Chapter 17

Choice of Law

Chapter Contents

Introduction	528
The proper law – express choice	531
The proper law – implied choice	534
The proper law – closest connection	537
Particular issues	545
English public policy and overriding mandatory rules	548
Certain particular types of contract	553
Torts and restitutionary obligations	564
Conclusion	568
Further reading	568

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Introduction

In English litigation relating to contracts, choice of the applicable substantive law is now governed largely by EC Regulation 593/2008 on the Law Applicable to Contractual Obligations, which is usually referred to as the Rome I Regulation.1 By Art 24(1) the Regulation replaces the Rome Convention 1980,2 which was given the force of law in the United Kingdom (UK) by the Contracts (Applicable Law) Act 1990. The Regulation applies to contracts concluded after its entry into application on 17 December 2009, and the Convention remains applicable in the UK to contracts concluded between 1 April 1991 and 16 December 2009.3 In most respects, the Regulation closely resembles the Convention, and, in general, case-law decided under the Convention remains reliable in relation to corresponding provisions of the Regulation.4 This Chapter focusses on the Regulation, but important departures from the Convention will be noted.5

By Art 1(1), the Rome I Regulation applies, in situations involving a conflict of laws, to contractual obligations in civil and commercial matters, but it does not apply, in particular, to revenue, customs or administrative matters.6 By Art 2, any law specified by the Regulation must be applied whether or not it is the law of a member state. Article 22(1) adds that where a state, such as the UK, comprises several territorial units, each of which has its own rules of law in respect of contractual obligations, each territorial unit (such as England and Wales; Scotland; and Northern Ireland) is to be considered as a country for the purposes of identifying the law applicable under the Regulation.7 Thus, from an English viewpoint, the Regulation is equally applicable whether the foreign connection is with another European Union (EU) country (such as France), or with a country external to the EU, such as the US, or even with another part of the UK, such as Scotland. Moreover, it is clear from Art 3(3) that the Regulation applies even where the only foreign element arises from a choice of law agreed to by the parties and the situation is otherwise exclusively connected with a single country, as where a contract concluded in England between English residents and requiring all performances to take place in England contains a clause choosing French law as governing the contract.

The Rome I Regulation does not contain a definition of ‘contractual obligations’. However, in view of Recital 7, it seems clear that the concept of a contractual obligation, for the purpose of the Regulation, must be given an independent meaning, defined by EU law in the light of the purposes of the Regulation and of the general trend that emerges from the laws of the member states viewed as a whole, rather than as being remitted to the law of the country whose court is seised, and that the concept must have essentially the same meaning as in Art 5(1) of the Brussels I Regulation, as referring

1For its text, see [2008] OJ L177/6. With regard to the belated acceptance of the Regulation by the UK, see EC Commission Decision 2009/26 [2009] OJ L10/22. The Regulation applies in all of the member states except Denmark.

2EC Convention, opened for signature at Rome on 19 June 1980, on the Law Applicable to Contractual Obligations. For its text, see [1998] OJ C27/34, or Sched 1 to the Contracts (Applicable Law) Act 1990.

3 See Arts 28 and 29 of the Regulation, and Art 17 of the Convention.

4The case-law on the Rome Convention consists mainly of decisions given by national courts, since it was not until August 2004 that the European Court gained power under the Brussels Protocols, signed on 19 December 1988, to give preliminary rulings on the interpretation of the Rome Convention; see [1989] OJ L48, or Sched 3 to the 1990 Act. Guidance on the interpretation of the Rome Convention, and thus of the Rome I Regulation, may also be drawn from the Giuliano and Lagarde Report; see [1980]

OJ C282, and s 3(3)(a) of the 1990 Act.

5In the final section of this Chapter, we briefly examine the rules on choice of law in respect of torts and restitutionary obligations, laid down by EC Regulation 864/2007, which is commonly referred to as the Rome II Regulation. For its text, see [2007] OJ L199/40.

6 This is subject to the exclusions of certain types of contract, term or issue specified in Art 1(2)–(3).

7Although Art 22(2) permits a state within which different territorial units have their own rules of law in respect of contractual obligations not to apply the Regulation to conflicts solely between the laws of such units, the UK has chosen not to utilise this permission; see s 2(3) of the 1990 Act.

INTRODUCTION

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to obligations freely assumed by one party toward another.8 In any event, the concept should not be restricted by technical rules of the internal lex fori, such as the English rule requiring consideration, which are designed to regulate the validity, rather than define the nature, of a contract.9

The material scope of the Rome I Regulation is, however, restricted to a limited extent by Art 1(2)–(3), which excludes certain types of transaction, certain terms and certain issues from the ambit of the Regulation, thus remitting them (in the absence of other EU legislation) to the traditional conflict rules of the court seised.

As regards types of transaction, the Regulation has almost entirely eliminated an important exclusion formerly made by Art 1(3) and (4) of the Convention, which had referred to contracts of insurance (other than reinsurance) covering risks situated within the EU.10 In contrast,Art 1(2)(j) of the Regulation makes a very minor exclusion from its scope in respect of insurance contracts whereby an insurer who is not established in a member state provides death, unemployment or sickness benefits in connection with particular employers or trades. Another exclusion, made by Art 1(2)(d), concerns obligations arising under bills of exchange, cheques or promissory notes, or under other negotiable instruments in so far as the obligations arise from the negotiable character of the instrument.11 A further exclusion, made by Art 1(2)(h), concerns the constitution of trusts and the relationship between settlors, trustees and beneficiaries. Another exclusion, made by Art 1(2)(b) and (c), covers obligations arising out of family or comparable relationships, including maintenance obligations, or from matrimonial or comparable property regimes, or wills and succession. This exclusion, taken with the exclusion made by Art 1(2)(a) of questions of individual status or capacity, seems designed to cover all contracts which fall within the sphere of family law.12

Whatever the type of contract, Art 1(2)(e) excludes the validity and interpretation of arbitration or jurisdiction clauses from the scope of the Rome I Regulation.13 However, the exclusion does not extend to the substantive contract containing an arbitration or jurisdiction clause, and it does not prevent such a clause from being taken into account in determining the law which governs the substantive contract under Arts 3 and 4 of the Regulation.14

Other exclusions by Art 1(2) encompass particular issues, rather than types of transaction or clause. They relate to:

•individual status or capacity (Art 1(2)(a));

•questions governed by company law, such as the creation (by registration or otherwise), legal capacity, internal organisation or winding up of companies and other bodies, and the personal liability of officers and members as such for the obligations of a company or body (Art 1(2)(f));

•the question whether an agent is able to bind a principal, or an organ to bind a company or other body, to a third party (Art 1(2)(g))15;

8See Case C-26/91: Handte v TMCS [1992] ECR I-3967; and Case C-51/97: Réunion Européenne v Spliethoff’s Bevrachtingskantoor [1998] ECR I-6511.

9 See Re Bonacina [1912] 2 Ch 394.

10Instead the matter had been regulated by EC Directive 88/357 (as amended) in the case of non-life insurance, and EC Directive 2002/83 in the case of life insurance. See [1988] OJ L172, [1992] OJ L228, and [2002] OJ L345.

11Negotiable instruments are subject to special conflict rules both in the UK (under the Bills of Exchange Act 1882, s 72) and in Continental countries (under the Geneva Conventions 1930 and 1931 for the Settlement of Certain Conflicts of Laws in Connection with (respectively) Bills of Exchange or Cheques).

12See Giuliano and Lagarde [1980] OJ C282, at p 10.

13See Akai v People’s Insurance [1998] 1 Lloyd’s Rep 90.

14See Giuliano and Lagarde [1980] OJ C282, at p 12.

15However, see Marubeni v Mongolian Government [2002] 2 All ER (Comm) 873, where Aikens J accepted, on the basis of the predecessor of Rule 244 in Dicey, Morris and Collins, The Conflict of Laws, 15th edn, 2012, Sweet & Maxwell (Dicey), that ostensible authority, usual authority and ratification are governed by the putative proper law of the main contract, itself determined under the Rome I Regulation.

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•obligations arising out of dealings prior to the conclusion of a contract (Art 1(2)(i))16; and

•evidence and procedure (Art 1(3)).

In view of the last-mentioned exclusion, there is no reason to suppose that the Regulation requires any change to the English rule that the possible applicability of foreign law must be ignored unless a party invokes a foreign rule by appropriate pleading and proof.

By Art 23, the Rome I Regulation gives way to other EU legislation which, in relation to particular matters, lays down conflict rules relating to contractual obligations. Accordingly, the Regulation gives way to Directive 93/13 on unfair terms in consumer contracts17; to Directives 94/47, 97/7, 1999/44 and 2002/65, which deal with various other aspects of consumer protection18; and to Directive 96/71 on the posting of workers in the framework of the provision of services.19 Similarly, the Regulation gives way to Arts 17 and 18 of Directive 86/653, on self-employed commercial agents, which guarantee certain rights to commercial agents after the termination of agency contracts. As the European Court ruled in Ingmar v Eaton Leonard,20 these provisions must be applied where the commercial agent carried on his activity in a member state, even if the principal is established in a non-member country and a clause of the contract stipulates that the contract is to be governed by the law of that country. However, Art 23 of the Regulation makes an exception for Art 7, which deals with insurance and replaces the relevant provisions of Directives 88/357 and 2002/83.

By Art 25, the Rome I Regulation does not prejudice the application of international conventions to which one or more member states were parties when the Regulation was adopted, and which lay down conflict rules relating to contractual obligations. From an English perspective, Art 25 saves the operation of the (UK) Carriage of Goods by Sea Act 1971, which makes the HagueVisby Rules applicable to shipments from either the UK or another contracting state, with the result that in the case of such a shipment they override a choice of a foreign proper law.21 It also saves the operation of Art VIII(2)(b) of the International Monetary Fund Agreement signed at Bretton Woods in 1944, by which exchange contracts that involve the currency of an International Monetary Fund (IMF) member state and that contravene exchange control regulations of that state, maintained or imposed consistently with the IMF Agreement, are rendered unenforceable in other member states. This provision is implemented in the UK by the Bretton Woods Agreements Act 1945 and Order 1946.22 Since the breakdown of the system of fixed parities in the early 1970s, Art VIII(2)(b) has been construed narrowly. Thus, a contract is an ‘exchange contract’ only when it provides for the exchange of one currency for another and not (for example) for the sale of goods, or in so far as it is a monetary transaction in disguise.23

Under the Rome I Regulation, most issues relating to a contract are governed by a single law, which the Regulation refers to as the law governing or applicable to the contract, but which may more conveniently be referred to by the traditional English term, ‘the proper law of the contract’. The proper law is determined under the rules laid down by Arts 3 and 4, which refer to an express or a clearly demonstrated implied choice by the parties, or, in default of any such choice, to the country most closely connected, usually presumed to be the residence of

16However, such obligations are subjected to the actual or putative proper law of the contract by Art 12(1) of the Rome II Regulation.

17[1993] OJ L95/29. See especially Art 6(2).

18See at pp 555-56.

19[1997] OJ L18/1. See recital 11 to the Directive.

20Case C-381/98, [2000] ECR I-9305.

21See The Hollandia [1983] 1 AC 565. See Chapter 8.

22SR&O 1946/36.

23See Wilson Smithett and Cope v Terruzzi [1976] QB 683; and United City Merchants v Royal Bank of Canada [1983] 1 AC 168.