Yesterday a new EU Regulation changed the rules that determine the law applicable to a range of non-contractual obligations in civil and commercial matters. The aim of this new Regulation (commonly referred to as “Rome II”) is to harmonise the rules across the EU about which country’s laws will apply to a non-contractual dispute. It also allows the parties in certain prescribed circumstances to elect the choice of law.
What will Rome II cover?
Rome II covers non-contractual obligations arising in most civil and commercial matters. It applies principally in the context of proceedings in tort, but also extends to proceedings for unjust enrichment and various other non-contractual obligations. It does not apply to revenue, customs and administrative matters, or to liability of a state for acts and omissions in exercising state authority. Non-contractual obligations in relation to bills of exchange, cheques and promissory notes, the creation and legal capacity of companies, certain aspects of trusts law and defamation are also excluded.
Before Rome II the position was that most EU member states applied the principle that the applicable law is that of the place where the harmful act was committed. However, under Rome II the applicable law for the resolution of non-contractual disputes will be determined on the basis of the place where the damage occurs, or is likely to occur. This is regardless of the law of the country or countries in which the event giving rise to the damage occurs, and irrespective of the country or countries where the indirect consequences of that event occur.
There are, however, some exceptions:
- Where the claimant and defendant have their habitual residence in the same country, the law of that country will apply
- Where it is clear from all the circumstances of the case that the tort is manifestly more closely connected with the law of another country, in which case the law of that other country will apply. Such a connection might be based on a pre-existing relationship between the parties, for example, and as will often be the case, a contract that is closely connected with the tort
Assessment of Damages
Rome II does however present some problems. Industry fears that if consumer claims in tort are to be governed by the law of the place where the injury occurs, businesses will have to carry out a risk analysis based on the law of every country where their products might be used. This would be an expensive and uncertain exercise. In addition, Rome II makes clear that the applicable law will govern the existence, nature and assessment of damage or the remedy claimed. If interpreted to apply to the quantification of damages (there is some uncertainty about what approach the English courts will take) this could lead to a significant change of approach.
Freedom of choice
Parties may seek to avoid the potentially adverse effects of Rome II by expressly agreeing to submit non-contractual obligations to the law of their choice. Whilst certain mandatory rules cannot be avoided, nor can the application of EC Community law in some circumstances, Rome II permits parties to agree the applicable law:
- where all the parties are pursuing a commercial activity, by an agreement which has been freely negotiated before the event giving rise to the damage occurred or
- by an agreement entered into after the event giving rise to the damage occurred
Potential areas of difficulty will include whether a particular agreement was “freely negotiated” and what constitutes a “commercial activity”. For example:
- Will standard terms and conditions (such as a standard form of security or guarantee) be “freely negotiated”?
- Will an agreement over which a party has no effective bargaining power be considered to be freely negotiated (for example, most bondholders are not involved in the negotiation of the terms and conditions of a bond issue)?
- Will a borrower or a security provider which is a charitable organisation or other non-profit organisation be considered to be pursuing a “commercial activity”?
Key points to note
Rome II seeks to harmonise conflict of law rules in respect of non-contractual obligations in civil and commercial matters.
Commercial parties will be able to choose the law to apply before the event takes place, in certain circumstances. Their agreement must have been freely negotiated and the rights of third parties cannot be prejudiced. Certain mandatory rules, however, cannot be avoided, nor can the application of EC Community law in certain prescribed circumstances.
If there is no valid choice of law, then the general rule is that the law of the country in which the damage occurs will apply, unless both parties have their habitual residence in another country, in which case the law of that country law will apply. Where it is clear that the tort is manifestly more closely connected with another country, the law of that country will apply.
It is not possible to choose the law applicable to infringement of intellectual property rights, unfair competition, or acts restricting free competition.
There are special rules dealing with a number of specific areas including environmental damage, unjust enrichment, product liability and acts committed without authority.
There are certain exclusions from the scope of Rome II (for example, relating to negotiable instruments and defamation) and provisions that allow effect to be given to mandatory rules, and the public policy of the forum.
Rome II applies in all EU member states other than Denmark from 11 January 2009.
The Regulation is available by clicking here.
This Law Now is a follow up to that published in 2007 and available by clicking here.
