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Government backs new rules for cross-border contracts

The UK Government is backing a proposed EU law to control which country's laws apply in cross-border contract disputes. The Regulation, called Rome I, has been revised in ways that satisfy earlier concerns, the Government said in a new consultation paper.07 Apr 2008

The Rome Convention of 1980 currently determines how parties in different countries should settle disputes. It did not harmonise actual laws governing contracts but it did establish which country's law should apply in any dispute.

In 2005, the European Commission proposed the Rome I Regulation, intending that would cover the same ground as the Convention. The UK opted out of that proposal at an early stage because the Government did not believe that it was in the economic interests of the UK. Rome I differed from the Rome Convention in ways that it could not support, it said at the time.

The Regulation was never passed and the European Commission issued an amended proposal last November. The Ministry of Justice has now said that following these changes it thinks it is best if the UK does sign up. "The proposal is now substantially in accord with the Rome Convention," it said.

It has explained its change of stance in a 136-page consultation paper in which it asks UK businesses to give their views on the Commission's new proposal.

"The analysis in this consultation leads to the preliminary conclusion that the UK should opt in to the Rome I Regulation and apply similar rules to contracts connected to two or more jurisdictions within the UK," said the consultation paper.

Rome I enshrines the basic principle of the Rome Convention, which is that two parties can choose which of their countries' laws will govern their dealings.

The Convention and proposed Regulation also determine which laws will apply if there is no agreement between the parties. This changes depending on whether a contract involves a consumer or not and whether it is for goods or services or property, amongst other factors.

The trouble with Rome I, version I

The Government explained in its consultation paper why it had initially rejected the Regulation.

"The Commission proposed fundamental changes to the law applicable to consumer contracts, as well as entirely new provisions on contracts concluded by an agent and on voluntary assignment and subrogation," it said. "There were also structural changes to core provisions, such as the law applicable in the absence of choice. Taken together, the Commission proposal was not simply a transposition from one legal form to another with necessary updating."

Its consultation process also uncovered resistance in the private sector. "There were fundamental concerns about the Commission’s proposal and the manner in which it had been prepared," said the current consultation document. "The key concerns centred on aspects of the rules on party choice, default rules in the absence of choice, consumer contracts, contracts by an agent, mandatory rules, assignment and subrogation."

"UK stakeholders, especially those involved in international finance and commerce, were concerned about the potential economic impact of several of the provisions. There was particular concern about the potential of the proposal to introduce significant legal uncertainty into complex, multi-party international contracts," it said.

Under the Rome Convention, businesses generally had freedom to declare in their contracts that, for example, English law would apply to the contract and therefore to any dispute. That was qualified for consumer contracts such that a consumer would always enjoy the protection of "mandatory rules of law" in his own country. The Commission's 2005 proposal removed all freedom of choice for consumer contracts, instead stating that in all cases the applicable law would be that "of the Member State in which the consumer has his habitual residence."

The UK Government described that as a "radical departure" from the Rome Convention.

"The Commission’s proposal caused widespread concern in those business sectors, in particular the small business and e-commerce sectors, which routinely provide goods and services to consumers in the European Union," said the consultation paper. "It was felt that the new rule would represent a change that was not justified by the generally satisfactory operation in practice of Article 5 of the Convention. Such a change would place a requirement on businesses to research the entire law of contract in every country where goods and services were to be supplied to consumers. Fears were expressed that such a burden of 'due diligence' would interfere with the operation of the internal market and in some instances even deprive consumers of goods and services currently sold to them by overseas suppliers."

Rome I, version II

The Government said that it believes that the latest version of the proposal for a Regulation fixes these problems, and that it would not be in the UK's interests to stay outside of any agreement.

"Some of the benefits of the Rome I Regulation arise from its structure as a Community instrument, rather than the specifics of the text," said the consultation paper. "In conflict of laws issues, the widespread application of similar rules can provide a benefit for those contracting across borders. In particular, maintaining a single system prevents the need for extensive legal advice."

"This benefit, presently provided by the Rome Convention, will be lost if the UK does not opt in, as the Regulation will apply in other Member States in any event. While the Convention and the Regulation are similar in many respects, maintaining two separate systems would increase complexity, especially for business."

The consultation is open until 25th June 2008.

The proposed Rome I Regulation is separate from the proposed Rome II Regulation, which governs the law to be used in the case of non-contractual disputes in the EU.