Choice of law — overviewApplicable law

Applicable law is the law that governs a dispute between the parties. Generally, parties have the freedom to chose the applicable law. However, where they have failed to do so or have chosen a law which is prohibited for some reason then the applicable law will be determined by the application of the relevant directive, convention or common law rules.

Rome Convention — introduction and interpretation

The Rome Convention is used to determine the law applicable to contractual obligations; commonly called the governing law. The Rome Convention provides that any law specified by the convention by applied whether or not it is the law of a contracting state, so that Japanese law for example may, under the rules in the convention, apply to the contract.

The UK has made two reservations under the convention so that those provisions do not apply. There are different mechanisms and information which are available to assist in the interpretation of the convention and special rules apply to consumer and employment contracts.

Rome Convention — determining the governing law

It is important to understand the distinction between jurisdiction and governing law and how governing law will be determined. The outcome of any dispute may turn on the applicable law for instance a different decision may result depending on whether English or French law are applied to the same facts.

Parties may chose the governing law and set this out on the contract or the courts will have to determine it. Generally this is now done by the application of the Rome Convention in which the governing law will be that of the country with the closest connection.

Rome Convention — when parties fail to choose governing law

Where parties have failed to choose the law governing their contract, the Rome Convention provides that it will be governed by the law of the country with the closest connection. The Rome Convention lays down certain presumptions when determining the country with the ‘closest connection’. The presumptions depend on the type of contract be it a contract for immovable property, the carriage of goods or some other type of contract. It is important to understand how the presumptions are applied and in what circumstances the presumptions may be disregarded.

Rome Convention — validity of contract

There are two forms of validity of a contract:

• material validity — this refers to whether the contract is valid under the governing law

• formal validity — this refers to any formal requirements which must be present for a contract to exist

Different issues can impact on the validity of a contract for example whether the parties to the contract were in different countries when the contract was concluded or whether the contract was concluded by an agent.

Rome Convention — application

Parties cannot contract out of the Rome Convention. Specific rules apply to determine whether the Rome Convention applies. For example it applies regardless of domicile but does not apply to questions governed by the law of companies or contracts of insurance.

When considering the application of the Rome Convention it is important to know that the concept of renvoi is specifically excluded under the Rome Convention. Further a Contracting State can refuse to apply a rule of law which is contrary to its own public policy.

Where states with more than one legal system the Rome Convention sets out that each territorial unit is to be viewed as a separate country for the purposes of identifying the law applicable.

Rome I — introduction and interpretation

Rome I comes into force for all contracts concluded on or after 17 December 2009. It replaces and updates the provisions in the Rome Convention for contractual obligations. Rome I, as an EU regulation, will apply automatically. The UK having originally opted out subsequently opted back into Rome I at the end of 2008.

It is important to have an understanding of the different information available to assist in interpreting Rome I, for example, the recitals.

Rome I — application

Parties cannot contract out of Rome I. It comes into force on 17 December 2009 and will apply to contractual obligation in civil and commercial matters. It is important to understand what is meant by civil and commercial matters. There are also a number of exceptions which do not fall under Rome I and these are revenue, customs or administrative matters and those matters listed in Article 2.

Rome I has universal application and the scope of the applicable law determined under it will govern a wide variety of issues such as interpretation and performance of the contract

Rome I contains general rules within Articles 3 and 4. Specific types of contract have their own rules which are dealt with in subsequent articles

Rome I — applicable law chosen by the parties

Parties have the freedom to choose the applicable law to govern their contract. However, there are some restrictions where there is an imbalance in the negotiating power of the two parties, for example, in an employment contract. In some instances the applicable law may be implicit from the type of contract, for example, Lloyd's policies.

Parties can change the applicable law after entering in to the contract but it cannot affect the rights of third parties or the validity of the contract.

Parties cannot agree to derogate by agreement from certain laws and it is important to understand this terminology which differs from the Rome Convention.

Rome I — parties fail to choose the applicable law

Rome I contains a series of straight forward rules to apply in the event that the parties fail to choose the applicable law. This is different to the Rome Convention which required the application of a series of presumptions.

Article 4 sets out the law to be applied to specific forms of contracts. If a contract does not fall within this list, the applicable law will be the law of the country where the party required to give effect to the 'characteristic performance' of the contract has his 'habitual residence'. Where the applicable law cannot be determined then the contract will be governed by the law most closely connected with the contract.

An 'Escape' route is provided within Article 4(3).

Rome I — contracts of carriage (Article 5)

When determining the applicable law for a contract of carriage specific rules need to be applied which are set out in Article 5. They divide into two forms of carriage

• carriage of goods (Article 5(1)), and

• carriage of passengers (Article 5(2))

An escape clause is found in Article 5(3).

Rome I — consumer contracts (Article 6)

Contracts between a consumer and a professional are governed by specific rules within Article 6. This is due to the fact that generally the consumer would be the weaker party when negotiating a contract.

Article 6(1) sets out the laws of the country to apply to the contract. If the requirements within this article do not apply then the applicable law will be determined in accordance with the general rules in Article 3 and 4. The freedom to choose the applicable law is restricted by the provisions within Article 6(2) and recital 25 should also be considered.

There are exceptions to the general rules for consumer contracts and these are set out in Article 6(4).

Rome I — insurance contracts (Article 7)

Rome I covers almost all insurance contracts and this is a radical departure from the previous provisions under the Rome Convention. The provisions are divided into those governing large insurance risk contracts and all other insurance contracts. Reinsurance contracts are excluded.

Some Member States impose an obligation to take out insurance and such obligations are subject to rules in Article 7(4).

Rome I — employment (Article 8)

Employees are generally regarded as the weaker party in negotiating employment contracts. As a consequence they are protected by specific rules in Rome I which are more favourable then the general rules found under Articles 3 and 4.

Limits are placed on the ability of the parties to choose the governing law (Article 8(1)) and special rules apply in the event that parties failed to choose the applicable law (Article 8(2)). The basis on which the escape clause applies is perhaps less stringent than for other types of contracts.

The provisions also address when an employee can be regarded as a temporary employee.

Rome I — overriding mandatory provisions (Article 9)

This is a new concept and has been introduced in Rome I to try and bring an end to the confusion caused in the Rome Convention by the use of the phrase mandatory provisions which had two different meanings. The overriding mandatory provisions relate to public policy issues and may be applied by the Member State if they fall within the provisions of Article 9(3).

It is important to understand the differences between the provisions in Rome I and the Rome Convention.

Choice of law in contract — common law

The Rome Convention is the primary means of determining the governing law of a contract but the common law applies in two circumstances:

• any contract made before 1 April 1991

• any exceptions set out in the Rome Convention

Under the common law rules the governing law will depend on whether there was an express or implied choice of law by the parties. In the absence of either then the court will determine it by looking at the system of law with the closest and most real connection.

Tort — introduction and common law

The rules for determining the applicable governing law of tortious claims have changed over time. To determine the regime that applies you will need the date of the tortious event.

Damage prior to 1 May 1996 - regimes which will apply:

• the common law

Damage between 1 May 1996 and 11 January 2009 - regimes which apply:

• Part III of the Private International Law (Miscellaneous Provisions) Act 1995, or

• the common law

Damage post 11 January 2009 - regime which applies:

• Rome II

Tort — Rome II

Rome II sets out the rules used to determine the governing law for tortious claims. It came into force on 11 January 2009 and is not retrospective and applies in the English courts whether the parties are domiciled on Member States or not.

The general rule is that the applicable law for non-contractual obligations arising out of a tort will be the law of the country where the damage occurs. However the general rule can be displaced.

Tort — Part III of Private International Law (Miscellaneous Provisions) Act

If a tortious event occurred prior to 11 January 2009 the either the Act or common law will apply. The Act abolishes certain rules such as double actionability and it also expressly excludes some types of claims such as defamation claims.

The general rule is that the applicable law is the law of the country in which the events constituting the tort (or delict) occurred. However, there are exceptions to the general rule.

Governing law clauses

Parties to a contract should always try to include a governing law clause to avoid the disadvantages of a contract without such a clause e.g. uncertainty or delay.

Governing law clauses will impact on how a contract is negotiated and drafted.