Explanatory Memorandum to COM(2005)650 - Law applicable to contractual obligations (Rome I) - Main contents
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This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2005)650 - Law applicable to contractual obligations (Rome I). |
|---|---|
| source | COM(2005)650  |
| date | 15-12-2005 |
1. Context of the proposal
1.1. Background and objective
The Brussels Convention of 1968 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters contains options enabling a claimant to choose between specified courts, which generates the risk that a party will choose the courts in one Member State rather than another simply because the law is more favourable to his cause. To reduce the risk, the Member States, acting on the same legal basis, signed in 1980 the Rome Convention on the law applicable to contractual obligations.
The Amsterdam Treaty gave a new impetus to private international law of Community origin. That was the legal basis on which the Community adopted what is known as the ”Brussels I” Regulation1 to replace the Brussels Convention of 1968 in relations between Member States. On 22 July 2003 the Commission presented a proposal for a Regulation on the law applicable to non-contractual obligations (Rome II).2 The Rome Convention is now the only Community private international law instrument that remains in international treaty form. The drawbacks that this represents are all the less acceptable as Brussels I, Rome II and the Rome Convention of 1980 form an indissoluble set of Community rules of private international law relating to contractual and non-contractual obligations civil and commercial matters.
1.2. Grounds for the proposal
The importance of compatibility between conflict-of-laws rules for achieving the objective of mutual recognition of judicial decisions was acknowledged in the Vienna Action Plan.3 The 2000 Mutual Recognition Programme4 sets forth measures to harmonise the conflict-of-laws rules as accompanying measures to facilitate the implementation of the mutual recognition principle. More recently, in the Hague Programme, the European Council5 restated that work on the conflict-of-laws rules regarding contractual obligations (Rome I) should be “actively pursued”. The Council and Commission action plan to give effect to that programme provides for a Rome I proposal to be adopted by 2005.6
2. Outcome of consultations of interested parties and other institutions - impact analysis
This proposal has been preceded by extensive consultation of the Member States, the other institutions and civil society, in particular via the Green Paper of 14 January 20037 and the public hearing on it in Brussels on 7 January 2004. The 80 or so replies to the Green Paper,8 received from governments, universities, the legal professions and a variety of economic actors, confirmed that the Rome Convention is not only a widely-known instrument but also highly appreciated in relevant circles, who by a large majority supported its conversion into a Community Regulation while also confirming the need to modernise certain of its rules. On 4 and 5 November 1999 the Commission also organised a public hearing on Electronic Commerce: jurisdiction and applicable law, receiving about 75 written contributions.
In their Opinions dated 29 January9 and 12 February 200410 respectively, the European Economic and Social Committee and the European Parliament came out in favour of converting the Convention into a Community Regulation and modernising it.
On 17 February 2005, the Member States’ experts met to consider a preliminary draft Rome I Regulation prepared in the Commission.
Given the limited impact of this proposal on the existing body of legislation and the relevant circles, the Commission has decided to refrain from making a formal impact assessment. The proposal does not set out to establish a new set of legal rules but to convert an existing convention into a Community instrument. But some of the amendments made will help to modernise certain provisions of the Rome Convention and make them clearer and more precise, thus boosting certainty as to the law without bringing in new elements such as would substantially change the existing legal situation. All the changes proposed here are based on the results of the Commission’s extensive consultations, which were widely accessible to the public. For further details of the nature and impact of the changes, see the specific commentaries on the individual articles (point 4.2 below).
3. Legal aspects of the proposal
3.1. Legal basis
Since the Amsterdam Treaty entered into force, the conflict-of-laws rules have come under Article 61(c) of the TEC. Under Article 67 of the TEC, as amended by the Treaty of Nice, the Regulation is to be adopted by the codecision procedure of Article 251 of the TEC. Article 65(b) provides: “ Measures in the field of judicial cooperation in civil matters having cross-border implications, to be taken in accordance with Article 67 and in so far as necessary for the proper functioning of the internal market, shall include: … promoting the compatibility of the rules applicable in the Member States concerning the conflict of laws and of jurisdiction”. The Community legislature thus has some room for manoeuvre in deciding whether a measure is necessary for the proper functioning of the internal market. Harmonisation of the conflict-of-laws rules relating to contractual obligations is necessary for the proper functioning of the internal market.
Title IV of the TEC, which is the basis for the matters covered by this proposal, does not apply to Denmark by reason of the Protocol applicable to it. Nor does it apply to Ireland and the United Kingdom, unless those countries exercise their right to opt into this initiative as provided by the Protocol annexed to the Treaty.
3.2. Principles of subsidiarity and proportionality
The objective of the proposal – the adoption of uniform rules on the law applicable to contractual obligations to make judicial decisions more easily foreseeable – cannot be adequately attained by the Member States, who cannot lay down uniform Community rules, and can therefore, by reason of its effects throughout the Community, be better achieved at Community level, the Community can take measures, in accordance with the subsidiarity principle set out in Article 5 of the Treaty. And the measures respect the proportionality principle set out in that Article, by increasing certainty in the law without requiring harmonisation of the substantive rules of domestic law.
Point 6 of the Protocol on the application of the principles of subsidiarity and proportionality provides that “Other things being equal, directives should be preferred to regulations..”. For this proposal, however, the Regulation would seem to be preferable as its provisions lay down uniform rules on the applicable law that are detailed, precise and unconditional and require no measures for their transposal into domestic law. If the Member States enjoyed some room for manoeuvre in transposing, the uncertainty as to the law which the aim is to abolish would be restored.
4. Article-by-article commentary
4.1. Adaptations linked to the nature of the instrument
Apart from the changes of substance (point 4.2), the obvious differences between the legal nature of the Rome Convention (the “Convention”) and the Regulation warrant a number of adaptations: apart from the purely formal adaptations, there are those that allowed contracting States to enter reservations (article 22), to adopt new conflict rules after a notification procedure (article 23) or the limited duration of the Convention (article 30). Likewise the two Protocols annexed to the Convention concerning interpretation by the Court of Justice are now superfluous.
4.2. Adaptations to modernise the Rome Convention rules
Given the similarity between the Convention and the proposed Regulation, only changes of substance from the Convention are considered here.
Article 1 – Scope
The proposed changes seek to align the scope of the future Rome I instrument on that of the Brussels I Regulation and to reflect the work done by the Council and the European Parliament on the proposed Rome II Regulation. Point (e) confirms the exclusion of arbitration agreements and agreements on the choice of court as the majority of the replies to the Green Paper felt that the former was already covered by satisfactory international regulations and that the question of the law applicable to the choice-of-forum clause should ultimately be settled by the Brussels I Regulation. Point (f) combines the rules of point (e) and the company-law aspects of point (f) of the Convention. The first sentence of point (f) of the Convention has been deleted as there is a specific rule on agency (Article 7). Point (i) proposes a specific rule for pre-contractual obligations which, according to the contributions, confirms the analysis of the majority of legal systems in the Union and the restrictive concept of the contract adopted by the Court of Justice in its judgments concerning Article 5(1) of the Brussels I Regulation: for the purposes of private international law, they would be treated as a matter of tort/delict and governed by the future Rome II instrument.
Article 2 – Application of law of non-member States
The discussions of the Rome II draft revealed that the title of Article 2 of the Convention (“Universal application”) was a source of confusion: it has therefore been changed for the sake of clarity.
Article 3 – Freedom of choice
The proposed changes to the second and third subparagraphs of paragraph 1 require the courts to ascertain the true tacit will of the parties rather than a purely hypothetical will: they suggest that the parties’ conduct be taken into account and seek to clarify the impact of the choice of court, so as to reinforce the foreseeability of the law.
To further boost the impact of the parties’ will, a key principle of the Convention, paragraph 2 authorises the parties to choose as the applicable law a non-State body of law. The form of words used would authorise the choice of the UNIDROIT principles, the Principles of European Contract Law or a possible future optional Community instrument, while excluding the lex mercatoria, which is not precise enough, or private codifications not adequately recognised by the international community. Like Article 7(2) of the Vienna Convention on the international sale of goods, the text shows what action should be taken when certain aspects of the law of contract are not expressly settled by the relevant body of non-State law.
Paragraph 4 addresses the issue of fraudulent evasion of the law, referring not only to binding international provisions within the meaning of Article 8 but also the mandatory provisions in the domestic law of a legal system. Paragraph 5 aims to prevent fraudulent evasion of Community law.
Article 4 –Applicable law in the absence of choice
The rule in the Convention, whereby the applicable law is the law of the place where the party performing the service characterising the contract has his habitual residence, is preserved, but the proposed changes seek to enhance certainty as to the law by converting mere presumptions into fixed rules and abolishing the exception clause. Since the cornerstone of the instrument is freedom of choice, the rules applicable in the absence of a choice should be as precise and foreseeable as possible so that the parties can decide whether or not to exercise their choice.
Regarding the solutions for the different categories of contracts, only those proposed at points (g) and (h) have come up for discussion and prompted court decisions in the Member States in relation to determination of the characteristic performance. The solutions are based on the fact that Community law seeks to protect the franchisee and the distributor as the weaker parties.
Paragraph 2 retains the characteristic performance criterion for contracts for which paragraph 1 lays down no special rule, such as complex contracts that are not easy to categorise or contracts involving mutual performance by the parties in terms that can be regarded as characteristic on both sides.
Article 5 – Consumer contracts
Paragraph 1 proposes a new, simple and foreseeable conflict rule consisting of applying only the law of the place of the consumer’s habitual residence, without affecting the substance of the professional’s room for manoeuvre in drawing up his contracts. The solution adopted in the Convention was widely criticised in the responses to the Green Paper as it often produced hybrid solutions in which the law applicable to the professional and the mandatory provisions of the law applicable to the consumer were applied in parallel. In the event of a dispute, this complex solution entails additional procedural costs that are all the less justified as the consumer’s claim will tend to be quite small. There are two possible solutions to prevent this hybrid situation – full application of the law applicable to the professional or the law applicable to the consumer – only the latter would be truly compatible with the high level of protection for the consumer demanded by the Treaty. It also seems fair in economic terms: a consumer will make cross-border purchases only occasionally whereas most traders operating across borders will be able to spread the cost of learning about one or more legal systems over a large range of transactions. Finally, in practice this solution does not substantially modify the situation of the professional, for whom the initial difficulty in drafting standard contracts is to comply with the mandatory provisions of the law in the country of consumption; under the Convention, the mandatory provisions are already those of the country of the consumer’s habitual residence. Regarding other clauses, which the parties are free to draft as they wish, the freedom of the parties to draft their own contract is the rule that continues to prevail; it therefore matters little whether they are governed by the law of one or other party.
Paragraph 2 specifies the conditions for applying the special rule. The first subparagraph now recalls that the consumer’s contracting partner, a concept defined in some detail by the Court of Justice, is a professional. As requested in the great majority of contributions in response to the Green Paper, the second subparagraph replaces the conditions of Article 5(2) and (4)(b) of the Convention by the targeted activity criterion, already present in Article 15 of the Brussels I Regulation to take account of developments in distance selling techniques without substantially changing the scope of the special rule. When the Brussels I Regulation was adopted, a joint declaration by the Council and the Commission11 specified that, for the consumer protection provisions to be applicable, it was not enough for a firm to target its activities on the Member State where the consumer was domiciled a contract must also have been concluded in the exercise of his trade or profession. “The mere fact that an Internet site is accessible is not sufficient for Article 15 to be applicable, although a factor will be that this Internet site solicits the conclusion of distance contracts and that a contract has actually been concluded at a distance, by whatever means. In this respect, the language or currency which a website uses does not constitute a relevant factor”. The sites to which this declaration refers are not necessarily interactive sites: a site inviting buyers to fax an order aims to conclude distance contracts. On the other hand, a site which offers information to potential consumers all over the world but refers them to local distributor or agent for the purposes of concluding the actual contract does not aim to conclude distance contracts. Unlike Article 5(2) of the Convention, the proposed Regulation does not require the consumer to have done the acts needed to conclude the contract in the country of his habitual residence, as this is a superfluous condition in terms of contracts concluded via the Internet. On the other hand, the last subparagraph of this paragraph brings in a safeguard clause to protect the professional, for example where he has agreed to enter into a contract with a consumer who has lied about his habitual residence; for a contract concluded via the Internet, it will up to the professional to ensure that his standard form makes it possible to identify where the consumer lives.
The proposed Regulation no longer contains a list of contracts to which the special rule applies; its material scope is accordingly extended to all contracts with consumers except those expressly excluded by paragraph 3.
Article 6 – Individual employment contracts
The basic rule in paragraph 2(a) has been amplified and the reference is now to the “country in or from which…” to take account of the law as stated by the Court of Justice in relation to Article 18 of the Brussels I Regulation and its broad interpretation of the habitual place of work. This change will make it possible to apply the rule to personnel working on board aircraft, if there is a fixed base from which work is organised and where the personnel perform other obligations in relation to the employer (registration, safety checks). Paragraph 2(b) will thus apply more rarely. The text then provides additional guidance as to whether an employee posted abroad is temporarily employed there, though there is no rigid definition. The courts are to have regard to the intentions of the parties.
Article 7 – Contracts concluded by an agent
Among the three legal relationships that arise from a contract concluded by an agent – between principal and agent, between agent and third party and between principal and third party – only the first two are covered by the Convention. The question of the agent’s powers is excluded by Article 1(2)(f); the reasons for the exclusion are the diversity of the national conflict rules when the Convention was negotiated and the existence of the Hague Convention of 14 March 1978 on the law applicable to agency. As only three Member States have signed and/or ratified the Convention and national solutions have come closer into line with each other, the exclusion is no longer warranted. The proposed Regulation brings together in a single Article all the rules governing legal relationship arising from agency contracts.
Article 8 – Mandatory provisions
Paragraph 1 proposes a definition of international mandatory provisions for the purposes of Article 8 which is inspired by the Court of Justice’s judgment in Arblade.12 Paragraph 31 of that judgment holds that the fact that national rules are categorised as mandatory provisions legislation does not mean that they are exempt from compliance with the provisions of the Treaty: the considerations underlying such national legislation can be taken into account by Community law only in terms of the exceptions to Community freedoms expressly provided for by the Treaty. Paragraph 3 specifies the criteria that may be used by the courts to decide whether it should apply the mandatory provisions of another Member State. The replies to the Green Paper having enabled decisions referring to the concept of foreign mandatory provisions, including those of the Member States that had entered reservations on Article 7(1) of the Convention, to be identified, the utility of the rule would seem to be confirmed, especially as the Brussels I Regulation sometimes provides for alternative grounds of jurisdiction; it is therefore essential in a genuine European justice area for the courts to be able to have regard to another Member State's mandatory provisions where there is a close connection with the case and where a court action has already been brought by the claimant.
Article 10 – Formal validity
Given the growing frequency of distance contracts, the rules in the Convention governing formal validity of contracts are now clearly too restrictive. To facilitate the formal validity of contracts or unilateral acts, further alternative connecting factors are introduced. The specific rules for contracts concluded by an agent have been incorporated in paragraphs 1 and 2.
Article 13 – Voluntary assignment and contractual subrogation
Voluntary assignment and contractual subrogation perform a similar economic function and are now covered by a single Article. Paragraph 3 introduces a new conflict rule relating to the possibility of pleading an assignment of a claim against a third party; the solution is the one recommended by the great majority of respondents, which was also adopted in the 2001 UNCITRAL Convention on the assignment of receivables in international trade.
Article 14 – Statutory subrogation
Voluntary subrogation is now covered by Article 13, so Article 14 applies solely to statutory subrogation as provided, for instance, where an insurer who has compensated a person who has suffered a loss is subrogated to the victim’s rights against the person who caused the loss. The amendment reflects the work done by the Council and the European Parliament on the Rome II proposal to explain this mechanism, unknown in certain legal systems, in terms that are easier to understand.
Article 15 – Multiple debtors
The amendment reflects the same work so as to cover subrogation and multiple debtors by two separate provisions and present the conflict rules relating to multiple debtors in simpler terms. The final sentence clarifies the situation of a debtor enjoying special protection.
Article 16 – Statutory offsetting
The contributions confirmed the analysis in the Green Paper regarding the usefulness of a rule governing statutory offsetting, given that contractual offsetting is by definition subject to the general rules in Articles 3 and 4. The aim of the solution adopted here is to make offsetting easier while respecting the legitimate concerns of the person who did not take the initiative.
Article 18 – Assimilation to habitual residence
Like the Rome II proposal, Article 18 contains a definition of “habitual residence”, in particular for legal persons.
Article 21 – States with more than one legal system
Where a State consists of several territorial units each with its own substantive law of contractual obligations, this Regulation must also apply to conflicts of laws between those territorial units so as to ensure foreseeability and certainty on the law and the uniform application of European rules to all conflict situations.
Article 22 – Relationship with other provisions of Community law
Like Article 20 of the Convention, Article 22 determines the relationship with other provisions of Community law. Point a) covers the conflict-of-laws rules in instruments of Community secondary legislation in the specific subject-areas listed in Annex 1. The purpose of point b) is to secure consistency with a possible optional instrument in the context of the European Contract Law project. The relationship between the proposed Regulation and the rules to promote the smooth operation of the internal market is governed by point c).
Article 23 – Relationship with existing international conventions
The purpose of the proposed amendments is to strike a balance between compliance with the Member States’ international commitments and the objective of establishing a genuine European judicial area while enhancing the transparency of the body of law in force by publishing the conventions to which the Member States are Parties. Paragraph 2 sets out the basic rule that international conventions take precedence over the proposed Regulation. But there is an exception where at the time of conclusion of the contract all material aspects of the situation are located in one or more Member States. The co-existence of two parallel schemes – application of conventions rules for Member States which have ratified and application of the proposed regulation elsewhere – would be contrary to the smooth operation of the internal market. Paragraph 3 specifically refers to bilateral conventions concluded between the new Member States.