The 1980 Rome Convention on the law applicable to contractual obligations will be replaced by a new regulation, the Rome I Regulation (Regulation 593/2008, [2008] OJ L177/6). This was approved by the Council on 5th June 2008 and signed by the European Parliament and Council on 17th June 2008. Despite initial reluctance to adopt the Regulation by Ireland, the UK, and Denmark, the regulation will apply to contracts concluded in all EU Member States except Denmark from the 17th December 2009.
Scope of the Regulation
The new Regulation provides clear rules to determine the law applicable to any given contract (both civil and commercial) in the absence of a choice of law clause. It follows the principle that parties are mostly free to choose the law that governs their contract. Under Article 1 the Regulation does not apply to certain matters such as revenue, customs or administrative matters, choice of court agreements, arbitration agreements, or matters governed by company law. At Article 12(1) the Regulation states that it governs all aspects of relevant contracts including interpretation, performance, consequences of breach, assessment of damages, consequences of nullity of contract, and methods of removing obligations.
The basic rule
The basic rule under Article 3 of the Regulation is that a contract, or any part thereof, is to be regulated by law of the choosing of the parties involved. This does not mean that the parties are required to make a set choice of law. The appropriate choice of law can be found either in the terms of the contract or the circumstances of the individual case. In the right circumstances, parties can agree with each other to change the choice of law.
Habitual Residence
Where there is no choice of law by the parties, the applicable law is identified through a series of rules for specific types of contracts. The habitual residence of a party to the contract is generally the deciding factor. The law of the country where the seller is habitually resident will govern contracts for the sale of goods and contracts for the provision of services. Where the country in question is comprised of several different legal jurisdictions with different rules of law on this matter, each jurisdiction is deemed a country under the Regulation.
To define what habitually resident means, the Regulation distinguishes in Article 19 between companies, natural persons, and branches, agencies or any other establishment. The relevant point in time for determining habitual residence is the time the contract is concluded. The principal place of business is the habitual residence of a natural person acting in the course of business, while the place of central administration is the habitual residence of companies and other bodies. For franchise agreements, the relevant place of habitual residence is the place where the franchise is located and where the contract is concluded.
Exceptions
There are specific rules set out at Articles 5 8 that govern certain exceptional situations where there is no express choice of law. This includes situations where there are contracts for employment, contracts for carriage of goods or passengers, consumer contracts, and insurance contracts. Franchise and distribution contracts fall into the category of contracts for service in paragraph 17. As stated above, the law of the country where the seller is habitually resident usually governs contract for services. Franchise and distribution contracts, however, are subject to their own specific rules. Under these rules, the law of the jurisdiction within which the franchisee or distributor normally resides will regulate franchise and distribution contracts (article 4).
To summarise, from 17th December 2009 all contracts entered in to, with the exception of those involving Denmark, will be subject to the new regulation. The regulation clearly states the rules for determining which jurisdiction’s law apply to a contract. Effectively, this means that all courts of the individual Member States will apply the same law be it their own or that of another EU country to the contract in question should it come into dispute. This is despite the fact that the law of the Member State in which the hearing is held may differ from the law being enforced. Should a party to a proposed contract be unhappy with this situation they must include specific provision to the contrary in their contract. The Rome Convention will continue to apply to any contracts concluded up until 17th December 2009, and also to contracts where performance occurs in Denmark.