House of Lords - European Union

Select Committee on European Union Eighth Report

Chapter 2: Background and Outline of the Proposal

Private international law—choice of law rules

13. The proposed Regulation stipulates the rules that are to apply where a court in one Member State is faced with deciding which law to apply in order to resolve a claim alleging a breach of a non-contractual obligation where the facts of the case involve one or more international elements (for example, where the wrongful act occurred outside that Member State).

14. Courts faced with a choice of law issue ("what law should be applied in this case?") generally have two choices: the court can apply the law of the forum (lex fori), i.e. its own domestic rules, making no distinction or adaptation because of the foreign element—courts will generally apply the lex fori to procedural questions. Or the court can apply the law of another country, for example the place of the transaction or event giving rise to the dispute (lex loci) or, if that is fortuitous or otherwise inappropriate, a law having a connection with the parties or the circumstances (such as the law of the domicile or habitual residence of the parties or one or other of them). In deciding what law to apply the court will first have to determine what sort of issue is the subject of the dispute (for example, is it a contractual or tortious matter?)—a process of classification or "characterisation" in which the forum court will generally apply its own domestic rules. The issue having been thus characterised, the choice of law is generally determined having regard to relevant connecting factors (such as, in tort cases, the place where the allegedly wrongful act occurred or its consequences were felt; or the domicile or habitual residence of the parties in family matters; or the intention of the parties, or the place where the contract was concluded or was to be performed, in relation to contracts).

Private international law—Union law-making

15. Under the Treaty of Rome, work on harmonisation within the Community in the field of private international law was achieved by Conventions agreed upon by all Member States. There was no direct Community competence. Article 293 (ex 220) provides that "Member States shall, so far as necessary, enter into negotiations with each other with a view to securing for the benefit of their nationals … the simplification of formalities governing the reciprocal recognition and enforcement of judgments of courts or tribunals and of arbitration awards". Both the Brussels I and Rome I Conventions (described below) were adopted by the Member States pursuant to this provision.

16. The Maastricht Treaty, however, established a Union competence in Justice and Home Affairs matters, which made up the so-called Third Pillar. This provided for co-operation in a number of areas, including judicial co-operation in civil matters. But the Third Pillar maintained an intergovernmental lawmaking structure. While Member States had a general right of initiative, that of the Commission was more limited and the European Parliament played a minimal role.

17. The Amsterdam Treaty created the concept of an "area of freedom, security and justice", provided for the incorporation of the Schengen acquis into the Treaties, and introduced a new Title IV (Visas, asylum, immigration and other policies related to the free movement of persons) into the EC Treaty. Certain Third Pillar matters were also transferred into the mainstream EC lawmaking structures.[6] These included judicial co-operation on civil matters. Notwithstanding the existence of Article 293 (ex 220) EC described above, Article 65 EC includes "improving and simplifying … the recognition and enforcement of decisions in civil and commercial cases" as well as "promoting the compatibility of the rules applicable in the Member States concerning the conflict of laws and of jurisdiction" as a basis for EC lawmaking competence. Special arrangements, however, enable three Member States in relation to Title IV EC, namely, Denmark, Ireland and the UK to remain outside Title IV but allow the latter two to opt in to individual measures adopted under Title IV. The United Kingdom has opted into the negotiations of Rome II.

18. EC Regulations have now largely replaced Conventions as the means of Community law making in relation to private international law.[7] With the entry into force of the Amsterdam Treaty Member States agreed that the texts of a number of measures, including certain Conventions which had been negotiated and agreed in the Third Pillar, should be "frozen" and that the measures should be reintroduced under the new Title IV (First Pillar). A number of Conventions have now been converted into Regulations, including the Brussels I Regulation on the jurisdiction and recognition of judgments,[8] the Insolvency Regulation,[9] the Regulation on service of judicial and extra judicial documents,[10] and the Regulation, adopted in May 2000, on Jurisdiction Recognition and Enforcement of Judgments in Matrimonial Matters (Brussels II).[11] The Commission has published a Green Paper canvassing views on whether to convert the 1980 Rome I Convention into a Community Regulation.

19. The Nice Treaty also introduced a notable institutional and procedural change. Measures under Article 65, with the exception of family law, are now to be adopted by co-decision of the Council and the European Parliament. Qualified majority voting applies in the Council.

Brussels I

20. The Brussels Convention on jurisdiction and enforcement of judgments in civil and commercial matters (the Brussels Convention) was concluded by Member States in 1968. It provides a set of rules for determining which Member State's courts have jurisdiction in relation to a particular matter (such as a commercial contract or a tort) and when and how the judgments of the courts of one Member State acting under the Convention must be recognised and enforced in other Member States. The United Kingdom gave effect to the Convention by the Civil Jurisdiction and Judgments Act 1982. The Convention has been amended from time to time to take account of the accession of new Member States to the Community. The Brussels Convention also formed the basis of the Lugano Convention 1988 which extended the rules on jurisdiction and enforcement of judgments to the EFTA countries.

21. The Brussels Convention has been converted into a Community Regulation. For all Member States except Denmark the Convention was replaced as from 1 March 2002 by Council Regulation (EC) No 4/2001 of 22 December 2000 on jurisdiction and enforcement of judgments in civil and commercial matters.[12]

22. The basic rule under the Brussels I Regulation is that a defendant must be sued in the courts of the Member State in which he or she is domiciled. In addition to the general rule Brussels I provides certain rules of special jurisdiction which allow the claimant to choose to bring proceedings before courts other than those in which the defendant is domiciled. One such special rule, in Article 5(3), relates to tort, delict and quasi-delict, where the defendant may be sued in the courts "for the place where the harmful event occurred". This has been the subject of litigation before the European Court of Justice. According to the case law, where the place of the happening of the event giving rise to the alleged liability in tort and the place where that event results in damage are not the same, the expression "place where the harmful event occurred" should be understood as covering both the place where the damage occurred and the place of the event giving rise to it. The defendant may be sued, at the option of the claimant, in the courts of either of these places.[13] The Court of Justice has been reluctant to extend the notion of the place where the damage occurred beyond the place where the initial damage was incurred so as to allow the claimant to sue where any incidental or consequential damage has been suffered.[14]

Rome I

23. The Rome Convention on the law applicable to contractual obligations ("Rome I") was agreed by Member States in 1980. It lays down uniform rules to determine the law applicable to contractual obligations[15] in the Union. Under Rome I, parties may agree on which law (which need not be the law of a Member State) is to be the law applicable to the contract and may change that choice of law at any time. The Convention, however, places certain restrictions on the choice of applicable law and also determines which law is applicable if no choice is made by the parties. In that event, the contract is governed by the law of the country with which it is most closely connected (usually the law of the place of habitual residence or place of central administration or the principal place of business of the party responsible for performing the contract). Special rules apply to contracts concerning immovable property, contracts concerning the transport of goods, consumer contracts and employment contracts. Rome I was implemented in the United Kingdom by the Contracts (Applicable Law) Act 1990.

24. In January 2003 the Commission published a Green Paper[16] canvassing views on whether to convert Rome I into a Community Regulation and, if it is to be converted, whether any and, if so, what changes of substance should be made to it.

Outline of the present proposal

Scope

25. The material scope of the Rome II proposal is set out in Article 1. The Regulation applies to non-contractual obligations in "civil and commercial matters", a term which is to be understood in the same sense as in the Brussels I Regulation. The Regulation would therefore not apply to revenue, customs or administrative matters. Article 1(2) specifically excludes non-contractual obligations arising out of family relationships, matrimonial property regimes and succession, obligations under negotiable instruments, the personal liability of officers and members for the debts of a corporate and incorporated body, the personal liability of persons carrying out a statutory audit, the liability of settlors, trustees and beneficiaries of a trust, and, finally, non-contractual obligations arising out of nuclear damage.

26. The approach taken by the Commission in the Regulation is to divide non-contractual obligations into two major categories, those that arise out of a tort or delict and those that do not. The latter category would include quasi-delictual or quasi-contractual obligations, including, in particular, unjust enrichment and negotiorum gestio (agency without authority).

Universality

27. Article 2 provides that the Regulation is to have universal application so the uniform conflict rules laid down in the Regulation can designate the law of an EU Member State or of a third country. Rome II is not restricted to cross border or intra Community disputes. Its rules would apply and could lead to the application of Californian law in a case before a United Kingdom court brought by an American claiming damages for a traffic accident caused by a United Kingdom citizen when driving on holiday in California.

The basic rule

28. Article 3 lays down the general rules for determining the law applicable to non-contractual obligations arising out of a tort or delict. The law applicable is to be the law of the country in which the damage arises or is likely to arise irrespective of the country in which the event giving rise to the damage occurred or of the country or countries in which indirect consequences of that event arise. There are two exceptions to the general rule. Article 3(2) contains a special rule that where the person claimed to be liable and the person who has allegedly sustained damage are habitually resident in the same country, the law of that country would be applicable. Article 3(3) contains a more general exception. Where it is clear from all the circumstances of the case that the non-contractual obligation is manifestly more closely connected with another country, the law of that other country should apply.

Special rules

29. The general rule in Article 3 is displaced by particular rules which apply in the case of product liability (Article 4), unfair competition (Article 5), privacy and the rights relating to personality (Article 6), violation of the environment (Article 7) and the infringement of intellectual property rights (Article 8).

Product liability

30. Product liability is a matter on which there is already a substantial degree of harmonisation as a result of the Product Liability Directive[17] of 1985. But Member States' laws still contain differences, not least because the Directive permits certain options and covers only certain types of damage. Article 4 requires the law applying to a product liability claim to be the law of the country in which the person sustaining the damage is habitually resident, unless the defendant can show that the product was marketed in that country without his consent. In the latter case the applicable law would be that of the habitual residence of the defendant, however, Article 3(2) (habitual residence) and (3) (general exception clause) would also apply.

Unfair competition

31. Under Article 5 in an action arising out of an act of unfair competition the applicable law would be the law of the country "where competitive relations or the collective interests of consumers are or are likely to be directly and substantially affected". Unfair competition is not defined but the Commission's Explanatory Memorandum would suggest that it is intended to cover both traditional Continental unfair competition (i.e. misleading advertising, enticement away of a competitor's staff, boycotts and passing off) and also actions for breach of "modern competition law" such as Articles 81 and 82 of the EC Treaty.

Privacy and defamation

32. Article 6 deals with 'violations of privacy and rights relating to the personality' (for example, defamation actions). The Commission originally proposed that the laws of a victim's habitual residence should be applied but that proposition was subject to extensive criticism during the consultation exercise. Article 6 now proposes that law applicable to violations of privacy and rights relating to the personality should be determined in accordance with the rules in Article 3 (that is the law of the place where the direct damage is sustained) unless the parties reside in the same State or the dispute is more closely connected with another country. But where the application of that law would be contrary to the fundamental principles of the forum as regards freedom of expression and information the applicable law would be the domestic law of the court. Article 6(2) provides for the law of the habitual residence of the broadcaster or publisher to apply in relation to any right to reply or "equivalent measures".

Environmental damage

33. As regards the "violation of the environment", Article 7 provides that the applicable law should again be determined by the general rule in Article 3 unless the claimant "prefers to base his claim on the law of the country in which the event giving rise to damage occurred". The victim of environmental damage would therefore be able to choose which applicable law would be more favourable to him. The Commission's explanation is that relying only on Article 3 would mean that a victim in a low protection country would not enjoy the higher level of protection available in neighbouring countries, and that this could give the polluter an incentive to carry out his operations at the border so as to discharge toxic substances into a river and enjoy the benefits of the laxer rules of the victim's country.

Intellectual property rights

34. Article 8 contains a special rule relating to the infringement of intellectual property rights. According to Recital 14 the term intellectual property rights means copyright, related rights, sui generis rights for the protection of databases and industrial property rights. The applicable law will be the law of the country in which protection is sought. This rule, which the Commission explains derives from the nineteenth century version of the Berne and Paris Conventions, enables each country to apply its own law to enforcement of an intellectual right which may be validly asserted in that country.

Other non-contractual obligations

35. The approach taken by the Commission in the Regulation is to divide non-contractual obligations into two major categories, those arising out of a tort or delict (to be governed by Articles 3 to 8 described above) and those that do not. The latter category would include quasi-delictual or quasi-contractual obligations, including in particular unjust enrichment and agency without authority (negotiorum gestio). Article 9 lays down five rules which seek, without using too technical expressions or terminology, to cover all the types of action falling within this second category. Article 9(6) provides that all non-contractual obligations in relation to intellectual property are to be governed by the rule in Article 8 (described above).

Common rules

36. Section 3 of the draft Regulation sets out rules common to tort or delict cases as well as those arising from other non-contractual obligations. Article 10 provides that the parties must be allowed after the dispute has arisen to choose the law applicable to the non-contractual obligation. This would not be allowed for intellectual property disputes, where the rule in Article 8 would apply.