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Hakki, Murat Metin --- "The European Union's Conflict of Law Rules - A Re-Evaluation" [2003] MurdochUeJlLaw 2; (2003) 10(1) Murdoch University Electronic Journal of Law

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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

    Introduction

  1. 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]

  2. 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.

  3. 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.

  4. 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.

  5. 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.

    Scope of the Convention

    The General Situation

    [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:

  6. 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.

  7. 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.

  8. 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.

    Excluded transactions and issues

  9. 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.

  10. 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]

  11. 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.

    Substantive Provisions: General Rules

  12. 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.

  13. 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]

  14. 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]

  15. 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]

  16. 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?

  17. 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''.

  18. 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.

  19. 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]

  20. 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]

  21. 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.

  22. 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]

  23. 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)).

  24. 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.

  25. 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.

  26. 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]

  27. 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]

  28. 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]

  29. 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)).

    Protection of the weak party

  30. 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.

  31. 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.

  32. I submit that the Rome Convention is only partially successful in achieving its objective of protecting the weak party:

    1. 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]
    2. 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.
    3. 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]

  33. 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.

  34. 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.

  35. 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]

  36. 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).

  37. 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.

  38. 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]

  39. Title Three of the Convention contains a number of procedural Articles, including those dealing with revision or amendment of the Agreement.

    Conclusion

  40. 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.

  41. 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.

Bibliography

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

Notes

[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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