Rome Regulations

Commentary

Second Edition

Edited by Gralf-Peter Calliess Published by: Kluwer Law International PO Box 316 2400 AH Alphen aan den Rijn The Netherlands Website: www.kluwerlaw.com

Sold and distributed in North, Central and South America by: Aspen Publishers, Inc. 7201 McKinney Circle Frederick, MD 21704 United States of America Email: [email protected]

Sold and distributed in all other countries by: Turpin Distribution Services Ltd Stratton Business Park Pegasus Drive, Biggleswade Bedfordshire SG18 8TQ United Kingdom Email: [email protected]

Printed on acid-free paper.

ISBN 978-90-411-4754-7

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without written permission from the publisher.

Permission to use this content must be obtained from the copyright owner. Please apply to: Permissions Department, Wolters Kluwer Legal, 76 Ninth Avenue, 7th Floor, New York, NY 10011-5201, USA. Email: [email protected]

Printed and Bound by CPI Group (UK) Ltd, Croydon, CR0 4YY.

Suggested citation: Gebauer, Art. 4 Rome I, in Calliess (ed.) Rome Regulations (2nd. ed 2015), mn. 5 ARTICLE 12 SCOPE OF THE LAW APPLICABLE

(1) The law applicable to a contract by virtue of this Regulation shall govern in particular: Rome I

(a) interpretation; (b) performance; (c) within the limits of the powers conferred on the court by its procedural law, the consequences of a total or partial breach of obligations, including the assessment of damages in so far as it is governed by rules of law; (d) the various ways of extinguishing obligations, and prescription and limitation of actions; (e) the consequences of nullity of the contract.

(2) In relation to the manner of performance and the steps to be taken in the event of defective performance, regard shall be had to the law of the country in which performance takes place.

Overview

I. Purpose II. Scope of Application III. Legislative History IV. Content 1. Paragraph 1: Applicable Law 2. Paragraph 2: Manner of Performance of Obligations

I. Purpose

The purpose of Article 12 is to define the sphere of the applicable law under the 1 Rome 1 I Regulation. That law shall govern, in particular, interpretation, performance, the consequences of breach, extinction of obligations and the consequences of nullity of contracts. For those matters, the same law will be applicable as for its existence and validity (cf. Article 10). This is to create a uniform lex contractus.1 Article 12(2) is a special rule that relates solely to the manner of performance and the 2 steps to be taken in the event of defective performance. It complements the regulation of the performance of a contract in paragraph 1(b) and allows a severance (dépeçage) with regard to the law of the real place of performance. The purpose of paragraph 2 is

1. Magnus, Art. 12 Rom I-VO, in Staudingers Kommentar zum Bürgerlichen Gesetzbuch (Magnus ed., revised edition 2011), para. 2 (Prinzip des einheitlichen Vertragsstatuts); Spellenberg, Art. 12 Rom I-VO, in Münchener Kommentar zum BGB Vol. 10 (Säcker and Rixecker eds, 6th ed. 2015), para. 3; Ferrari, Art. 12 Rom I-VO, in Kommentar zum Internationalen Vertragsrecht (Ferrari et al. eds, 2nd ed. 2012), para. 1; Rauscher/Freitag, EuZPR/EuIPR (Rauscher ed., 2011) Art. 12 para 1.

Schulze 307 Rome I Article 12 Scope of the Law Applicable oeI Rome to avoid conflicts between the law applicable to the contract and the law of the country where the performance takes place. This special provision of private international law is not a conflict-of-laws rule in the classical sense but may have similar results (‘regard shall be had to the law’) (see mn. 33–35).

II. Scope of Application

3 The Rome I Regulation gives no definition either for the contract or for the terms listed in paragraph 1. That list of terms is not exhaustive as it is indicated by the words ‘in particular’ (paragraph 1). Under the Rome I Regulation, it is necessary to apply a uniform meaning of these notions as the scope of application is equal for all Member States.2 For the understanding of Article 12, reference will be made to the definitions for the European Private Law set out in the Draft Common Frame of Reference (DCFR).3 One of its politically accepted functions is to be an instrument for the development of a coherent terminology.4 4 Thus, Article 12 covers every type of contract that is qualified to be a contract under the Regulation. That means an agreement intended to create obligations in a binding legal relationship or to have some other legal effect. The contract can be a bilateral or a multilateral one5 and may be valid or not.6 Unilateral acts as well as the conduct of

2. Cf. Lehmann, Der Anwendungsbereich der Rom I Verordnung – Vertragsbegriff und vorvertra- gliche Rechtsverhältnisse, in Ein neues Vertragsrecht für Europa – Der Vorschlag für eine Rom I-Verordnung (Ferrari and Leible eds, 2007), 17, 20; already to the Rome Convention Plender/Wilderspin, The Rome Convention on the Choice of Law for Contracts (2nd ed. 2001), 10–02; other opinion Kaye, The New PIL of Contract of the European Community (1993), 273 (lex fori). 3. Principles, Definitions and Model Rules of European Private Law, Draft Common Frame of Reference (DCFR), Interim Outline Edition (von Bar, Clive and Schulte-Nölke eds, 2008), Book II, 183 et seq. 4. See for the political progress Council 2 December 2009, Doc. 17024/09, Annex: The Stockholm Programme, 33, 3.4.2: The European Council reaffirms that the common frame of reference for European contract law should be a non-binding set of fundamental principles, definitions and model rules to be used by the lawmakers at Union level to ensure greater coherence and quality in the lawmaking process; cf. further the Second Progress Report from the Commission on The Common Frame of Reference, COM(2007) 447 final: ‘CFR is intended to be a ‘toolbox’ or a handbook for the Commission and the EU legislator to be used when revising existing and preparing new legislation in the area of contract law … The Commission considers the CFR a better regulation instrument … with the purpose of ensuring consistency and good quality of EU legislation in the area of contract law. It would be used to provide clear definitions of legal terms, fundamental principles and coherent modern rules’; see also Zoll, The Draft Common Frame of Reference as an Instrument of the Autonomous Qualification in the Context of the Rome I Regulation, in Rome I Regulation – The Law Applicable to Contractual Obligations in Europe (Ferrari and Leible eds, 2009), 17 et seq. 5. For that definition see Art. II.–1: 101 DCFR Outline Edition, 183 and Annex, Definitions: Contract, 549; for a similar functional definition see Lehmann, Anwendungsbereich, 17, 28 et seq. 6. Magnus, Art. 12 Rom I-VO, in Staudingers Kommentar, paras 10 and 77; Spellenberg, Art. 12 Rom I-VO, in Münchener Kommentar, para. 161.

308 Schulze Scope of the Law Applicable Article 12 Rome I a party to the contract will also be included to the extent that they have a relevant relation to the contract.7 The liability for faults in the pre-contractual time phase (culpa in contrahendo) is 5 8 qualified as a matter of non-contractual liability. Recital 10 clarifies that these Rome I questions are covered by the Rome II Regulation and therefore fall out of the scope of the Rome I Regulation. Thus, Recital 10 reads as follows: Obligations arising out of dealings prior of the conclusion of the contract are covered by Article 12 of Regulation (EC) No 864/2007. Such obligations should therefore be excluded from the scope of this Regulation. The scope of Article 12 also covers choice-of-law clauses. As the Giuliano-Lagarde 6 report for the Rome Convention notes,9 the word ‘term’ shall cover cases in which there is a dispute about the validity of a term of the contract, such as a choice-of-law clause. Hence, the applicable law also dictates the interpretation and effects of such a clause. Only the questions as to whether there is a choice of law and which law is chosen by the parties are to be answered by the law of the forum.10 Where the applicable law is severable under Article 3, the law governing the obligation upon which the plaintiff’s action is based must be taken to be the one that is applicable according to Article 12(1). If two claims are involved and if these are subject to separate applicable laws, it is possible to proceed only with those that are not time-barred according to the relevant applicable law.11 Article 12 does not govern the matters of consent and material validity covered by 7 Article 10.12 Article 1(2) lists matters that are excluded from the scope of the Regulation. Because 8 Article 12 does not govern these aspects – namely the question of legal and contractual representation (Article 1(2)(g)) and capacity (Article 1(2)(a) and (f)) – the status of legal capacity of the contractual partners, either of individuals or of companies and other bodies, will be excluded from the scope of application. These questions concern the consequences of a lack of capacity and must be answered by the proper conflict- of-laws rules of the forum.13 Article 13 of the Regulation gives a single exception clause

7. Leible, Art. 12 Rom I-VO, in NomosKommentar BGB Vol. 6 (Mansel and Hüßtege eds, 2013), para. 8; Spellenberg, Art. 12 Rom I-VO, in Münchener Kommentar, para. 8; Ferrari, Art. 12 Rom I-VO, in Kommentar zum Internationalen Vertragsrecht, para. 6. 8. Martiny, Art. 1 Rom I-VO, in Münchener Kommentar, paras 10 and 71; Ferrari, Art. 12 Rom I-VO, in Kommentar zum Internationalen Vertragsrecht, para. 35; Rauscher/Freitag, EuZPR/EuIPR (2011) Art. 12 para 3. For the former discussion about this issue under the Rome Convention, see Spellenberg, Art. 32 EGBGB, in Münchener Kommentar zum BGB Vol. 10 (Rebmann, Säcker and Rixecker eds, 4th ed. 2006), paras 58 et seq.; Leible, Art. 32 EGBGB, in Anwaltskommentar zum BGB Vol. 1 (Heidel et al. eds, 2005), paras 24 et seq. 9. Cf. Giuliano-Lagarde report, Art. 8 para. 1. 10. Ferrari, Art. 12 Rom I-VO, in Kommentar zum Internationalen Vertragsrecht, para. 7; Spellen- berg, Art. 12 Rom I-VO, in Münchener Kommentar, para. 8; Spickhoff, Art. 12 Rom I-VO, in Kommentar zum BGB Vol. 3 (Bamberger and Roth eds, 3rd ed. 2012), para. 4. 11. Stone, EU PIL. Harmonization of Laws (2008), 308. 12. Thorn, Art. 12 Rom I, in Palandt, Bürgerliches Gesetzbuch (Palandt ed., 74nd ed. 2015), para. 2; Hohloch, Anh III Art 26 EGBGB Art. 12 Rom I, in Erman, Bürgerliches Gesetzbuch (Westermann ed., 14th ed. 2014), para 3. 13. Magnus, Art. 12 Rom I-VO, in Staudingers Kommentar, para. 11; Hohloch, Anh II Art 26 EGBGB Art. 12 Rom I, in Erman, Bürgerliches Gesetzbuch, para 3; in German international private law,

Schulze 309 Rome I Article 12 Scope of the Law Applicable oeI Rome to protect the other contractual party under certain circumstances. No change is intended as compared to Article 1(2)(a) and (e), 11 of the Rome Convention. 9 The provisions to protect consumers (Article 6(2) of the Regulation) and employees (Article 8(1)), which the parties cannot dispose of, will be applicable instead of the proper law of the contract. There may also be overriding mandatory rules of the law of the forum or of the law of the country where the obligations arise out of the contract (Article 9 of the Regulation). Such rules will supersede the proper law of the contract just as the rules of the public policy of the forum will (Article 21 of the Regulation).14 10 The wording of Article 12 is identical with Article 10 of the Rome Convention. That reflects that the regulation proved its worth and that there was no need for a change.15 Just as it was set out by CJEU for the interpretation of the Brussels I Regulation in relation to the prior Brussels Convention, these articles have to be interpreted as in the predecessor instrument.16 11 As mentioned above, the scope of the applicable law is related to matters that are also treated in the principles, definitions and model Rules of European Private Law set out in the DCFR.17 Recital 14, which opens the choice of law to other future legal instruments adopted by the Union, can be relevant for such future cases and their matters.18 Contractual matters and claims under a future Common European Sales Law (CESL)19 would also been covered by Art. 12.20

e.g., individuals were treated in accordance to the law of their nationality (Art. 7 para. 1 of the Einführungsgesetz zum Bürgerlichen Gesetzbuch (EGBGB), cf. Schulze, Art. 7 EGBGB, in Anwaltskommentar zum BGB Vol. 1 (Heidel et al. eds, 2nd ed. 2012) para. 2) or the law of the country of the corporate domicile of the company (cf. Kindler, Internationales Gesellschaftsre- cht, in Münchener Kommentar zum BGB Vol. 11 (Rebmann, Säcker and Rixecker eds, 5th ed. 2010), paras 420 et seq.). 14. Harris, Mandatory Rules and Public Policy under the Rome I Regulation, in Rome I Regulation – The Law Applicable to Contractual Obligations in Europe (Ferrari and Leible eds, 2009), 269 et seq.; Thorn, Art. 12 Rom I, in Palandt, para. 1; Magnus, Art. 12 Rom I-VO, in Staudingers Kommentar, para. 17; Hohloch, Anh III Art 26 EGBGB Art. 12 Rom I, in Erman, Bürgerliches Gesetzbuch, para 3. 15. Mankowski, Die Rom I-Verordnung – Änderungen im europäischen IPR für Schuldverträge, IHR 2008, 139, 149; Cheshire/North/Fawcett, PIL (14th ed. 2008), 746. 16. CJEU Case 533/07 Falco Privatstiftung a. Rabitsch v. Weller-Lindhorst, para. 52; Bitter, Ausle- gungszusammenhang zwischen der Brüssel I-Verordnung und der künftigen Rom I-Verordnung, IPRax 2008, 96, 100; see also Recital 7 of the Rome I-Regulation for a consistent interpretation of the regulations Brussels I, Rom I and Rom II: ‘The substantive scope and the provisions of this Regulation should be consistent with Council Regulation (EC) No 44/2001 of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (Brussels I) and Regulation (EC) No 864/2007 of the European Parliament and of the Council of 11 July 2007 on the law applicable to non-contractual obligations (Rome II)’; see also Pocar, Some Remarks on the Relationship between the Rome I and the Brussels I Regulations, in Rome I Regulation – The Law Applicable to Contractual Obligations in Europe (Ferrari and Leible eds, 2009), 343 et seq. 17. DCFR Outline Edition, 183 et seq. 18. Recital 14 reads as follows: ‘Should the Community adopt, in an appropriate legal instrument, rules of substantive contract law, including standard terms and conditions, such instrument may provide that the parties may choose to apply those rules’. 19. Proposal for a Regulation of the European Parliament and of the council on a Common European Sales Law, (11 October 2011) COM (2011) 635 endg. Cf. R. Schulze (Ed.), Common European Sales Law (CESL) – Commentary, 2012. 20. Cf. Wendelstein, Ein gestörtes Zusammenspiel zwischen Europäischem IPR und dem GEK? – Probleme der Vorschaltlösung, GPR 2013, 70, 71 et seq.

310 Schulze Scope of the Law Applicable Article 12 Rome I

As an exception clause (lex loci solutionis), Article 12(2) provides that in relation 12 to the manner of performance, regard shall be had to the law of the country in which performance takes place (lex loci solutionis). Since that law does not necessarily apply, the judge may consider whether such law has any relevance to the manner in which the Rome I contract should be performed.21 The special rule of exception in Article 12(2) applies solely to ‘the manner of performance’. The distinction between ‘performance’ and ‘manner of performance’ must be developed in the future in a uniform way.22 Therefore, clarification must be awaited from the courts.

III. Legislative History

The origin of Article 12 lies in Article 10 Rome Convention. The wording of Article 13 12 is identical with Article 10 of the Rome Convention. Article 12 also remains unaltered from the Proposal of the Commission,23 which would have integrated the provisions as Article 11.

IV. Content

1. Paragraph 1: Applicable Law. The law applicable to the contract governs namely 14 the terms listed in paragraph 1. That list is not exhaustive, which is expressed by the words ‘in particular’ (paragraph 1). This wording implies that also unspecified matters will be embraced such as the effects of a contract, which includes the rights and obligations of the parties under the contract and the extent to which those rights and obligations affect third parties.24 The listed matters falling within the scope of Article 12(1) are those generally known as ‘substance’ or ‘essential validity’ of contracts. The only exceptions are issues of formal validity (Article 11 of the Regula- tion) and incapacity (Article 1(2)(a) and (f)). Several aspects overlap with the specific categories listed in Article 12(1). There is, 15 for example, the effect of a penalty clause that relates to the performance as well as to the consequence of breach.25 The result remains the same; both questions will depend on the law governing the contract. a. Article 12(1)(a): Interpretation of a contract. The law applicable to the contract 16 governs the interpretation of the contract as a whole as well as of its particular terms. To ascertain the parties’ intentions, reference will be made to the legal system under

21. Plender/Wilderspin, The European Private International Law of Obligations (3rd ed. 2009), 14-032, 408 with ref. made to Giuliano-Lagarde report, Art. 10 para. 2. 22. Under the Rome Convention it should to be drawn in accordance with the lex fori, cf. Plender/Wilderspin, The European Private International Law of Obligations, 14-033, 408. 23. Proposal for a Regulation of the European Parliament and the Council on the law applicable to contractual obligations (Rome I), 15 December 2005, COM (2005) 650 final. 24. Plender/Wilderspin, The European Private International Law of Obligations, 14-013, 398with ref. made to Court of Queen’s Bench [1862] 2 B.&S. 11; 121 E.R. 978 Scott v. Pilkington. 25. Dicey/Morris/Collins, The Conflict of Laws (15th ed. 2012), para. 32–153.

Schulze 311 Rome I Article 12 Scope of the Law Applicable oeI Rome which the parties have concluded their agreement. Ascertaining the true meaning of the parties’ wording is also a question of fact,26 but the procedure and criteria are based on rules of law (e.g., under German law, sections 133, 157 BGB). If the governing law ascribes a particular meaning to particular words, the parties are bound by that meaning. Thus, the applicable law will dictate whether trade usages can be deemed incorporated in the contract for the purposes of its construction.27 Furthermore, the applicable law guides whether usual business clauses, like ‘freibleibend’ or Incoterms like ‘fob’ or ‘cif’ are part of the contract and how they are to be understood.28 If the parties use terms in a foreign language or from the law other than the applicable law, the court must consider the meaning of the term in the used language or under the foreign legal system.29 17 Interpretation also encompasses the determination of matters that may be taken into account in interpreting the contract. The burden of proof is also a question of the law applicable to the contract (cf. Articles 18 and 1(3)), whereas evidence and procedure are excluded from the scope of application. Any aspects that are held to be procedural in nature are excluded from the Regulation’s scope and, consequently, from that of the applicable law thereunder.30 Therefore, evidentiary rules and the rules of procedure will be governed by the law of the forum. There is no change applicable as compared to Article 1(2)(h) and Article 14 of the Rome Convention. 18 Particular problems arise with regard to the interpretation of contractual obligations to pay money, such as the denomination of a specific currency of payment other than that of the country whose law is applicable. It seems appropriate to refer to the law of the money of account.31 19 In a choice-of-law case the chosen law will also govern the issue of interpretation. The applicable law, chosen in accordance with Article 3 of the Regulation, must be applied for the interpretation of the contract.32 But the parties are free to insert a construction clause in the contract (‘This contract is to be construed according to English Law’)33 or to choose a law solely for the question of interpretation of the contract (cf. Article 3(1) section 2 of the Regulation).34

26. Cheshire/North/Fawcett, PIL, 753. 27. Dicey/Morris/Collins, The Conflict of Laws, para. 32-143. 28. Leible, Art. 12 Rom I-VO, in NomosKommentar BGB , para. 10; Magnus, Art. 12 Rom I-VO, in Staudingers Kommentar, para. 31; Ferrari, Art. 12 Rom I-VO, in Kommentar zum Internationalen Vertragsrecht, para. 10. 29. BGH, II ZR 274/90, NJW-RR 1992, 423, 425; Thorn, Art. 12 Rom I, in Palandt, para. 4; Leible, Art. 12 Rom I-VO, in NomosKommentar BGB, para. 11; Ferrari, Art. 12 Rom I-VO, in Kommentar zum Internationalen Vertragsrecht, para. 9. Hohloch, Anh III Art 26 EGBGB Art. 12 Rom I, in Erman, Bürgerliches Gesetzbuch, para 6. 30. Already to the Rome Convention Kaye, The New Private International Law of Contract of the European Community, 297. 31. Plender/Wilderspin, The European Private International Law of Obligations, 14-023, 403. 32. Cheshire/North/Fawcett, PIL, 753. 33. Magnus, Art. 12 Rom I-VO, in Staudingers Kommentar, para. 25 notes that a construction clause has to be understood as a choice of law clause solely to the interpretation, since the parties chose another law for the proper contract. 34. Leible, Art. 12 Rom I-VO, in NomosKommentar BGB, para. 9 (selbständiges Auslegungsstatut).

312 Schulze Scope of the Law Applicable Article 12 Rome I

In German doctrine there is dispute over whether the applicable law of the contract 20 also must be applied to the choice-of-law clause.35 Some prefer the application of the law of the forum.36 The situation seems to be similar to the questions of consent and validity of the contract (see Article 10(1) note 10 et seq.). The purpose of Article 10 and Rome I of Article 12 of the Regulation is to build up a uniform lex contractus to avoid several laws being applicable to one contract. Therefore, it seems to be appropriate to apply the proper law of the contract to the choice-of-law clause as well. b. Article 12(1)(b): Performance of obligations. The law applicable to the contract 21 governs the performance of the obligations37 arising from the contract. This encompasses the totality of the conditions for the fulfilment of an obligation resulting from the law or from the contract, except the question of the manner of its performance insofar as this is referred to in paragraph 2. As noted in the Giuliano-Lagarde report, the word ‘performance’ covers the conditions in accordance with which is essential for the fulfilment of the obligation.38 Thus, paragraph 1(b) embraces the standard, the exactness and the diligence with which the obligation must be performed, the conditions relating to the place and time of performance, the currency39, the extent to which the obligation can be performed by another person and all questions relating to the form and the mode of fulfilment (joint and several obligations, alternative obligations, divisible and indivisible obligations, pecuniary obligations).40 The proper law of the contract also dictates whether special commercial rules are applicable, such as, for example, under German commercial law the special provisions on the status of a businessman under the Handelsgesetzbuch (HGB).41 Illegality of performance falls within the scope of paragraph 1(b), whereas questions affecting existence or validity of the contract are a matter of the putative applicable law under Article 10 of the Regulation.42 Furthermore paragraph 1(b) includes all conditions relating to the discharge of the 22 debtor, the appropriation of the payment and the receipt. The requirement of notice of

35. Leible, Art. 12 Rom I-VO, in NomosKommentar BGB, para. 12; Spellenberg, Art. 12 Rom I-VO, in Münchener Kommentar, para. 8; Thorn, Art. 3 Rom I, in Palandt, para. 6; Ferrari, Art. 12 Rom I-VO, in Kommentar zum Internationalen Vertragsrecht, para. 7. 36. Spickhoff, Art. 12 Rom I-VO, in Bamberger/Roth, para. 4. 37. For a uniform meaning of performance cf. Thorn, Art. 12 Rom I, in Palandt, para. 5. For a definition see DCFR Outline Edition, Annex, Definitions: performance, 561 (Performance, in relation to an obligation, is the doing by the debtor of what is to be done under the obligation or the not doing by the debtor of what is not to be done). 38. Cf. Giuliano-Lagarde report, Art. 10 para. 2. 39. Diekmann/Bernauer, Mögliche Rechtsfolgen für vertragliche Verhältnisse bei einer Währung- sumstellung eines Mitgliedstaates der EU, NZG 2012, 1172, 1176 (the possibilty to fulfil with a foreign currency); Dicey/Morris/Collins, Conflict of Laws, para. 32-152. 40. Cf. Collier, Conflict of Laws, (3rd ed. 2001), 298; Ferrari, Art. 12 Rom I-VO, in Kommentar zum Internationalen Vertragsrecht, para. 13; Hohloch, Anh III Art 26 EGBGB Art. 12 Rom I, in Erman, Bürgerliches Gesetzbuch, para 7 et seq. 41. See §§ 1–7 HGB; Leible, Art. 12 Rom I-VO, in NomosKommentar BGB, para. 14; Spellenberg, Art. 12 Rom I-VO, in Münchener Kommentar, para. 60; contrary Thorn, Art. 7 EGBGB, in Palandt, para. 53; Magnus, Art. 12 Rom I-VO, in Staudingers Kommentar, para. 40 (law of the country of the place of the habitual residence of a person). 42. Cf. Queen’s Bench Division (Commercial Court) [1989] 3 All ER 252 Libyan Arab Foreign Bank v. Bankers Trust Co.

Schulze 313 Rome I Article 12 Scope of the Law Applicable oeI Rome termination or rescission to be given to the party falls under the notion performance43 as well as the contractual liability for third persons.44 The interest of a contractual debt is a matter of performance under paragraph 1(b), whereas the right to interest on damages for breach of contract is a matter of consequences of the breach under paragraph 1(c). Both matters are covered by the proper law of the contract. 23 Excuses for Non-performance such as the doctrines of force majeure or hardship are also matters for the proper law under paragraph 1(b), as well as rights to refuse the performance (right of retention, plea of non-performance).45 However, the law of the place of performance may be invoked with regard to the manner of performance or to the specific steps to be taken.46 Article 12(2) allows an exception for the lex loci solutionis under certain circumstances. If, for example, under a seller under a German contract undertakes to deliver goods to London during ‘usual business hours’, it would presumably be for the English law to state what business hours are usual; however, German law would determine whether nonperformance was excused by frustration or to what extent the seller was liable for defects in the goods delivered (Article 12(2), see mn. 33–35). The proper law of the contract is furthermore applicable to the question whether and when the risk passes.47 24 c. Article 12(1)(c): Breach of Obligations Including the Assessment of Damages. The law applicable to the contract governs the consequences of total or partial failure to perform these obligations. The expression ‘consequences of breach’ has to be understood widely48 and therefore include contractually agreed as well as statutory/common law consequences for the breach of a contractual obligation. Contractually agreed consequences may encompass, for example, penalty clauses or fixed amounts of loss under certain circumstances49 or agreed interest on account of delay. The general statutory/common law consequences of a breach of contract, in contrast, may include remedies like the right of price reduction, damages50 and interest51 or restitution.52 The consequences for acquisition and loss of ownership of

43. Stone, EU Private International Law. Harmonization of Laws, 300. 44. Leible, Art. 12 Rom I-VO, in NomosKommentar BGB, para. 15; Magnus, Art. 12 Rom I-VO, in Staudingers Kommentar, para. 38. 45. Magnus, Art. 12 Rom I-VO, in Staudingers Kommentars, para. 58. 46. Dicey/Morris/Collins, The Conflict of Laws, para. 32–148; Morris/McClean/Ruiz Abou-Nigm, The Conflict of Laws (Morris ed., 8th ed. 2012), para. 11–056, 372 with reference to English jurisprudence. 47. Thorn, Art. 12 Rom I, in Palandt, para. 5; Spellenberg, Art. 12 Rom I-VO, in Münchener Kommentar, para. 64. 48. Cheshire/North/Fawcett, PIL, 756. 49. Leible, Art. 12 Rom I-VO, in NomosKommentar BGB, para. 22; Spellenberg, Art. 12 Rom I-VO, in Münchener Kommentar, paras 88 et seq. 50. Magnus, Art. 12 Rom I-VO, in Staudingers Kommentar, para. 57; Spellenberg, Art. 12 Rom I-VO, in Münchener Kommentar, para. 90; also the consequences of unlawful discrimination cf. Thorn, Art. 12 Rom I, in Palandt, para. 7. 51. BGH, XA ZR 76/07 (12 November 2009), NJW 2010, 1070 para 17 (interest for late payment for which the Regulation (EC) No 261/2004 of 11 February 2004 establishing common rules on compensation and assistance to passengers in the event of denied boarding and of cancellation or long delay of flights contains no provision). 52. Ferrari, Art. 12 Rom I-VO, in Kommentar zum Internationalen Vertragsrecht, para. 15; Magnus, Art. 12 Rom I-VO, in Staudingers Kommentar, paras 49 et seq.

314 Schulze Scope of the Law Applicable Article 12 Rome I goods are not comprised by the proper law of the contract under paragraph 1(c). This is a matter covered by the conflict-of-laws rules of the lex fori.53 Paragraph 1(c) furthermore embraces not only the consequences but also the 25 conditions of the breach of a contract. Thus, the conditions for the assumption of Rome I liability also fall under paragraph 1(c), whereas the question to whom the breach is attributable, the claim to terminate the contract for breach and also the question whether and under what circumstances a breach entitles the innocent party to repudiate or rescind the contract are matters of the lex contractus.54 A court will not be required to make an order unknown to its legal system or to make an order that is regarded inappropriate by its procedures. English courts will therefore not be required to follow a foreign proper law in answering the question to what extent non-monetary remedies are possible.55 As far as a tort liability matter is governed by the statute of contract (cf. Art. 4(3) and Art. 12(1) Rom II Regulation) claims for tortious damages are covered by para 1 (c).56 The assessment of damages is also included to the extent that this is governed by 26 rules of law and lies within the limits of the powers conferred upon the court by its procedural law. The remoteness of damage thus is be governed by the lex causae.57 The amount of compensation, reduction to failure to mitigate a loss, requirement to pay a single lump sum rather than periodic payments, or the validity of a contractual provision for specified damages as well as the right to pay by instalments are questions of the applicable law under paragraph 1(c). Quantification is also to a large extent governed by the law applicable to the contract. This is because quantification of damage is mainly determined by the operation of legal rules, such as whether a loss of value is to be assessed in relation to market value or the time as to which loss is to be assessed58 as well as the right to punitive damages.59 Other procedural matters of quantification, such as the assessment or computation of damages that are not governed by rules of law, are governed by the lex fori.60

53. Spellenberg, Art. 12 Rom I-VO, in Münchener Kommentar, para. 52 (lex rei sitae); Leible, Art. 12 Rom I-VO, in NomosKommentar BGB, para. 16; Rauscher/Freitag, EuZPR/EuIPR (2011) Art. 12 para 8. 54. Spellenberg, Art. 12 Rom I-VO, in Münchener Kommentar, paras 72 et seq.; Thorn, Art. 12 Rom I, in Palandt, para. 7; Leible, Art. 12 Rom I-VO, in NomosKommentar BGB, para. 18. 55. For example an order of specific performance because that would necessitate continuing judicial supervision, cf. Stone, EU PIL. Harmonization of Laws, 301; Morris/McClean/Ruiz Abou-Nigm, The Conflict of Laws, paras 11–057, 373; Dicey/Morris/Collins, Conflict of Laws, para. 32–155; Collier, Conflict of Laws, 299. 56. Cf. Rauscher/Freitag, EuZPR/EuIPR (2011) Art. 12 para 20. 57. Stone, EU Private International Law. Harmonization of Laws, 301; Plender/Wilderspin, The European Private International Law of Obligations, 14-044, 413; Dicey/Morris/Colins, Conflict of Laws, para. 32-154. 58. Clarkson/Hill, The Conflict of Laws (Clarkson and Hill eds, 4th ed. 2011), 256. 59. Such provisions of the proper law of the contract will probably excluded through the public policy of the forum (cf. Art. 21 of the Regulation); see Leible, Art. 12 Rom I-VO, in NomosKo- mmentar BGB, para. 25; Spellenberg, Art. 12 Rom I-VO, in Münchener Kommentar, para. 87; Ferrari, Art. 12 Rom I-VO, in Kommentar zum Internationalen Vertragsrecht, para. 18; Hohloch, Anh III Art 26 EGBGB Art. 12 Rom I, in Erman, Bürgerliches Gesetzbuch, para 11. 60. Cf. Dicey/Morris/Collins, The Conflict of Laws, para. 32–153; Collier, Conflict of Laws, 299. For example, the estimation of a damage in accordance to §§ 286, 287 ZPO, Leible, Art. 12 Rom I-VO, in NomosKommentar BGB, para. 24; Spellenberg, Art. 12 Rom I-VO, in Münchener Kommentar,

Schulze 315 Rome I Article 12 Scope of the Law Applicable oeI Rome 27 d. Article 12(1)(d) Various Ways of Extinguishing Obligations, and Prescription and Limitation of Actions. The law applicable to the contract governs all ways of extinguishing obligations, including their limitations. Extinction and prescription of obligations as well as limitation of actions or claims61 are matters for the proper law of the contract.62 Ways of extinction are the discharge of a contractual obligation by the case and the discharge by legislation. Examples for the prior are extinction of obligations by performance, by merger, by moratorium, by novation of obligation or transfer of contract63; examples for the latter are extinction by outbreak of war or by supervening impossibility.64 28 A solvent scheme of arrangement set out in part 26 of the British Companies Act 2006 liberate the debtor partly.65 The contractual qualification of such a scheme is con- tested.66 The scheme as a private instrument of the parties is covered by the proper law of the contract as far as the applicable law causes material conseqences like UK-Law.67 It was generally held under the Rome Convention that the right to set-off68 and its conditions were covered by the applicable law under Article 10(1)(d) of the Conven- tion, although there was no explicit rule concerning set-off. Article 17 of the Rome I Regulation contains now a specific rule on the law applicable to set-off where the right to set-off is not agreed by the parties. That set-off by operation of law shall be governed by the law applicable to the claim against which the right to set-off is asserted (see Article 17) no matter whether the claim with which the set-off is exercised is also governed by that law.69 There was full consensus in doctrinal literature that the law applicable to agreements concerning set-off should be the law governing the

para. 95; Ferrari, Art. 12 Rom I-VO, in Kommentar zum Internationalen Vertragsrecht, para. 17; Rauscher/Freitag, EuZPR/EuIPR (2011) Art. 12 para 23. 61. Including doctrine of waiver, cf. Magnus, Art. 12 Rom I-VO, in Staudingers Kommentar, para. 73; Hohloch, Anh III Art 26 EGBGB Art. 12 Rom I, in Erman, Bürgerliches Gesetzbuch, para. 13. 62. BGH, Xa ZR 61/09 (10 December 2009), NJW 2010, 1526 para. 18 (the proper law of the contract is also applicable for claims based on Art. 7 Regulation (EC) No 261/2004 of 11 February 2004 establishing common rules on compensation and assistance to passengers in the event of denied boarding and of cancellation or long delay of flights). 63. Selke, Die Anknüpfung der rechtsgeschäftlichen Vertragsübernahme, IPRax 2013, 205, 209 et seq. (the taking-over of the contract). 64. Cheshire/North/Fawcett, PIL, 757; Dicey/Morris/Collins, The Conflict of Laws, paras 32–157 et seq.; Ferrari, Art. 12 Rom I-VO, in Kommentar zum Internationalen Vertragsrecht, para. 19. 65. See sec. 895 et seq., cf. Mankowski, Die Anerkennung englischer Solvent Schemes of Arrange- ment in Deutschland, WM 2011, 1201, 1206 et seq. 66. Denied for example by Lüke/Scherz, Zu den Wirkungen eines Solvent Scheme of Arrangement in Deutschland, ZIP 2012, 1101, 1111. 67. Cf. Mankowski, Die Anerkennung englischer Solvent Schemes of Arrangement in Deutschland, WM 2011, 1201, 1207; Paulus, Das englische Scheme of Arrangement – ein neues Angebot auf dem Markt für außergerichtliche Restrukturierungen, ZIP 2011, 1077, 1082; restrictively Lüke/Scherz, Zu den Wirkungen eines Solvent Scheme of Arrangement in Deutschland, ZIP 2012, 1101, 1111 (only if english Law is applicable). 68. For a definition, see DCFR Outline Edition, Annex, Definitions: Set-off, 566. 69. Thorn, Art. 12 Rom I, in Palandt, para. 8; Spellenberg, Art. 12 Rom I-VO, in Münchener Kommentar, paras 103 et seq; Leible, Art. 12 Rom I-VO, in NomosKommentar BGB, para. 30; Rauscher/Freitag, EuZPR/EuIPR (2011) Art. 12 para. 26; Dicey/Morris/Collins, The Conflict of Laws, para. 32-160.

316 Schulze Scope of the Law Applicable Article 12 Rome I agreement itself.70 Those agreements will be determined according to the general rules in Articles 3 and 4 of the Rome I Regulation. Hence, such an agreement will be covered by Article 12(1)(d) of the Regulation.

Prescription, in relation to the right to performance of an obligation, is the legal 29 Rome I effect whereby the lapse of a prescribed period of time entitles the debtor to refuse performance.71 Prescription of obligations or of actions and the limitation of actions fall under paragraph 1(d). Thus, the applicable law governs the commencement, the computation, the extension (suspension, postponement of expiry, renewal of period) of prescription as well as the effects of prescription (right of the debtor to refuse performance, right to the creditor to keep hold of the performance).72 Problems arise with regard to the qualification of prescription and limitation of action. Especially under English law, prescription and limitation of actions were matters of procedure and not of substance and thus were not part of the lex contractus. The lex fori is applicable.73 However, it seems to be adequate that a foreign court treats the limitation period under the applicable English law as an aspect of substantive English law. The foreign Limitation Periods Act of 1984 provides, vice versa, that the limitation rules of lex causae are to be applied to actions in England.74 The question whether a foreign judgment or other foreign procedural acts suspend 30 the expiration of the period of prescription is a question of the interpretation of the applicable substantive law (so-called substitution). German doctrine acknowledges mainly the effect of suspension under the condition that the judgment will be recognized under German law.75 e. Article 12(1)(e): Consequences of Nullity of a contract. The law applicable to the 31 contract covers the legal consequences of the nullity of the contract. The principal objective of the provision is to deal with the restitution of benefits in the event of a finding that a contract is void under the applicable law. Systematically, the rights of restitution on contractual avoidance fall within the realm of quasi-contract rather than

70. Hellner, Set-off, in Rome I Regulation – The Law Applicable to Contractual Obligations in Europe (Ferrari and Leible eds, 2009), 251, 260 et seq. 71. For that definition see DCFR Outline Edition, Annex, Definitions: Prescription, 562. 72. Ferrari, Art. 12 Rom I-VO, in Kommentar zum Internationalen Vertragsrecht, para. 23; Spellen- berg, Art. 12 Rom I-VO, in Münchener Kommentar, paras 124 et seq.; Magnus, Art. 12 Rom I-VO, in Staudingers Kommentar, paras 63 et seq.; Thorn, Art. 12 Rom I, in Palandt, para. 8; Hohloch, Anh III Art 26 EGBGB Art. 12 Rom I, in Erman, Bürgerliches Gesetzbuch, para. 14; Rauscher/Freitag, EuZPR/EuIPR (2011) Art. 12 para. 27; restrictively Leible, Art. 12 Rom I-VO, in NomosKommentar BGB, para. 32. 73. Plender/Wilderspin, The European Private International Law of Obligations, 14-057, 417; Stone, EU Private International Law. Harmonization of Laws, 308. 74. The Regulation takes the position of English law in the Foreign Limitation Periods Act 1984, that the limitation rules of the lex causae govern, Morris/McClean/Ruiz Abou-Nigm, The Conflict of Laws, paras 11–058, 373; Plender/Wilderspin, The European Private International Law of Obligations, 14-057, 417; Stone, EU Private International Law. Harmonization of Laws, 308 with reference to the of the material of the Law Commission; Dicey/Morris/Collins, The Conflict of Laws, paras 32–161. 75. Thorn, Art. 12 Rom I, in Palandt, para. 8; without that condition Leible, Art. 12 Rom I-VO, in NomosKommentar BGB, para. 33; Spellenberg, Art. 12 Rom I-VO, in Münchener Kommentar, paras 126 et seq.

Schulze 317 Rome I Article 12 Scope of the Law Applicable oeI Rome contract.76 Nevertheless, the proper law of the contract is applicable under the Regulation to determine the consequences of nullity for all Member States77 to avoid a severance of the applicable law for claims under the contract and for claims to reverse. The contract should be governed by one lex contractus until its end.78 32 Paragraph 1(e) furthermore contains the contractual restitution on other grounds than avoidance, such as in case of non-performance.79 The consequences of a lack of capacity will also be answered by the proper law of the contract.80 The consequences of formal invalidity will be governed by the law applicable in accordance with Article 11 of the Regulation.81 As far as a tort liability matter is governed by the statute of contract (cf. Art. 4(3) Rom II) claims for restitution / unjust enrichment are deemed to be included from para 1 (e).82 33 A particular aspect of nullity of the contract is nullity as consequence of illegality.83 Illegality under the Rome Regulation is a matter of the applicable law, rather than that of the place of contracting or the place of performance.84 Where it is alleged that the contract is void for illegality in accordance with, for example, the applicable English law, the English rule as to supervening illegality will apply. The decision would be the same in an English court or if the place of performance was in England. There may also be overriding mandatory rules of the law of the forum or of the law of the country where the obligations arising out of the contract have to be or have been performed that render the performance of the contract unlawful (see Articles 9(2) and (3) section 1). Illegality by the place of performance might supersede the proper law of the contract by way of mandatory rules (Article 9) or by way public policy (Article 21), which requires the court to treat a contract as illegal or at least unenforceable whatever the applicable law. 34 2. Paragraph 2: Manner of Performance of Obligations. Article 12(2) is an exception clause for the application of the lex loci solutionis. The manner of performance and the steps to be taken in the event of defective performance relate to

76. Stone, EU Private International Law. Harmonization of Laws, 309 et seq.; Dicey/Morris/Collins, The Conflict of Laws, paras 32– 161. 77. The former provision for contracting states to reserve the right not to apply Art. 10(1)(e) (cf. Art. 22 (1)(b) of the Rome Convention: Italy and Great Britain) has been abolished. Reservations are incompatible with a Regulation, cf. Cheshire/North/Fawcett, PIL, 758; Stone, EU Private Inter- national Law. Harmonization of Laws, 303. 78. Leible, 12 Rom I-VO, in NomosKommentar BGB, para. 35. 79. Ferrari, Art. 12 Rom I-VO, in Kommentar zum Internationalen Vertragsrecht, para. 27; Spellen- berg, Art. 12 Rom I-VO, in Münchener Kommentar, paras 164 et seq.; Thorn, Art. 12 Rom I, in Palandt, para. 9; Hohloch, Anh III Art 26 EGBGB Art. 12 Rom I, in Erman, Bürgerliches Gesetzbuch, para. 15; Rauscher/Freitag, EuZPR/EuIPR (2011) Art. 12 para. 5. 80. Contrary Thorn, Art. 12 Rom I, in Palandt, para. 9; Leible, Art. 12 Rom I-VO, in NomosKom- mentar BGB, para. 37. 81. Article 11(1) of the Regulation ascribes the law that governs the contract in substance under this Regulation or the law of the country where it is concluded; see Leible, Art. 12 Rom I-VO, in NomosKommentar BGB, para. 37. 82. Cf. Sendmeyer, Die Rückabwicklung nichtiger Verträge im Spannungsfeld zwischen Rom II-VO und Internationalem Vertragsrecht, IPRax 2010, 500, 503. 83. Already to the Rome Convention Plender/Wilderspin, The Rome Convention on the Choice of Law for Contracts, 10–02. 84. To the former English law see Morris/McClean/Ruiz Abou-Nigm, The Conflict of Laws, para. 11–060, 374.

318 Schulze Scope of the Law Applicable Article 12 Rome I the law of the country in which performance takes place. The Giuliano-Lagarde report for the Rome Convention already pointed out that the manner of performance of an obligation is not a precise term and does not give a strict definition of this concept.

Under the Rome Convention, therefore, the lexi fori determines what is meant by that Rome I term;85 meanwhile, under the Rome Regulation a uniform interpretation should be achieved.86 Examples are the rules governing public holidays87 or the manner in which goods are to be examined and the steps to be taken if they are refused.88 Other examples involve ‘minor details of performance’ such as the money of payment (unit of currency)89; the kind of payment (cash, by cheque); date at which lay days begin to run; hours during which delivery may be tendered (normal business hours); and how to effect delivery alongside a steamer.90 The need to obtain an export license and customs clearance belongs to the necessary steps of fulfilment and therefore falls under the lex loci solutionis as well.91 The expression ‘having regard’ to the law of the place of performance means that 35 the court may consider whether such law has any relevance to the manner in which the contract should be performed and has discretion whether to apply it in whole or in part.92 Such an interpretation does not exclude that the court has an obligation to refer to that law at some point.93 The Giuliano-Lagarde report states that the court shall do justice between the parties.94 Apart from this general guideline, the criteria for the exercise of discretion are unclear. Clarification must be awaited from the courts. The parties may choose solely with regard to the manner of performance a law other 36 than that which is the applicable law of the contract.95 Provisions of the law of the place

85. Giuliano-Lagarde report, 1980, Art. 10 para. 3. 86. Ferrari, Art. 12 Rom I-VO, in Kommentar zum Internationalen Vertragsrecht, para. 29; Magnus, Art. 12 Rom I-VO, in Staudingers Kommentar, para. 80; for a definition in accordance to the proper law of the contract Spellenberg, Art. 12 Rom I-VO, in Münchener Kommentar, para. 171. 87. For a definition see DCFR Outline Edition, Annex, Definitions: Public holiday, 563 (any day designated as such in a list published in the official journal of the state). 88. Magnus, Art. 12 Rom I-VO, in Staudingers Kommentar, paras 84 et seq. 89. Diekmann/Bernauer, Mögliche Rechtsfolgen für vertragliche Verhältnisse bei einer Währung- sumstellung eines Mitgliedstaates der EU, NZG 2012, 1172, 1178 (the possibilty to fulfil with a foreign currency). 90. Cheshire/North/Fawcett, PIL, 755; Dicey/Morris/Collins, The Conflict of Laws, paras 32–151. 91. Stone, EU Private International Law. Harmonization of Laws, 301 et seq.; Magnus, Art. 12 Rom I-VO, in Staudingers Kommentar, para. 87. 92. Cf. Collier, Conflict of Laws, 298; Spellenberg, Art. 12 Rom I-VO, in Münchener Kommentar, para. 179; Leible, Art. 12 Rom I-VO, in NomosKommentar BGB, para. 41. 93. Stone, EU Private International Law. Harmonization of Laws, 303; Magnus, Art. 12 Rom I-VO, in Staudingers Kommentar, para. 93; Spellenberg, Art. 12 Rom I-VO, in Münchener Kommentar, para. 184. 94. Cf. Giuliano-Lagarde report, 1980, O.J. C 282/1 (Annex IV), 33; crit. Cheshire/North/Fawcett, PIL, 755; Morris/McClean/Ruiz Abou-Nigm, The Conflict of Laws, 11–054, 371. 95. Leible, Art. 12 Rom I-VO, in NomosKommentar BGB, para. 42; Ferrari, Art. 12 Rom I-VO, in Kommentar zum Internationalen Vertragsrecht, para. 33; Spellenberg, Art. 12 Rom I-VO, in Münchener Kommentar, para. 187.

Schulze 319 Rome I Article 12 Scope of the Law Applicable oeI Rome of performance may also be applicable as overriding mandatory rules under Article 9(3).96 The applicaton of Art. 12(2) may be excluded explicitly by agreement.97

96. Cf. Thorn, Art. 12 Rom I, in Palandt, para. 1; with critical remarks Harris, Mandatory Rules and Public Policy under the Rome I Regulation, in: Rome I Regulation – The Law Applicable to Contractual Obligations in Europe (Ferrari and Leible eds, 2009) 269, 330 et seq. 97. Piltz, Praktische Handreichung für die Gestaltung internationaler Kaufverträge. Vorteile des UN-kaufrechts gegenüber nationalem Recht, NJW 2012, 3061, 3064; recommended by Osten- dorf, Die Wahl des auf internationale Wirtschaftsverträge anwendbaren Rechtsrahmens im Europäischen Kollisionsrecht: Rechtswahlklauseln 2.0, IHR 2012, 177, 178.

320 Schulze