Out-Law / Your Daily Need-To-Know

Rome I comes into force, clarifies whose laws apply to contract disputes

Out-Law News | 03 Dec 2009 | 5:01 pm | 2 min. read

Companies that negotiate contracts without specifying which country's law should govern any contractual disputes between them will face a new legal regime in two weeks' time. From 17th December, a new EU law, Rome I, will decide which law should apply.

The Rome Convention of 1980 currently provides the tools for determining which national laws govern disputes about contractual obligations, and it will continue to apply to contracts signed before 17th December. But contracts concluded after that date will be subject to the new rules.

Rome I provides additional ways of proving what the parties really intended should be the governing law of the contractual dispute, as well as setting out clearer rules for working out what national law should apply where the contract makes no reference to the proper governing law of the contract.

"Most parties to international contracts include an express choice of law clause in their agreements governing their contractual relations, but a surprisingly high minority of contracts still fail to deal with the issue, often because the issue gets sidelined and then forgotten during the course of commercial negotiations," said Adrian Wood, a specialist in EU law at Pinsent Masons, the law firm behind OUT-LAW.COM.

The adoption of Rome I as a Regulation changes the status of the Rome Convention, turning it from an inter-government agreement to a fully-enforceable Regulation that falls under the jurisdiction of the Court of Justice of the European Union.

The UK initially resisted it and opted out of Rome I because the Government thought that it departed too far from the Rome Convention and from the realities of doing business. Last year it accepted changes that were made to the proposed Regulation and opted to sign the UK up to it.

Wood said that businesses should welcome the change, and that it could provide certainty for companies that find themselves in disputes.

"The good news is that Rome I does not dramatically overturn the current state of affairs. Rome I clarifies current understanding, removes some ambiguities in the Rome Convention and is more user-friendly in an e-commerce environment," said Wood.

"Whilst Rome I is not perfect, it does have the particular merit of providing a more simplified framework for determining which national governing law should apply to a contract, in circumstances where the parties have forgotten to consider the question or where they have ducked the issue," he said.

Like the Rome Convention, Rome I says that the law which applies in a dispute about a contract where no choice of law has been made changes according to whether that contract involves a consumer or not and whether it is for goods or services or property.

The Government explained the benefits of the Regulations when it consulted with the public about opting back into it.

"Some of the benefits of the Rome I Regulation arise from its structure as a Community instrument, rather than the specifics of the text," said the consultation paper. "In conflict of laws issues, the widespread application of similar rules can provide a benefit for those contracting across borders. In particular, maintaining a single system prevents the need for extensive legal advice."