International In-house Counsel Journal Vol. 8, No. 29, Autumn 2014, 1

Bounds and Pitfalls When Splitting the

ANDREAS SCHØNBECK Attorney-at-law, Vestas Wind Systems A/S, Denmark

The paper outlines, from a Danish law perspective, the possibilities available to the parties to a , pursuant to the Rome Convention and the , to split the choice of law between the laws of different states. In this connection it is stated where the bounds for the possibility of splitting are assumed to be found and which pitfalls the parties ought to take into account when contemplating splitting. It is concluded that even when splitting may be deemed largely possible, the parties may want take a cautious approach to this exercise. 1. Introduction For most in-house lawyers dealing with international is a daily and ordinary task. In the multi-state context where the contract has a connection to more than one the parties will almost inevitably discuss by which law the contract will be governed, and hence what law should apply in case of disputes or litigation. In this regard, international private law becomes part and parcel of handling international contracts. This area of law contains inter alia1 the rules relating to the question of what law governs a particular international dispute ( or lex arbitri depending on whether it is a or arbitration case), irrespective of whether the dispute is based on a contractual or delictual claim. The focus of this paper will be contractual claims between the parties to an international contract. Moreover, the paper will approach the topic from the angle of Danish law. International private law is an area of law of great complexity. As no uniform rules apply globally to the choice of law in international contracts, one will have to navigate between regional rules, but even on a regional basis the relevant rules can differ from state to state, often leaving practitioners with a Gordian knot of legislation to be untangled before it is even possible to dig into the actual substance of the dispute in question. 2. The Rome Convention and the Rome I Regulation For a long time there has been significant cooperation between the member states of the European Union (EU) with a view to implementing uniform rules to apply when designating the applicable law of a dispute. This is undertaken to avoid the disadvantages of a regime where each state applies its own exclusive rules (lex fori or lex arbitri) which are not rooted in a regional set of rules. Within the EU, cooperation in the area of choice of law of international private law has resulted in two sets of rules: the Rome Convention2 (Convention) and the Rome I

1 International private law also encompasses the international venue rules, i.e. the rules designating the state in which the proceedings under an international dispute should take place. 2 The Convention on the Law Applicable to Contractual Obligations, June 19 1980.

International In-house Counsel Journal ISSN 1754-0607 print/ISSN 1754-0607 online 2 Andreas Schønbeck

Regulation3 (Regulation). The latter was intended to supersede the former. Albeit, since Denmark, as the sole remaining member state, has not yet implemented the Regulation, the Convention continues to be the set of rules to consult if Danish private law is lex fori or lex arbitri. Hence, as this paper approaches the topic from a Danish law perspective, it will deal with the possibility of splitting the choice of law both in terms of the Convention and the Regulation. 2.1 The parties’ autonomy One of the basic principles under both the Convention and the Regulation is the parties’ autonomy with respect to the choice of the applicable law of the contract. This autonomy can be exercised in case the parties do not want to rely on the regulation under the Convention or Regulation, according to which the forum court or arbitration will designate the applicable law. In the Convention, the parties’ right to choose the applicable law of the contract is set out in article 3. The article states in its first and second sentence that ‘[a] contract shall be governed by the law chosen by the parties. The choice must be expressed or demonstrated with reasonable certainty by the terms of the contract or the circumstances of the case’. From this can be inferred that the parties have a relatively unfettered right to make their choice of law as long as the choice at least can be ‘… demonstrated with reasonable certainty by the […] circumstances of the case’.4 It could thus be held, that the threshold for a choice of law being upheld is to be considered fairly low. In the Regulation, the parties’ autonomy appears in article 3 of the Regulation, according to which, ‘[a] contract shall be governed by the law chosen by the parties. The choice shall be made expressly or clearly demonstrated by the terms of the contract or the circumstances of the case’. This shows that the Regulation contains more demanding requirements to the parties’ choice of law, in comparison to the Convention. In any case, the assessment of whether the parties’ choice of law has in fact been agreed will have to be made in accordance with lex fori or lex arbitri, which with regard to the Convention and the Regulation will be pursuant to article 3 (4) and article 3 (5) respectively. Subsequently, the assessment of the validity of such choice of law is subject to the designated law (lex contractus). Irrespective of whether the choice of law is made pursuant to the Convention or the Regulation, it is relevant to keep in mind that the designated law does not have to be the law of a member state of the EU nor a state that has ratified the Convention or the Regulation, as applicable. It should further be noted, that the fact that the parties have designated the venue for the handling of any disputes will not, as such, be sufficient to assume that they thus also indirectly have made a choice of law that meets the requirements set out in the Convention or the Regulation, as applicable. Such fact will merely be included as one of the relevant factors.

3 The Regulation of the European Parliament and of the Council, 17 June 2008 on the law applicable to contractual obligations. 4 Furthermore, the choice of law can be agreed after the contract comes into force, and it can later be changed by a new agreement between the parties. Also, it is not required that the parties have any affiliation with the designated law, although it is required that the law is the law of a state.

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2.2 Agreed splitting of the choice of law As a consequence of their autonomy in respect of the choice of law, the parties are also entitled to agree [1] that the designated law will not govern the whole of the contract or [2] that more than one designated law will apply to the contract. This possibility to split the choice of law is labelled dépeçage or rather agreed dépeçage in order to distinguish the term from the situation where the splitting of the choice of law is done by the court.5 In the Convention, the splitting option follows from its article 3 (3) according to which the parties by their choice ‘… can select the law applicable to the whole or a part only of the contract’. In the Regulation the splitting option follows from its article 3 (3) which is identical to the equivalent provision in the Convention. It should be noted, that although the Hague Convention6 does allow for the parties to make an agreed choice of law, the convention lacks the splitting option as found in the Convention and the Regulation. Therefore, the Hague Convention will not be taken into account in this paper. As a minimum, the parties’ agreed splitting of the choice of law pursuant to both the Convention and the Regulation must follow the formal general requirements to the agreed choice of law per se. But the actual extent to which the splitting of the choice of law can be carried out cannot be derived from these formal requirements. Neither do any such bounds explicitly appear from the content of the relevant articles in the Convention or the Regulation, because a verbatim understanding of those articles merely suggests that the splitting can be done without limitation or restriction. However, such objective interpretation of the parties’ right to split the choice of law is not accurate, as both legal scholars, as well as the essential Giuliano/Lagarde-report7, suggest that the splitting does have to respect certain limits. Some legal scholars are of the opinion that agreed dépeçage should only be allowed exceptionally and that the unity of the applicable law of the contract thus should be preserved unless the splitting is carried out between various contracts within the same contractual complex, cf. section 3.1 below.8 These scholars are consequently dismissive of a splitting within the same contract, cf. sections 3.2 and 3.3 below. This approach to the dépeçage principle can be described as reticent and conservative. Despite the above cautious approach to the splitting of the choice of law in a contract, it is predominantly the view among legal scholars, that the splitting can take place almost without restriction as long as the split does not mean [1] that the application of the respective designated laws does not lead to contradictory results or [2] that the same issue is governed by more than one law.9 Such restrictions seem logical and can be accepted without further ado. On that basis, it is obvious that the restrictions leave the parties with great freedom to exercise the dépeçage; and freedom that may appear beneficial and comfortable at first sight, but eventually may give rise to significant pitfalls if the splitting is indeed taken to its theoretical limits.

5 E.g. pursuant to articles 10 (2) and 4 (1, 2. sentence) of the Convention, and article 12 (2) of the Regulation. 6 Convention On The Law Applicable To International Sale Of Goods – The Hague, 1955. 7 Report on the Rome Convention on the Law Applicable to Contractual Obligations from June 19 1980, by Professors Mario Giuliano and Paul Lagarde (OJ 1980 No C282/1). 8 See Stone and Svenné Schmidt. 9 See Lookofsky, Hertz, Arnt Nielsen, Philip and Pålsson.

4 Andreas Schønbeck

From the above it can be concluded that the splitting of the choice of law can be exercised to a large extent and perhaps to a larger extent than is, in fact, in the interest of the parties. It is thus likely that a split may be convenient when negotiating the contract, but subsequently complicates the foreseeability and practicability of the contract when a dispute occurs and the consequences of the split materialize. 3.1 Dépeçage of contracts within a contractual complex In the event that the parties agree on different laws to apply to different contracts within an overall contractual complex, such splitting could probably be justified as each designated law exclusively applies to a specific contract. In that way, the risk of conflicts prompted by the different laws can only take place between the relevant contracts rather than within a particular contract. Naturally, that does not mean that a conflict between various contracts in a contractual complex is ideal or not worth avoiding. Nevertheless, the point is that such risk seems to represent an issue less severe than when the conflict occurs within the contract – perhaps jeopardising the certainty and effect of the contract. In practice the situation could be that the parties are negotiating a framework agreement concerning the trade of goods. The primary contract in that respect will most likely be the actual framework agreement setting out the overall terms and conditions according to which the parties’ trade will take place including the parties’ respective rights and obligations. The main body of the contractual complex may subsequently be accompanied by other contracts, such as underlying contracts (subject to the framework agreement), a non-disclosure agreement and other separate contracts pertaining to the framework agreement. All of these individual contracts comprise the contractual complex and will be interlinked to the extent that such a connection is established in one or more of the contracts. Because of this, it may not be controversial to assign an applicable law to some of the contracts which differs from the law applicable to the other contracts. In fact, this may not even give rise to any legal issues or contradictions but may, on the other hand, be required due to the actual project setup according to which the contracts may have a close connection to different . Alternatively, the splitting opportunity could come in handy when negotiating the contract in order to accommodate a party’s request for designating a different law to a specific contract. The risk that nevertheless follows from the split (despite the fact that the split is carried out between contracts) is that more than one law has to be taken into account before the legal position is possible to determine accurately. This comes with a cost as lawyers from more than one jurisdiction will have to be consulted in relation to the assessment. This risk is not tightly linked to splitting of the choice of law within a contractual complex only, but is an intrinsic risk that follows from any such splitting no matter on what level the it is exercised, cf. below sections 3.2 and 3.3. 3.2 Dépeçage of objective aspects of a contract Another typical level of dépeçage is the split between objective aspects of a contract, i.e. where the parties let the splitting of the choice of law take place within a contract and e.g. designate a particular law to apply to an objective aspect of the contract. As a result, the contract may end up with one designated law for the contract in general and another law to apply to an objective aspect separately. The term objective aspect refers to a part of the contract which is not linked to the parties’ rights and obligations and thus is not concerning the subjective aspects of the contract, cf. the below section 3.2. An example of an objective aspect can be the aspect of determining whether the goods sold under the contract are defective or the aspect of ascertaining whether a contract under a framework agreement has been concluded (in light of the order and order confirmation).

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To detach such objective aspect from the general designated law of the contract and apply a separate law to it can be a prudent decision for many reasons. If, for instance, the particular aspect has a closer connection to a specific state than the rest of the contract, it could make sense to the let laws of that state govern the aspect. To reuse the aforementioned example, it could be the case where the goods will be used exclusively in one state that is different from the state whose laws govern the contract in whole. Here the designation of the laws of the state, in which the use of the goods will take place, may seem rational to the parties in order to link the two items. Moreover, the split is likely to work in practice, as it probably will not lead to confusion or intermixture of governing laws, as the split will be the same for both parties no matter which of them raises a claim pursuant to the designated law. However, for as much as the above split may work in practice and seem logical, one should not be oblivious to the fact that it can cause some undesirable issues. That would particularly be the case if the parties’ designation of the venue for settling any disputes is in a state other than the one of the applicable law. If, for instance the dispute concerns an aspect of the contract to which the parties have decided the laws of state X apply, then it may give rise to complications if the venue is in state Y. Of course the above pitfall may not be considered alarming or the source of insurmountable obstacles, as such a scenario cannot be assumed to be uncommon and as the judges of and arbitrations in most countries will be adequately qualified to handle such issues in a sound manner, despite being trained in the laws of a different state. Nevertheless, this situation needs to be highlighted as a potential risk, resulting from this kind of splitting of the choice of law between different aspects of a contract. Moreover it should be presumed, that this kind of splitting is unlikely to conflict with the bounds mentioned in section 2.2 above which the split is supposed to respect, according to legal scholars. 3.3 Dépeçage of subjective aspects of a contract A final typical dépeçage approach worth mentioning is the one where the splitting of the choice of law takes place between subjective aspects of a contract. That will be the case if the parties, for example, decide to let one party’s obligations be governed by the laws of state X, whereas the other party’s obligations will be governed by the laws of state Y and all residual matters will be governed by the laws of state Z. On the face of it, this approach may not seem significantly different than the one handled in section 3.2 above, as both approaches concern a split of the choice of law between different aspects of the contract. However, the difference is indeed relevant, as the split in this case is carried out between subjective aspects of the contract pertaining to the parties. Although the consequence of such split is not obvious, it quickly appears to be able to cause alarming confusion as, for example, what constitutes one party’s obligations may not be judged the same under the laws of state X as under the laws of state Y, and, as a result, an intermixture of the applicable laws may ensue. As set out in section 2.2 above, agreed splitting of the choice of law must not have an outcome where two (or more) laws apply to the same issue or where the result of applying two (or more) laws to the same contract lead to contradictory results. Of course the parties’ autonomy must be respected; however this is just a (strong) starting point that cannot lead to the above confusion. Therefore, such an event, where the court or arbitration cannot assess the dispute because of the conflict created by the contradictory choice of law, will force the judges to make a choice of law themselves, based on lex fori or lex arbitri. It must thus be recommended

6 Andreas Schønbeck that the parties do not even take the possibility of splitting to its limits as the consequences for the choice of law(s) being disregarded will be contrary to their original intention. 4. Conclusion The pros and cons stead above concerning the various approaches to the splitting of the choice of law of a contract does not mean that only one law should govern a contract in every instance. Such a view is both too dichotomous and insufficient to take into account the possible necessity of splitting of the choice of law. However, in order to avoid the most obvious problems connected to a multi-law contract, it is recommended that the parties should take a single-law approach as their starting point from which they may depart if the circumstances suggest doing so. As the splitting of the choice of law can make sense in many ways, both from a negotiation and a strictly legal perspective, some reluctance of the parties to exercise the full extent of possible splitting will probably serve them well as it can be assumed that they, will avoid most of the pitfalls mentioned in this paper. Although such a cautious approach to splitting will not even be close to the limits of splitting as suggested by legal scholars, it will, on the other hand, in practice be manageable, create the desired certainty and support the parties’ autonomy with regard to choosing the applicable law(s) of their contract, without causing contradictory results. *** Andreas Schønbeck graduated from University of Copenhagen, School of Law, in 2009, after which he joined the Group Legal department in the Danish wind turbine manufacturer Vestas Wind Systems. He was admitted to the Danish bar in 2012. In his current position he supports Vestas Wind Systems’ Global Sourcing, Technology R&D and Marketing and Communication departments and the company’s supply chain and general legal matters. Specifically, the job is heavily based on contracts and all matters deriving from contracts, drafting, negotiating and managing contracts as well as disputes and settlements and related strategic issues. In parallel with the above, he is an external lecturer in Commercial Law at the University of Aarhus and writes legal papers. He is furthermore the author of a text book concerning non-disclosure agreements and is currently working on a text book manuscript about product liability and the contractual handling thereof. Vestas Wind Systems is the only global energy company dedicated exclusively to wind energy. The company was founded in 1898 as a blacksmith shop in western Denmark, and it started producing wind turbines in 1979, and has since gained a market-leading position with more than 64 GW of installed wind power and more than 42 GW under service globally. With installed wind turbines in 73 countries around the world, we have considerable experience in all the key disciplines – engineering, transportation, construction and operations and maintenance. Our projects have covered every kind of site, from high altitude to extreme weather conditions. The company has installed more than 52,000 turbines on six continents, which generate more than 90 million MWh of energy per year. The Company employs 19,500 employees globally and has offices in 24 countries.