Rome II: EU reaches agreement on applicable law for non-contractual obligations

Commercial parties will be able to choose in advance the law to be applied to their non-contractual disputes under a draft Regulation agreed recently by the European Parliament and European Council following four years of negotiation. The Regulation aims to increase legal certainty and reduce forum shopping by requiring courts in all Member States to apply the same choice of law rules in tort claims such as negligence, nuisance and defamation.

The final wording of the Regulation has yet to be published, but it appears that:

• parties will be able to choose the applicable law by agreement after the dispute has arisen or, if they are both commercial parties, in a freely negotiated prior agreement (subject to various mandatory and EU law provisions);
• if parties do not choose the applicable law:
  • the law of the country in which the direct damage arises will apply, irrespective of in which country the event giving rise to the damage occurs or the indirect consequences of the event arise;
  • if both parties are habitually resident in another country, the law of that country will apply instead;
  • in situations where the tort is manifestly more closely connected with another country, the law of that other country will apply.

Specific rules will apply for road traffic, product liability, environmental damage, unfair competition and intellectual property infringement cases. Agreement could not be reached on the issue of media violations of privacy, which has consequently been excluded from the Regulation. This issue is to be addressed by the Commission in a detailed study by the end of 2008, together with further provisions relating to road traffic cases.

The ability to choose the applicable law in tort cases represents a significant departure from current English law, which does not allow such a choice. Under current English rules the applicable law is the law of the country where the most significant element of the tort occurred (other than in personal injury and property damage cases where the law of the country in which the damage occurred applies, and in torts occurring before 1996 and defamation cases where more complex provisions apply). If the Regulation comes into force, in cases where the occurrence of damage is not the most significant element of the tort, a different law may then apply than would have applied under English law.

The EU now has until the middle of July to adopt the Regulation formally. If adopted, English courts will be required to apply the Regulation from January 2009 and to apply it to events giving rise to damage that occur after August 2007. Accordingly, commercial parties should consider amending the governing law clauses in their contracts now to ensure that the law they choose to apply to their contractual disputes will also apply to any tort claims after January 2009.