Rome I Regulation)

Freedom of choice and applicable law in the absence of choice in matters relating to a contract (Rome I Regulation)

Martina Mantovani EJTN Webinar, Conflict of laws in contractual and non contractual matters 22 July 2020 General structure of the Rome I Regulation

Recital 11: the principle of party autonomy (→ freedom to choose the law applicable to the contract) shall be one of the cornerstones of the system of conflict-of-law rules in matters of contractual obligations

• First thing to be checked*: is there a choice of law by the parties? The contract is subject to the law chosen by the parties (provided that YES the requirements under article 3 are satisfied)

The court shall identify the law objectively applicable to the contract NO according to articles 4 to 8 of the Rome I Regulation

www.mpi.lu 22 July 2020 Scope of applicable law: article 12

1. The law applicable to a contract by virtue of this Regulation shall govern in particular: 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; 2. In relation to the manner of performance and the steps to betaken in the event of defective performance, regard shall be had to the law of the country in which performance takes place

www.mpi.lu 22 July 2020 Article 3. Freedom of choice

Triggering factors: 1) A contract (→ an obligation freely assumed between the parties) 2) In civil and commercial matters 3) Involving a conflict of laws (→ a foreign/international element) 4) Including an implicit or explicit choice of law ▪ What kind of «law» can be chosen? ▪ How can it be chosen? ▪ When can it be chosen? ▪ Eventual limitations to the parties’ freedom?

www.mpi.lu 22 July 2020 Article 3. “The law” chosen by the parties (1) A contract shall be governed by the law chosen by the parties.

▪ What kind of «law» can be chosen? ➢ any State law → even if it is the law of a non-Member State ( cf art. 2) ❑ no need of a specific objective connection between the chosen law and the contract But: in contracts for the carriage of passenger, non-large risk insurance contracts the law may be selected from a limited range of options ❑ The choice refers to the substantive law of the country (→ it does not encompass the rules on choice of law of that country). It must be a law currently in force in that country (cf art 20)

www.mpi.lu 22 July 2020 Article 3. “Laws” that cannot be “chosen” (1) A contract shall be governed by the law chosen by the parties.

▪ What kind of «law» can be chosen? ➢ It must be a State law ❑ Not a religious law as governing law*

❑ Not a transnational body of principles (e.g. Unidroit principles, laws and regulations of the International Chamber of Commerce)

❑ Not an international convention (e.g. Vienna Convention on the International Sale of Goods) But see recital 13: This Regulation does not preclude parties from incorporating by reference** into their contract a non-State body of law or an international convention → through incorporation, a foreign law or a transnational body of principles operate as a contractual term, subordinate to the applicable law of the contract

www.mpi.lu 22 July 2020 Article 3. Form of the choice of law agreement (1) 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.

▪ How can the «law» be chosen? ➢ «Expressly» ❑ Most commonly: in writing, through a contractual clause or separate written agreement ❑ There are no specific formal requirements: nothing in the Regulation prevents an explicit agreement on choice of law being reached orally by the parties.

➢ Impliedly: in this case the choice of law shall be «clearly demonstrated»

www.mpi.lu 22 July 2020 Article 3. Implied choice of law (1)

An implied choice of law shall be «clearly demonstrated»

➢ By the terms of the contract

❑ Recital 12*: An exclusive choice of court agreement in favour of one more courts or tribunals of a Member State …should be “one of the factors” to be taken into account…

❑ The reference to provisions of a particular law (but→ this might also represent an incorporation of those provision as a term of the contract**)

www.mpi.lu 22 July 2020 Article 3. Implied choice of law (2)

An implied choice of law shall be «clearly demonstrated»

➢ By the circumstances of the case (the contractual environment)

❑ Connection between the contract in question and another contract in which there has been an explicit choice of law ❑ A previous course of dealing between the parties, usages or customs current in the relevant market ❑ The subsequent behavior of the parties to the contract ❑ Pre-contractual correspondence

www.mpi.lu 22 July 2020 Article 3. Dépéçage (1) 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. By their choice the parties can select the law applicable to the whole or to part only of the contract.

▪ How can the «law» be chosen? ➢ For the whole contract ➢ For part of the contract (dépéçage)*→ in this case, the severability of the contract into parts governed by different laws shall be ❑ Expressed or ❑ Clearly demonstrated

www.mpi.lu 22 July 2020 Article 3. Validity of the choice of law (5) The existence and validity of the consent of the parties as to the choice of the applicable law shall be determined in accordance with the provisions of Articles 10, 11 and 13

• The (formal and substantive) validity of the choice shall be determined by applying the chosen law* • Contractual capacity shall be determined in application of the rules of p.i.l of the forum (usually the law of the State of nationality of the parties) • Article 13 sets out a uniform rule governing incapacity: its applicability is limited to contracts concluded between contractual parties who are in the same country**

www.mpi.lu 22 July 2020 Article 3. Timing of the choice of law (2) The parties may at any time agree to subject the contract to a law other than that which previously governed it, whether as a result of an earlier choice made under this Article or of other provisions of this Regulation.

▪ When can the «law» be chosen? ➢ At any time, either solely prospectively or event retrospectively ➢ If the new choice of law is made/altered in the course of the proceedings, then the question of the limits of how effective this can be falls under the national law of procedure, and shall be settled according to it.

www.mpi.lu 22 July 2020 Article 3. Effects of a change of applicable law (2) The parties may at any time agree to subject the contract to a law other than that which previously governed it…. Any change in the law to be applied that is made after the conclusion of the contract shall not prejudice its formal validity under Article 11 or adversely affect the rights of third parties.

www.mpi.lu 22 July 2020 Article 3: Domestic and European mandatory rules

(3) Where all other elements relevant to the situation* at the time of the choice are located in a country other than the country whose law has been chosen, the choice of the parties shall not prejudice the application of provisions of the law of that other country which cannot be derogated from by agreement → purely domestic contract* (4) Where all other elements relevant to the situation* at the time of the choice are located in one or more Member States, the parties' choice of applicable law other than that of a Member State shall not prejudice the application of provisions of Community law, where appropriate as implemented in the Member State of the forum, which cannot be derogated from by agreement → intra-EU contract

www.mpi.lu 22 July 2020 Article 3: What constitutes a (domestic or European) mandatory rule?

[A choice of foreign law] shall not prejudice the application of provisions [of the objectively applicable law] which cannot be derogated from by agreement

➢ Ratio of the provisions: prevent the parties from evading the internally mandatory provisions by means of a choice of law. ➢ Identification of mandatory provisions: ❑ Sometimes the legislator explicitly rules that the domestic norm shall have this effect (e.g. art 12(1) Timeshare Directive) ❑ More often, it is a matter of interpretation of the ratio of the norm

www.mpi.lu 22 July 2020 Article 4. Applicable law in the absence of choice It applies when and “to the extent that the law applicable to the contract has not been chosen in accordance with Article 3 and without prejudice to Articles 5 to 8”

General ratio of the provision: ▪ Article 4, in its entirety, is based in the principle of proximity ▪ It embodies and conveys the general rule whereby the contract shall be governed by the law of the State with which it is more closely connected.

www.mpi.lu 22 July 2020 General structure of the provision: The operation of article 4 is based on a clear hierarchy ❑ Paragraph (1): establishes a (rebuttable) presumption of proximity in relation to certain types of “named contracts” ❑ Paragraph (2): establishes a general rule for identifying what should be, in principle, the law of the State with which is more closely connected to the contracts which are not included in the list sub (1) ❑ Paragraph (3): it allows to disregard the result achieved through the application of (1) or (2) if these provisions did not effectively appoint the law of the State which is most closely connected to the contract → escape clause, applicable where proximity is not achieved in practice ❑ Paragraph (4): residual rule, applying the principle of proximity to the contracts which are not encompassed by (1) or (2)

www.mpi.lu 22 July 2020 Article 4(1) (a) a contract for the sale of goods shall be governed by the law of the country where the seller has his habitual residence; (b) a contract for the provision of services shall be governed by the law of the country where the service provider has his habitual residence; (c) a contract relating to a right in rem in immovable property or to a tenancy of immovable property shall be governed by the law of the country where the property is situated; (d) notwithstanding point (c), a tenancy of immovable property concluded for temporary private use for a period of no more than six consecutive months shall be governed by the law of the country where the landlord has his habitual residence, provided that the tenant is a natural person and has his habitual residence in the same country (e) a franchise contract shall be governed by the law of the country where the franchisee has his habitual residence; (f) a distribution contract shall be governed by the law of the country where the distributor has his habitual residence; (g) a contract for the sale of goods by auction shall be governed by the law of the country where the auction takes place, if such a place can be determined; (h) contract concluded within a multilateral system which brings together or facilitates the bringing together of multiple third-party buying and selling interests in financial instruments, as defined by Article 4(1), point (17) of Directive 2004/39/EC, in accordance with non-discretionary rules and governed by a single law, shall be governed by that law.

www.mpi.lu 22 July 2020 (a) a contract for the sale of goods … (b) a contract for the provision of services… (c) a contract relating to a right in rem in immovable property or to a tenancy of immovable property… (d) notwithstanding point (c), a tenancy of immovable property concluded for temporary private use for a period of no more than six consecutive months … (e) a franchise contract … (f) a distribution contract … (g) a contract for the sale of goods by auction… (h) contract concluded within a multilateral system which brings together or facilitates the bringing together of multiple third-party buying and selling interests in financial instruments, as defined by Article 4(1), point (17) of Directive 2004/39/EC, in accordance with non-discretionary rules and governed by a single law…

www.mpi.lu 22 July 2020 1) Does the particular type of contract fall within the categories of named contract provided in art. 4(1) (a)-(h)?

YES NO

The «most closely connected law» is presumptively identified by article 4(1) on the basis of: • The location of immovable property (e.g. lett. c)

www.mpi.lu 22 July 2020 (c) a contract relating to a right in rem* in immovable property or to a tenancy of immovable property shall be governed by the law of the country where the property is situated;

e.g. A contract for the sale of a piece of land located in Echternach (Luxembourg) will be governed by Luxembourgish law. In the same vein, a long-term (+ 6 months) tenancy agreement concerning a house in Marseille (France) will be subject to French Law.

www.mpi.lu 22 July 2020 1) Does the particular type of contract fall within the categories of named contract provided in art. 4(1) (a)-(h)?

YES NO

The «most closely connected law» is presumptively identified by article 4(1) on the basis of: • The location of immovable property (e.g. lett. c) • The place where the transaction occurred (e.g. lett g)

www.mpi.lu 22 July 2020 (g) a contract for the sale of goods by auction shall be governed by the law of the country where the auction takes place, if such a place can be determined.

e.g. The contract relating to a car sold at an auction held in Dublin (Ireland) will be subject to Irish law.

www.mpi.lu 22 July 2020 1) Does the particular type of contract fall within the categories of named contract provided in art. 4(1) (a)-(h)?

YES NO The «most closely connected law» is presumptively identified by article 4(1) on the basis of: • The location of immovable property (e.g. lett. c) • The place where the transaction occurred (e.g. lett g) • The habitual residence of the characteristic performer of the contract (as designated ex lege)

www.mpi.lu 22 July 2020 The “characteristic performance” consists in the most essential obligation of the contract, conveying its social and economic environment function. It distinguishes a specific type of contract from all other contracts. It is usually the performance for which payment is due.

(a) a contract for the sale of goods shall be governed by the law of the country where the seller has his habitual residence; (b) a contract for the provision of services shall be governed by the law of the country where the service provider has his habitual residence; (e) a franchise contract shall be governed by the law of the country where the franchisee has his habitual residence; (f) a distribution contract shall be governed by the law of the country where the distributor has his habitual residence;

www.mpi.lu 22 July 2020 Article 19. Statutory definition of habitual residence

1. For the purposes of this Regulation, the habitual residence of companies and other bodies, corporate or unincorporated, shall be the place of central administration*. The habitual residence of a natural person acting in the course of his business activity shall be his principal place of business**.

3. For the purposes of determining the habitual residence, the relevant point in time shall be the time of the conclusion of the contract.

www.mpi.lu 22 July 2020 1) Does the particular type of contract fall within the categories of named contract provided in art. 4(1) (a)-(h)?

YES NO

The «most closely connected law» is presumptively identified by article 4(1) on the basis of: • The location of immovable property • The place where the transaction occurred • The habitual residence of the characteristic performer of the contract (as designated ex lege)

Escape clause under article 4(3)

www.mpi.lu 22 July 2020 Article 4(3): Where it is clear from all the circumstances of the case that the contract is manifestly more closely connected with a country other than that indicated in paragraphs 1 [and 2] the law of that other country shall apply.

→ this provision allows the court to disregard the law designated on the basis of the presumption set out under paragraph 1 if it deems that there are more significant objective factors establishing a closer connection be the contract and another country. Regard could be had, in particular: 1) To a very close connection with other contracts* 2) The place of performance of the obligations 3) The habitual residence of the parties 4) The place of contracting

www.mpi.lu 22 July 2020 1) Does the particular type of contract fall within the categories of named contract provided in art. 4(1) (a)-(h)?

YES NO

The «most closely connected law» is Art. 4 (2): presumptively identified by article 4(1) on - the contract is not covered by the basis of: paragraph 1 • The location of immovable property - or where the elements of the • The place where the trasaction contract would be covered by occurred more than one of points (a) to • The habitual residence of the (h) of paragraph 1, characteristic performer of the the contract shall be governed by contract (as designated ex lege) the law of the country where the party required to effect the characteristic performance of Escape clause under article 4(3) the contract has his habitual residence

www.mpi.lu 22 July 2020 1) Does the particular type of contract fall within the categories of named contract provided in art. 4(1) (a)-(h)?

YES NO

The «most closely connected law» is Art. 4(2). Where the contract is presumptively identified by article 4(1) on not covered by paragraph 1 or the basis of: where the elements of the • The location of immovable property contract would be covered by • The place where the trasaction more than one of points (a) to (h) occurred of paragraph 1, the contract shall • The habitual residence of the be governed by the law of the characteristic performer of the country where the party contract (as designated ex lege) required to effect the characteristic performance of the contract has his habitual Escape clause under article 4(3) residence

Escape clause under article 4(3)

www.mpi.lu 22 July 2020 Article 4(4). Subsidiary rule

Where the law applicable cannot be determined pursuant to paragraphs 1 or 2, the contract shall be governed by the law of the country with which it is most closely connected.

www.mpi.lu 22 July 2020 Thank you for your attention! [email protected]