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. Latham & Watkins operates as a limited liability partnership worldwide with affiliated limited liability partnerships conducting the practice in the United Kingdom, France and Italy. Under New York’s Code of Professional Responsibility, portions of this communication contain attorney advertising. Prior results do not guarantee a similar outcome. Results depend upon a variety of factors unique to each representation. Please direct all inquiries regarding our conduct under New York’s Disciplinary Rules to Latham & Watkins LLP, 885 Third Avenue, New York, NY 10022-4834, Phone: +1.212.906.1200. © Copyright 2009 Latham & Watkins. All Rights Reserved. Latham & Watkins | Client Alert 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. 2 Number 789 | 20 January 2009 Latham & Watkins | Client Alert 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).