Posted by on Aug 23, 2018 in LEGAL UPDATES

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INTERNATIONAL CONTRACTS: ARE THERE LIMITS TO THE PARTIES’ POWER OF CHOICE OF APPLICABLE LAW? 

(EU regulation Rome I, Nikiforidis, necessary application of rules, lois de police (rules of application))

1) How do you identify the law applicable to an international contract?

When there is a foreign element in the creation of a contract (i.e. one of the parties is foreign, there is a foreign object or the execution of the contract could potentially be carried out in accordance with foreign law) national law cannot always be said to be applicable. For this reason it is useful to analyse the different methods of identifying the applicable law when signing international contracts, and what limits are imposed on the signing parties.

a)  Firstly it is necessary to clarify what is meant by the law applicable to the contract: it is the legal order which regulates the interpretation, execution, the consequences of the non-execution or the invalidity of the contract itself. This law must not be confused with the law that applies to the forum, i.e. the set of rules governing the procedure should a dispute arise.

b) In principle, it is the parties who determine freely and in agreement which law will be applicable to the contract, which law will be the lex mercatoriae. the applicable national law of one of the parties.

c) If the aforementioned principle is valid, it is also true that there are priority rules that place themselves above the free determination of which national law can apply, which often leads to doubts as to which is the applicable national law of the contract.

2) Mandatory and non-mandatory material rules

a) The first rule that arises from the choice that the parties have, is the material rule of national origin, or the rule which results from the instruments of international payment, such as money, based on the principle of monetary sovereignty. Payment can be accepted in foreign currency, but the object of the contract must be based on this.

b) Other types of material rules are conventions, such as the Vienna Convention on International Sales. In the field of transport, for example, specific rules are set on the responsibility of the transporter, for fault or presumed fault.

c) Simple values of recommendation are the Unidroit principles, these are principles that regulate international commercial contracts and which have as their objective the unification of the applicable law.  These principles, if adopted by the parties, can overcome the difficulties inherent in the application of the law that regulates the contract or when the parties are in disagreement in the choice of the law itself. See 2010 draft principles or website https://www.unidroit.org/.

3) Limits on the freedom of choice of the parties: EU regulation 593/2008 (Rome I)

a) With the approval of the European Regulation (Rome I), which came into force on 17 December 17 2009, a more regular method was suggested as to how to deal with the problem of identifying the applicable law to the contract. (Please note that for the period prior to the date indicated above, the rules of the Rome Convention, issued in Italy with Law no. 975/1984 apply.)

(Link to Rome I Regulation)

This Regulation applies specifically to contractual obligations. Article 1 provides which matters are excluded (state and capacity of persons, matrimonial and succession regimes, food obligations etc). In such cases one should refer to other European regulations or directives, such as Rome 2 on non-contractual obligations.

b) In Article 3 of Rome I, the principle of freedom of choice of the parties is confirmed, either expressly or tacitly, i.e. resulting from the contractual provisions or the relative circumstances;  part of the contract may be regulated by a specific applicable law, as long as this is in accordance with internal public order rules.

c) The constraints that arise from Rome I are present in the absence of choice of the parties in some cases, (Articles 4 – 8) and which has been discussed in caselaw, for example in relation to consumer rights, insurance, transport. These limits are imposed only in circumstances where strictly necessary, as defined in Article 9: “provisions in which respect is considered crucial by a country for the protection of its public interests, such as its political, social or economic organization, to the extent that it is required to apply it to all situations that fall within their application, whatever the law applicable to the contract under this Regulation. “

d) In such cases, therefore, the national judges and international judges can refer to the public order rules, both in domestic and foreign law, which is different from the law chosen by the parties.

In particular, two judgments on this point have specified the importance of the necessary enforcement rules.

The French Supreme Court’s ruling of 6 March 2010 has in fact examined a case of transportation of goods (beef) from France to Ghana.

This transport had been subject to an embargo under the laws of Ghana, but the French company had requested compensation for the loss of the goods and therefore for the resale to recuperate loss, since the embargo was an external element to the contract, this request would not affect its validity.

In this case the Supreme Court applied the Article 9 of the Rome 1 regulation and specified that the application should be rejected because it would have to consider the application of the Ghanaian law on the embargo and would also have to reference to the contract.

Similarly, the European Court of Justice, with the Nikiforidis ruling of 18 October 2016, applied the same rule as the regulation in question. In this the parties sought to determine the amount due as compensation for dismissal of a Greek employee by a Greek employer and a contract executed in Germany. The Greek State, the employer, wanted to apply the Greek law and not the German law, because in the first instance the amount would have been lower and in accordance with the decision held in the European Court of Justice, the law of the country should apply. In relation to the execution of the contract, Greek law was also considered, as the law applicable to the contract.

The reason is precisely the provision of Article 9 of the Rome I, which does not oppose taking into account the law applicable to the contract or other rules that have facts in the contract.

Paragraph 3 of Article 9 expressly declares that: “the provisions of the country in which the obligations deriving from the contract must be or have been carried out may also be effective, insofar as such necessary rules of application render the fulfillment of the contract illegal. In deciding whether these rules should be effective, their nature and purpose should be taken into account as well as the consequences of whether they are applied or not. “

4) In conclusion, through the necessary rules of application, also called lois de police, the law applicable to the contract is not easy to determine, even in the presence of specific choices available to the parties, as it allows the courts to consider further different rules that are based on factual elements of the contract, as happened in the two sentences analysed above.

Therefore it is always be necessary to take these aspects into consideration when drafting an international contract.

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