Number 789 20 January 2009

Client Alert

Latham & Watkins Litigation Department

Rome II and the Law Applicable to Non-Contractual Obligations

Introduction and succession, promissory notes, negotiable instruments, nuclear On 11 January 2009, a fundamental damage, the law of companies and change to the way in which the defamation claims are expressly law applicable to non-contractual excluded from the auspices of Rome II. obligations will be determined Rome II was approved by the Council under English law took place when and European Parliament on 11 Regulation (EC) No 864/2007 on the July 2007 and came into force on 11 law applicable to non-contractual January 2009. It only applies to events obligations (Rome II) came into effect. giving rise to damage after it came The existing common law basis for into force. “Rome II will determining applicable law was enable parties replaced by the directly applicable Whilst Rome II is directly applicable doing business Rome II Regulation. and takes effect in the United Kingdom without the necessity for Rome II represents a significant across borders to implementing legislation, the Law departure from the former state of Applicable to Non-Contractual predict the law affairs under English law in certain Obligations (England and Wales that will apply respects, but it does give parties and Northern Ireland) Regulations the potential for achieving greater to their activities 2008 (SI 2008/2986) also came into certainty in their cross-border effect on 11 January 2009. Those with greater dealings. For the first time, parties Regulations make some consequential certainty. are able to choose (subject to some ” amendments to existing legislation exceptions) the law applicable to and extend the scope of Rome II to their non-contractual obligations. In conflicts between the laws of different addition, a standard set of rules for parts of the United Kingdom and/or determining the applicable law where any of those parts and Gibraltar. no express choice has been made came into effect across Europe. Practising lawyers across Europe, as well as companies and financial “Non-contractual” obligations relate institutions engaged in cross-border primarily to tortious claims, but also business, will need to come to terms include such things as breach of with the changes which Rome II statutory duty, unjust enrichment and makes to the rules as to which law restitutionary claims. However, the is applicable for torts and other liability of the state in the exercise non-contractual obligations and the of state authority, revenue and consequential changes which will be customs, family, matrimonial, wills necessary to contracts.

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Objectives determined by the jurisdiction in which the damage occurs to Party B (England). The fundamental objective of Rome There are, however, a number of II is to standardise the rules by which exceptions. The general rule will not be the law applicable to non-contractual applied where: obligations is determined, with the aim of ensuring that the courts of all • both parties have their habitual EU Member States (save for Denmark, residence in the same country at the which has opted out of the Rome II time when the damage occurs (Article regime) apply the same choice of 4(2)); law rules to disputes involving non- • the tort is ‘manifestly more closely contractual obligations. It is anticipated connected’ with another country that this will give rise to increased legal (Article 4(3)); certainty, facilitate mutual recognition • the parties have agreed on a of judgments and reduce the incidence particular law to govern their non- of forum shopping. Whether this will contractual obligations (Article 14); actually be the case, remains to be seen. • there are mandatory rules of the forum (Article 16); or Rome II will enable parties doing • the application of a provision of business across borders to predict the the law that would normally be law that will apply to their activities determined by Rome II is ‘manifestly with greater certainty. It also, for the first incompatible’ with the public policy of time, allows them to influence the law the forum (Article 26). that will govern their non-contractual obligations by contractually agreeing on However, note that special rules apply a choice of law. to product liability, unfair competition, environmental damage, intellectual The General Rule property and industrial action.

In virtually all EU Member States the Article 14 applicable law, in civil and commercial matters, for non-contractual obligations Article 14 is arguably the most used to be determined by the place significant introduction to English where the harmful act was committed Law precipitated by Rome II. Parties (lex loci delicti commissi). By way of have not previously been able to example, if Party A committed a harmful agree contractually as to the law that act in Germany in relation to which will apply to their non-contractual Party B suffered loss in England, then obligations. However, subject to some pursuant to the former position, the law exceptions, Article 14 now allows parties applicable to Party A’s act would have to make such an agreement. been German law. However, now that Rome II has come into force, this is no A distinction is made in Rome II longer the case. between agreements which pre-date and post-date the occurrence of the The fundamental change introduced event giving rise to the damage. In each by Rome II is that the lex loci delicti case, a choice of applicable law must commissi principle has been replaced be ‘expressed or demonstrated with by the general rule that the law reasonable certainty’. applicable to non-contractual obligations will be determined on the basis of Agreements between the parties as to where the damage occurs, or is likely the applicable law which post-date the to occur, regardless of the country or event (e.g. once a dispute has already the countries in which the act giving arisen or the damage has occurred), can rise to the damage occurs (Article 4). be freely made. Therefore, after damage Returning to the previous example, for has occurred to Party B, it is free to Party A’s harmful act, committed after 11 agree with Party A the law that will be January 2009, the applicable law will be applicable to Party A’s act.

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However, agreements on the law A simple governing law clause, applicable to non-contractual obligations containing an Article 14.1(b) choice of which pre-date the event causing applicable law agreement, might look as damage can only be made where: follows: 1) the parties are pursuing a commercial “This Agreement and any non- activity; and contractual obligations arising out 2) the agreement is freely negotiated. of or in connection with it, shall be governed by and construed in It will be interesting to see how the accordance with English law.” question of whether an agreement has From now onwards, parties should been ‘freely negotiated’ is developed by expect to see this type of wording in the courts and whether consideration draft agreements. of the parties’ respective bargaining positions will be necessary. In addition, whilst a contract on one party’s standard Exceptions to Article 14 terms may not comply with this test, it remains to be seen as to whether There are certain mandatory provisions the inclusion of such a provision in a of Rome II. For example: standard form contract (such as ISDA • where all elements relevant to the agreements) is treated as being ‘freely situation, at the time the event giving negotiated’ for these purposes. rise to damage occurs, are located Whilst choosing a governing law for in a country other than the country non-contractual obligations gives whose law has been chosen, the the parties greater certainty as to the parties’ choice will not prejudice the precise nature and scope of their legal application of that country’s law from relationships, there remains a possibility which the parties cannot derogate by that a party will be bound by that agreement (Article 14.2); choice, even if a dispute arises under • where all elements relevant to the which the law of the country where situation, at the time the event giving the damage occurred might have been rise to damage occurs, are located more favourable. However, in most in one or more Member States, the commercial, cross-border agreements, parties’ choice will not prejudice the the benefit to the parties of agreeing application of any Community law on the applicable law in respect of their which cannot be derogated from by non-contractual obligations will most agreement (Article 14.3); or likely far outweigh the potential risk • where the dispute relates to unfair that the ‘default’ applicable law would competition (Article 6) or infringement be more favourable to them. of IP rights (Article 8), in relation to which special rules apply. With the advent of Rome II, parties who engage in cross-border business with a number of counterparties now face the What the Governing Law will risk that, unless an agreement as to the Affect applicable law has been made, a tortious act committed in one jurisdiction which Rome II has ‘universal application’ causes damage to a number of claimants (Article 3). This means that the courts in a variety of jurisdictions may give rise of Member States will be able to apply to claims under a number of applicable the rules in Rome II to determine non- laws. The risk associated with managing contractual obligations, even if the litigation proceedings in relation to the application of those rules results in the same act under separate applicable substantive law of a non-Member State laws militates strongly towards agreeing being applied (e.g. the English courts the applicable law in advance, where will be able to apply the laws of New possible. York to a non-contractual dispute, if the provisions of Rome II lead to that conclusion).

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Once the applicable law has been If there is any doubt as to which law ascertained, that law will govern not is to apply to the contractual and non- only the basis and extent of a party’s contractual relationship, then an express liability, but also factors such as burden agreement should be made at the outset of proof, grounds for exemption from, of negotiations to ensure certainty. and limitation of, liability and the existence, nature and assessment of Unjust Enrichment and damages (Article 15). Negotiorum Gestio The practical significance of this is that (Articles 10 and 11) where the governing law of the non- contractual obligation is not the law of In unjust enrichment claims and/or the forum, the court will presumably claims arising from negotiorum gestio have to hear expert evidence on the (where a person acts for another without relevant principles of that governing law authority, which entities the quasi agent (e.g. how damages are calculated, etc.). to reimbursement of expenses, but not remuneration—similar in may respects The applicable law will not, however, to quantum meruit) the governing law affect issues of evidence or procedure, of the relationship between the parties which will be determined by the (either contractual or arising in relation jurisdiction of the court in which any to a tort) determines the law applicable to proceedings are to take place. the relevant non-contractual obligation. Pre-Contractual Issues If there is no relationship, but the parties have their habitual residence in the same country at the time the relevant Article 12 provides that that the law event takes place, the applicable law governing a non-contractual obligation will be that of the country of residence. arising out of pre-contractual dealings, If none of these apply, the law of the whether the contract was actually non-contractual obligation will be that concluded or not, will be the law that of the country in which the unjust applies to the contract itself (or that enrichment/negotiorum gestio took would have been applicable to it had it place. been entered into). Although in English law, pre-contractual Competition Issues (Article 6) negotiations are generally not binding, the effect of Article 12 is that parties to Where non-contractual obligations abortive negotiations who had included arise out of an act of unfair competition a governing law clause in their draft (under English law, this generally agreement may find themselves bound equates to breach of statutory duty), the by it in respect of any non-contractual applicable law will be the law where the liabilities which may arise (such as competitive interest or the interests of negligent misrepresentation or a breach consumers are likely to be affected. of confidence). Similarly, where an act of unfair Great care will, therefore, be required competition harms a specific competitor, during cross-border negotiations then the general rule set out in Article 4 to ensure that foreign law does not will apply—i.e. subject to the exceptions impose unexpected, but binding, non- identified previously, the applicable law contractual obligations on the parties. will be determined by reference to the For example, some jurisdictions imply country in which the damage occurs. As obligations of good faith in commercial with the general theme of Rome II, the negotiations, which are not recognised emphasis is on the jurisdiction in which under English law. the injured party suffers loss.

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Whilst the parties are not able to Conclusion derogate from the provisions of Article 6 by agreeing an applicable law, the Rome II came into force on 11 January injured party is given a choice under 2009 and has significant implications Article 6.3(b) to select either: for long term and future cross-border contracts. • the applicable law of the jurisdiction in which the damage occurred; or Consideration should be given to all key • where a defendant is sued in the court cross-border contractual relationships of its domicile, the applicable law of (and negotiations for the same) to that court, provided that the market in determine what applicable law is likely that Member State has been directly to prevail and to consider whether the and substantially affected by the parties should seek to agree a law for unfair competition. non-contractual obligations. If there is any doubt and/or any particular concern There is therefore a limited prospect of regarding non-contractual liabilities, this forum shopping for a claimant in these is an issue on which legal advice should circumstances. be sought.

Intellectual Property Rights (Article 8)

The law applicable to non-contractual obligations arising from the infringement of intellectual property rights is that of the country in which the protection is claimed. Where there is an infringement of a unitary Community intellectual property right (such as a Community Trade Mark) and the issue is not governed by a Community instrument, the applicable law will be the law of the country in which the infringement was committed. As with the provisions relating to unfair competition, parties are not permitted to derogate from the rules set out in Article 8. There is, therefore, no scope for the parties to agree on an alternative applicable law.

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