
- There is no doubt that the provision introduces an
unwelcome event of uncertainty into the choice of law rules of the
Convention.[39]
The notion of 'a close connection' is most imprecise and the courts not
well equipped for the task of balancing the interests of the States
whose laws are potentially involved.[40]
Moreover, the possibility of proving a whole range of potentially
applicable laws can make the whole judicial process more complex and
more expensive.[41]
- A variety of other matters are dealt with in Title Two,
such as the range of issues governed by the proper law (Art. 10), the
law applicable to assignments (Art. 12), to subrogation (Art. 13), the
burden of proof (Art. 14), the exclusion of the doctrine of renvoi
(Art. 15) and the residual power to refuse to apply a rule of a system
of law prescribed by the Convention if to do so would be manifestly
contrary to public policy (Art.16).
- One or two issues deserve slightly fuller comment.
According to Article 8, the validity of a contract is to be determined
by the law, which would be applicable if it were valid. However, a
party can also rely on the law of his habitual residence to establish
his lack of consent, thus solving the problem that arises if silence is
deemed to constitute acceptance in the country of a seller, but not of
the consumer.
- It might finally be mentioned that the Treaty leaves
unaffected existing international agreements to which Member States
are, or may become parties (Art.21). This section provides an
opportunity to acquire more satisfactory uniform choice of law rules in
other areas of private international law: but at the same time it opens
even further the possibility of breach with the aim of harmony of
result, which is the aim of unification, if the ratification of the
various conventions is not carried out by all Member States.[42]
- Title Three of the Convention contains a number of
procedural Articles, including those dealing with revision or amendment
of the Agreement.
- In conclusion, agreeing with Young,[43]I
submit that there is truth in the observations of both the Lord
Chancellor and Lord Wilberforce, quoted at the beginning of this essay.
It is an undeniable fact that any European lawyer is now able to find
the relevant law in a relatively short and succinct piece of
legislation rather than having to embark on a tortuous investigation
into the often ambiguous, often conflicting case law.
- Besides, Dr. Mann's prediction that the Treaty may
prove to be economically harmful to certain Member States seems to have
proved to be unfounded.[44]
Nevertheless, one is still disappointed that after years of preparation
the Rome Convention still leaves much to be desired, especially in
relation to the effectiveness and clarity of certain provisions.
I hereby want to acknowledge that while preparing this article, I have mainly relied on the following sources:
Young [1991] LMCLQ 320
Mann [1991] 107 LQR 353
Morse (1982) 2 YEL 107
Morse, [1992] 41 ICLQ 1
Briggs, The Conflict of Laws, Clarendon Law Series, OUP 2002
J.G.Collier, Conflict of Laws (2001)
Lando CMLR 1987 159
Williams [1986] 35 ICLQ
Dr. Alina Kaczorowska, Q & A Series- Conflict of Laws, 2nd ed
Kaye, The New Private International Law of Contract of the European Community, 1st ed
HL Debs, 24 April 1990
Morris, The Conflict of Laws, 5th ed
Collins [1976] 25 ICLQ 35
Jaffey [1984] 33 ICLQ 531
Giuliano-Lagarde Report
Cheshire & North, Private International Law, 13th ed
[1] See
generally, Dicey & Morris, The Conflict of Laws (13th edn. Sweet
& Maxwell, London, 2000), chap.32; R.Plender, European Contracts
Convention (2nd edn., Sweet & Maxwell, London, 2001); P.M.North
(ed.), Contract Conflicts (North Holland, 1982).
[2]
Lord Wilberforce in the debate on the third reading of the Contracts
(Applicable Law) Bill. HL Debs. Vol.518, col.438, 24 April 1990.
[3]
Lord Mackay of Clashfern, L.C., in the same debate, ibid. col.440
[4]
Young [1991] LMCLQ 320
[5]
Mann [1991] 107 LQR 353
[6]
Morse (1982) 2 YEL 107
[7] In
fact, in his book (The Conflict of Laws, Clarendon Law Series, OUP 2002
at p.147) Adrian Briggs argues that if there is a justification for the
new uniform law it must be this: that the greater the predictability of
choice of law rules, the less will legal uncertainty impede the free
movement of persons, goods, services throughout the Member States.
[8]
Article 2 provides that 'Any law specified by this Convention shall be
applied whether or not it is the law of a Contracting State'.
[9]
See J.G.Collier, Conflict of Laws (2001), 192.
[10]
Came into force on 1 March 2002
[11]
According to A. Briggs (The Conflict of Laws, Clarendon Law Series, OUP
2002, at p.151), the defining characteristic of a contractual
obligation will be that it was freely entered into with regard to
another. The second aspect of the definition would require that the
obligation be assumed in relation to another who can be identified, so
that if the defendant had no idea who the other party is, the
relationship is not contractual.
[12]
According to the Giuliano-Lagarde Report (p.11), such questions are left to be decided by the law of the forum.
[13]
Cheshire & North, Private International Law, 13th ed., p. 547.
[14]
Morse (1982) 2 YEL 107 at 115.
[15]
As far as England is concerned, it abolishes the ill-defined limit
imposed by the common law to the effect that the choice must be "bona
fide and legal''.
[16]
The circumstance whereby the contract can be split up and its different parts can be subjected to different laws.
[17]
J.G.Collier, Conflict of Laws (2001), 196.
[18]
Briggs, supra at p.161 Common law also denied validity of an agreement
to defer the actual choice of law to a date in the future.
[19]
Ibid
[20]
Morse (1982) 2 YEL 107 at 120.
[21]
Armar Shipping Co Ltd v Caisse Algerienne [1981] 1 All ER 498.
[22]
Young [1991] LMCLQ 320.
[23]
It is quite likely that the choice of the term 'country' in the Convention makes little difference.
[24]
Compagnie d'Armement Maritime SA v Compagnie Tunisienne de Navigation SA [1971] A.C. 572, 587 (per Lord Morris).
[25]
It is not clear how these degrees of connection are to be assessed.
[26]
The Assunzione [1954] 1 All ER 278, 289, 292 (per Singleton LJ)
[27]
Jaffey [1984] 33 ICLQ 531, Williams [1986] 35 ICLQ 1.
[28]
Morse (1982) 2 YEL 107 at 126.
[29]
P.20. The Treaty provides that it can be relied on while it is interpreted.
[30]
Cheshire & North, Private International Law, 13th ed., p. 570.
[31]
It is the law of the habitual residence of the characteristic performer
or, in the case of a body corporate or unincorporate, the law of the
place of central administration. Where, though, the contract is entered
into in the course of the trade or profession of the party who is to
affect the characteristic performance, then the governing law is
presumed to be that of the party's principal place of business.
[32]
Collins [1976] 25 ICLQ 35 at 45-46.
[33]
Morris, The Conflict of Laws, 5th ed., p.23.
[34]
Kaye, The New Private International Law of Contract of the European Community, 1st ed., p. 453 Cf. Lando CMLR 1987 159 at 201.
[35]
In such circumstances, the Treaty will have the effect of introducing
three steps into a search for the applicable law that can be satisfied
by just one step and by posing the question, namely, the question posed
in Article 4 (1).
[36]
Morse, [1992] 41 ICLQ 1 at 8.
[37]
Lando CMLR 1987 159 at 184-185.
[38]
This is the main factor that distinguishes Art.7 (1) from Art.3 (3).
[39]
This has prompted UK, Germany, Ireland and Luxembourg to opt out of this provision.
[40]
Morse (1982) 2 YEL 107 at 147.
[41]
Dr. Alina Kaczorowska, Q & A Series- Conflict of Laws, 2nd ed., at 186.
[42]
Williams [1986] 35 ICLQ 1 at 6.
[43]
Supra, at p. 325
[44]
Mann, supra, at p.355.
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