The EC Regulations known as Rome II came into force on 11 January 2009. The Regulations contain a set of rules to be applied in all EU member states (except Denmark) that will determine the law governing most non-contractual disputes between parties. To read our Law Now on Rome II and the new rules it introduces, click here.
Rome II follows on from the Rome Convention which set out the rules relevant to contractual disputes for all contracts entered into after 1 July 1991. Regulations dealing with contractual disputes, called Rome I, were introduced last year (the UK opted into them on 22 December 2008) and are to apply from December of this year.
To summarise Rome II:
1. it governs the substantive law applicable to disputes. It does not concern the forum (or jurisdiction) in which cases are to be heard. That is dealt with by way of a separate legal regime;
2. it applies to any cases heard in a member state, whether or not the potentially applicable laws are laws of members states or of other countries outside the EU;
3. absent agreement between the parties, the applicable law governing a tortious claim will be the law of the country in which the damage occurs. This may not be the same place as the country in which the event giving rise to the damage took place; but
4. if both parties are habitually resident in another country then the law of that country will apply instead; and
5. in situations where the tort is manifestly more closely connected with another country, the law of that country will apply.
6. where the parties are pursuing a commercial activity, it is open to them to enter into an agreement that the law of a particular member state will apply to any dispute. This will only apply where the term has been “freely negotiated”. (It is also open to the parties to agree the applicable law after the event: this will we suspect rarely apply in practice).
7. non-contractual obligations arising out of the law of companies, including the personal liability of officers for the obligations of the company, and personal liability of auditors to the company, are excluded from the scope of Rome II.
What does Rome II mean for insurers of commercial insureds?
First, and crucially, it means that where a commercial insured agrees a retainer letter or other commercial contract with a client which contains a choice of law clause, this will, if clearly drafted, be recognised for both contractual and tortious claims.
Where there is no agreement between the insured and its client on the proper law of any dispute in tort, the first question will be: where did the damage occur? For many physical damage cases, this may be relatively straightforward. It may not, however, be easy where the loss suffered is pure economic loss. Where, for example, the insured is an accountant advising a company with branches across Europe, did the damage occur where the advice was given, or where it was acted upon? Since reliance is a key element to negligent misstatement claims, the court might say it is the place where the advice is acted upon. If so, an insured giving advice to a company in England but where the advice is relayed to and relied on by a French branch of the client may find the argument raised that any claim in tort should be governed by French law.
This contrasts with the rules governing contractual disputes. Under Rome I there is a rebuttable presumption (again absent agreement between the parties to the contract) broadly that the governing law is the law of the country in which the party who is to perform the obligation which is the central feature of the contract has based his business. So, applying these two tests, it is quite possible that a different law could be applied to a contractual dispute based on where the insured has his business, and a tortious dispute based on where the damage occurs. In our accountants’ example, the place of performance may be England, but the damage suffered in France.
We expect that a court would endeavour to conclude that both elements of what may essentially be the same claim should be heard at the same time. But this remains to be determined, and there are some cases on jurisdiction which point towards the opposite conclusion. This also means that the way in which a claim against an insured is framed (contract or tort) may determine the law that applies to that claim.
If the parties are resident in the same country, then the law of that country is likely to apply (unless the parties have agreed otherwise). In straightforward PI cases this may be commonplace. But in more complex commercial transactions, this may not be the case. It also remains open to the parties in any such situation to argue that the tort is manifestly more closely connected with another country. In practice, though, how easy will this be? What of legal advice given by English lawyers on a transaction in Spain where the contract is governed by English law but the transaction is between Spanish companies: will that advice be “manifestly” more closely connected with Spain?
These uncertainties are each reasons for insureds to ensure that choice of law clauses are inserted into their contracts with clients, and for insurers to encourage their insureds to make sure this is done.
Further reading: Regulation (EC) No. 864/2007 on the Law Applicable to Non-Contractual Obligations.
