New EU rules on whose laws apply in contract disputes

The rules relate to the Rome Convention of 1980, which the Commission plans to update and convert into a Community instrument – an instrument with a working title of Rome I. This should not be confused with Rome II, an instrument that deals with non-contractual cross-border disputes, such as those on product liability or defamation.

In general terms, the 1980 Convention deals with disputes over international contracts, allowing the signatories to a contract to choose the law applicable to their contract, and to select the court that will hear disputes arising from that contract. It does not apply in certain disputes – including those involving wills and property rights related to family relationships, arbitration agreements and disputes governed by company law.

The Commission hopes to modernise the Convention, which is the only instrument of private international law in the Community that is still in international treaty form.

This is not a particularly good thing, in the Commission’s view, as it makes it possible for Member States to depart from the terms of the Convention by means of national rules or by acceding to multilateral conventions.

In addition, Europe’s top court, the Court of Justice, has no jurisdiction over the interpretation of the Convention unless signatory States give the Court of Justice that power. According to the Commission, Member States have taken 25 years to ratify the requisite protocols, the Court’s judgments are still not binding on all the Member States, and the national courts are under no obligations in this regard.

Finally, the Commission believes that a modernised EU law will make it easier to apply the rules in the new Member States, some of which have not yet signed a treaty of accession to the Convention.

The new rules, set out in a proposal for a Rome I Regulation adopted by the Commission yesterday, are designed to reinforce the core principle of the Convention – the freedom of parties in the business world to choose the law applicable to the relationship between them.

The Regulation would allow the parties to choose as the law applicable to their relationship rules originating in: the law of a State; certain international conventions; or internationally recognised private codifications (such as the Vienna Convention on the international sale of goods). This upholds a practice that has become common since 1980.

If the Community one day adopts an optional instrument on contracts (EC Contract Law project), the Regulation would also allow that instrument to be chosen.

The Regulation then considers those situations where parties have not chosen the law applicable to the relationship between them.

It specifically sets out which law will apply in certain common forms of contract (sales of goods, services, distribution, intellectual property), in contrast with the Rome Convention, which left courts with a wide discretion that turned out to be a source of uncertainty in the law.

According to the Commission, the rules have been devised so as to respect the parties’ legitimate expectations and the effect will be that the law of the party performing the characteristic service of the relevant type of contract will be applicable (the seller, service-provider, carrier, distributor, etc.).

“By providing foreseeable and simplified rules, the Rome I proposal on the law applicable to contracts will enable Europe’s citizens and firms to make more of the possibilities offered by the internal market,” said Franco Frattini, Vice President of the European Commission responsible for Justice, Freedom and Security, yesterday.