Governing law and jurisdiction: Rome II

Out-Law Guide | 05 Aug 2011 | 4:00 pm | 5 min. read

This guide was last updated in August 2011.

Resolving disputes which arise between parties can be complicated where they are based in different countries. It is important to establish what law will apply before parties into any type of contract or binding agreement.

This guide sets out what will happen if you do not choose a governing law, and sets out the European law relating to non-contractual obligations, including obligations in tort (Rome II). For information about the European law relating to contractual obligations (Rome I), please see our separate OUT-LAW Guide.

Background

Before Rome II came into force, virtually all member states applied the principle of 'lex loci delicti commissi' as the basic rule for deciding what was the applicable law for disputes arising out of non-contractual obligations. This means that the applicable law was that of the place where the harmful act was committed. In the UK the Private International Law (Miscellaneous Provisions) Act applies to torts committed on or after May 1996, but does not generally apply to torts committed after Rome II came into force. The general rule under the Act is that the applicable law is the law of the country in which the events constituting the tort occurred.

In 2003, the European Commission presented a proposal for a regulation on the law applicable to non-contractual obligations. As with the Rome I Regulation in relation to contractual disputes, Rome II does not harmonise the actual law of member states that applies to non-contractual disputes, but instead harmonises the rules by which the law applicable to non-contractual disputes is determined.

Rome II: non contractual obligations and governing law

Rome II, or the Rome Regulation on the law applicable to non-contractual obligations, has applied since 11 January 2009. It allows parties to contractually agree a governing law for non-contractual obligations. It is not confined to torts, or only to non-contractual obligations recognised as a matter of English law. In addition, certain claims brought in tort as a matter of English law may not fall under Rome II, but Rome I and be subject to the choice of law rules for contract.

In many cases parties will choose to enter into one governing law agreement which covers both contractual and non-contractual obligations and disputes. However:

  • parties may wish to agree a more extensive choice of law for non-contractual obligations or disputes - for example in respect of claims which relate to other, connected agreements;
  • parties may wish to restrict the contractual choice of law to contractual disputes, in which case narrow wording – for example, 'claims arising under the contract' – should be used.

What is covered?

Rome II applies to situations involving a conflict of laws regarding civil and commercial matters. Special rules are laid down for non-contractual obligations in the event of damage caused by defective products, damage arising from an unfair commercial practice, violation of the environment and infringement of intellectual property rights.

There is, as yet, no ruling from the European Court of Justice on the meaning of 'contractual obligations' under Rome I or its predecessor, the Rome Convention. However under the Brussels Regulation, which is a separate law dealing with jurisdiction and the recognition and enforcement of judgments, 'contract' has been interpreted to cover obligations freely entered into with another.

This concept may be enough for certain claims in tort under English law - such as claims for pure economic loss based on the so-called assumption of responsibility under a contract - to be considered contractual obligations and covered by Rome I.

Rome II also applies to pre-emptive actions. These are defined in the regulation as:

  • non-contractual obligations that are likely to arise;
  • events giving rise to damage that are likely to occur;
  • damage that is likely to occur.

Certain matters are excluded, including:

  • revenue, customs and administrative matters;
  • obligations arising out of family relationships and matrimonial property issues;
  • negotiable instruments;
  • company law issues;
  • voluntary trusts;
  • nuclear damages;
  • defamation and privacy;
  • evidence and procedure.

The general rule

The basic change introduced by Rome II is that the applicable law for the resolution of non-contractual disputes is determined on the basis of where the damage occurs, or is likely to occur, regardless of the country or countries in which the act giving rise to the damage occurs. This is subject to certain exceptions where that would be inappropriate, for example if the situation only has a tenuous connection with the country where the damage has occurred.

It will not always be obvious where the place the damage occurred is, particularly in claims for financial loss caused by certain commercial torts. For example, in a claim for negligent representation this could be the place where an investor received and decided to act on the representation, or the place where the resulting investment was made or the loss discovered. Although judges will decide on a case by case basis, analogies may be drawn with earlier cases dealing with jurisdiction or previous choice of law rules.

The place of damage is the place where "damage occurs irrespective of the country in which the event giving rise to the damage occurred and irrespective of the country or countries in which the indirect consequences of that event occur". The difference between 'direct' and 'indirect' damage has previously been considered under the Brussels Regulation. A parent company could not claim to have suffered damage in France where it felt the loss in its accounts of the insolvency of two German subsidiaries, allegedly caused by somebody else's wrongdoing, as the place of damage would be Germany, not France. However it may be that for the purpose of Rome II, a distinction could be drawn between any claim of the subsidiaries and the claim of the parent.

The place of damage rule is subject to two exceptions:

  • if the parties have the same habitual residence at the time of damage, the law of that country shall apply to the exclusion of the law of the place of damage. There need be no further meaningful connection between the place of mutual habitual residence and the damage in question. There is no definition of 'habitual residence' generally in Rome II, but it is defined in three circumstances:
  • the habitual residence of companies and other bodies, corporate or unincorporated, is the place of their central administration;
  • where the event giving rise to the damage occurs, or the damage arises, in the course of operation of a branch, agency or any other establishment, the place where the branch, agency or other establishment is located shall be treated as the place of habitual residence;
  • the habitual residence of a natural person acting in the course of his or her business activity shall be his or her principal place of business.
  • if the tort is manifestly more closely connected with another country. This exception will allow for displacement of either the law of the place of damage or the law of the place of mutual habitual residence, and in the case of the latter may mean reinstating the law of the place of damage. The requirement of a "manifestly" closer connection is intended to convey the exceptional nature of this rule – it cannot be lightly invokes to displace the law otherwise applicable.

See

Rome Regulation on the law applicable to non-contractual obligations http://eur-lex.europa.eu/LexUri?serv/LexUriServ.do?uri=OJ:L:2007:199:0040:0049:EN:PDF (10-page / 95KB PDF)