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On 17 December 2009, the Rome I Regulation (EU Regulation 593/2008) on the law applicable to contractual obligations comes into force and will be directly applicable in all EU Member States with the exception of Denmark. When we last reported on the draft Regulation, the UK was still considering whether to opt in. It decided to do so and a statutory instrument, The Law Applicable to Contractual Obligations (England and Wales and Northern Ireland) Regulations, adopting the EU Regulation into national law, will also come into force on 17 December. This will replace the Contracts (Applicable Law) Act 1990, which will then only apply to contracts concluded before 17 December 2009.

The Rome I Regulation replaces the Rome Convention 1980 in the EU Member States and will apply to all contracts concluded as from 17 December 2009. To a large extent, Rome I replicates the provisions of the Rome Convention. In particular, Rome I preserves the parties’ right to choose the law that will govern their contract where this choice is expressly made or clearly demonstrated by the terms of the contract or the circumstances of the case (Article 3(1)).

The retention of this freedom of contract has been welcomed by the shipping industry, as represented by the European Community Shipowners’ Association, the International Chamber of Shipping, BIMCO and the International Group of P & I Clubs in their published comments on the proposed Regulation. These representative bodies have pointed out that maritime contracts are essentially a matter of private rather than public law and that one of the prime concerns for commercial entities engaged in international trade is certainty, particularly with regard to their rights and obligations under their contracts. That is why maritime contracts usually contain an express choice of law clause.

Governing law in the absence of choice

The Rome Convention

Article 4(1) of the Rome Convention set out a default position whereby, in the absence of choice of law by the parties, the contract would be governed by the law of the country with which it was most closely connected. According to Article 4(2), this was the country where the party effecting the performance which was characteristic of the contract had its habitual residence or, in the case of a body corporate or unincorporate, its central administration. Article 4(5), however, provided that this presumption could be displaced if the circumstances as a whole indicated that the contract was more closely connected with another country.

The Article 4(2) presumption did not apply inter alia to contracts for the carriage of goods. In such contracts, if the carrier had its principal place of business in the country where loading or discharging of the goods took place or where the consignor had its principal place of business, it was presumed the contract was most closely connected with that country (Article 4(4) of the Rome Convention).

Rome I

Article 4(1) of Rome I lists eight specific types of contract and makes express provision for determining the law governing those types of contract in the absence of choice. These types of contract include a contract for the sale of goods which will be governed by the law of the country where the seller has its habitual residence.

Contracts of carriage

Article 5 of Rome I deals with contracts of carriage and states that, insofar as the parties have not chosen the law applicable to their contract, the law applicable shall be the law of the country of habitual residence (as to which see below) of the carrier, provided that the place of receipt or the place of delivery of the goods or the habitual residence of the consignor is also situated in that country. If those requirements are not met, the law of the country where the place of delivery as agreed between the parties is situated shall apply.

As regards contracts for the carriage of passengers, in the absence of choice the law applicable is the law of the country where the passenger has his or her habitual residence, provided that either the place of departure or the place of destination is situated in that country. Otherwise, the law of the country where the carrier has its habitual residence shall apply. As regards choice of law by the parties to a contract for the carriage of passengers, the parties are restricted to choosing between the country of the passenger’s habitual residence, the carrier’s habitual residence, the carrier’s place of central administration, the place of departure or the place of destination.

Article 19 of Rome I defines “habitual residence” as being the place of central administration in the case of companies and other corporate or unincorporated bodies. Where the contract is concluded in the course of the operations of a branch, agency or any other establishment or performance under the contract is the responsibility of a branch, agency or other establishment, the place where that branch or agency or establishment is located shall be the place of habitual residence. For a natural person acting in the course of a business, the habitual residence is his or her principal place of business.

However, both Articles 4 and 5 of Rome I contain a “catch-all provision” which states that in the absence of choice of law, where it is clear from all the circumstances of the contract that it is manifestly more closely connected with a country other than that provided for in those Articles, then the law of that other country shall apply.

Insurance contracts

Article 7 of Rome I deals with insurance contracts. Other than for life insurance, it provides for free choice of law for the insurance of large risks (as defined in Article 5(d) of the First Council Directive 73/239/EEC), whether or not the risk is situated in a Member State. If the applicable law has not been chosen by the parties, the insurance contract will be governed by the law of the country where the insurer has its habitual residence. Again, where it is clear from all the circumstances of the case that the contract is manifestly more closely connected with another country, the law of that other country will apply (Article 7(2)).

For insurance contracts covering “non-large” risks situated in a Member State, the parties may choose, amongst other things: the law of the Member State where the risk is situated at the time of conclusion of the contract; the law of the country where the policy holder has his habitual residence; and, in the case of life assurance, the law of the Member State of which the policy holder is a national. A full list of the options is set out in Article 7(3).

It is important to note that Article 7 does not apply to reinsurance contracts. They are governed by the general provisions regarding freedom of choice and applicable law in the absence of choice (Articles 3 and 4 respectively).

Conclusion

In order to preserve their freedom of choice, commercial parties entering into international transactions should incorporate an express choice of law clause into their contracts.