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Rome I Regulation: choice of law for contractual obligations

January 2011 - EU & Competition. Legal Developments by Avocado Rechtsanwälte .

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The EU Rome I Regulation (593/2008) of the European Parliament and of the Council came into force on 17 December 2009 (Convention). The Convention sets rules to determine the (national) law applicable to contractual obligations in civil and commercial matters. This Regulation replaces the 1980 Rome Convention and is especially relevant to cross-border businesses. The intention of the Convention is to provide legal certainty in cases where the parties have not expressly chosen the applicable law governing their contract.

Applicability

The Convention only applies to contracts entered into as of 17 December 2009 and applies throughout the EU (except Denmark). Contracts which were concluded before this date are still subject to the 1980 Rome Convention.

Contents

The essential point is the general freedom of the parties to choose the law governing the contract. The choice of law shall be made expressly or clearly demonstrated by the terms of the contract. It can cover the whole contract or only certain parts thereof.

In the absence of a choice of law, the Convention provides for a test to determine the applicable law. The Convention contains a catalogue of eight types of contracts such as, e.g., contracts for the sale of goods or the provision of services and contracts relating to a right in rem in immovable property for which a concrete test is provided. Tenancy and leasehold agreements are also subject to the Convention.

Other contracts are governed by the law of the country in which the party with the characteristic performance has its habitual residence. A definition of habitual residence is provided in Article 19 of the Convention.

In addition, the Convention contains an exemption from the above two tests if the contract is clearly more closely connected with a country other than that indicated by the preceding paragraphs. In this case, the law of this other country is applicable to the contract.

If neither of the two tests allow to determine the applicable law, the governing law shall be that of the country with which the contract is most closely connected (Article 4 paragraph 4 of the Convention).

Other Articles deal with special types of contracts and provide a more detailed breakdown of the rules for determining the applicable law in the absence of a choice of law. Those contracts are: contracts of carriage (Article 5), consumer contracts (Article 6), insurance contracts (Article 7) and individual employment contracts (Article 8).

Article 9 defines overriding mandatory provisions and explicitly states that the applicability thereof shall not be restricted. This is one of the exceptions to the free choice of law by the parties.

Conclusion

The Convention maintains the general freedom of choice of parties concerning the law applying to their contract. In the absence of an express choice, it provides clear rules to identify the applicable law.

On the one hand, the Convention protects consumer and employees interests. On the other hand, the courts still have flexibility and discretion in cases where the contract should be governed by the law of a different state.

Parties entering into cross-border agreements should keep the Convention in mind and should thus expressly state the governing law in their contract. Otherwise, such law would be determined by the tests established by the Convention. In case of consumer contracts, the result of this test is, with few exceptions, mostly in favour of the country where the consumer has its habitual residence.

avocado rechtsanwaelte
Tarec Alio, LL.M. (Boston), Rechtsanwalt and Attorney-at-Law (New York), 

 


 

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