The Choice of Law and Court’s Jurisdiction

In transnational commercial contracts, the Choice of Law and Court’s Jurisdiction are key issues. In this article, I have tried to adopt the Manager's perspective explaining how they are dealt with under EU law and what factors will be taken into account in determining which State’s laws govern a contract and which courts will resolve disputes.

Among the things the parties want to know when entering into an international contract are how to mitigate risks in case of failure, and to be aware of the possible applicable national laws that will govern their obligations. On the other hand, when a dispute arises from or is otherwise related to a contract that has links to more than one legal system, the courts must also be in a position to determine which country’s law governs that contract. One of the principles at the core of modern bodies of conflict is the freedom to choose the law governing contracts. It affects predictability and legal certainty of remedies available in case of future disputes, which are both important conditions for efficient cross-border trade and commerce.

The governing law operates as a “gap filler” since it will be applicable to settle legal issues that have not been completely addressed by the contract. The more deeply and precisely the parties have defined in the contract their duties, rights, and consequences of breaches, the less important is the chosen law which applies to the contract. In EU the European Parliament and Council issued the Rome I Regulation and the Rome II Regulation to confront the problem of the choice of law. The Rome II Regulation covers disputes (liability and compensation definition) arising from non-contractual obligations, including product liability and environmental claims, by affirming that the applicable law is the law of the country where damage occurred or is likely to occur (with the exception of cases where both claimant and defendant are living in the same country at the time the damage occurs, or where the dispute is manifestly more closely connected with another country). The parties to a dispute have some freedom to make their own choice of applicable law, either before or after the event, but without prejudicing compulsory provisions in the law of another country. The Rome I Regulation replaced the Convention on the Law Applicable to Contractual Obligations, signed in 1980. This regulation is applied in all EU member states except for Denmark, which has an opt-out from implementing regulation with regard to freedom, security, and justice issues.

According to Article 3, a contract shall be governed by the law mutually chosen by the parties. The choice should be expressly included or clearly demonstrated by the terms of the contract or the circumstances of the case. The parties can also establish that a specific law is applicable to only a part of a contract. So different laws can be chosen to be applied to different parts. They can also change the applicable law (after the conclusion of the contract) if this change doesn’t affect the rights of third parties, and also if it does not represent a prejudice of the formal validity of the contract. Article 3 affirms that if all other elements relevant to the situation at the time of the choice are located in a different country (a country other than the one whose law has been chosen) the choice of the parties shall not prejudice the application of provisions of the law of that other country. In the case that the contracts relate to one or more EU states, the choice of the parties shall not prejudice the application of provisions of Community law. This free choice of law is subject to the application of mandatory rules. When the law of a country is being observed, (in accordance with the current regime of a country) the mandatory rules of the law of another country  (closely connected to the situation) must be given effect, if and insofar as, under the law of the latter country, those rules must be applied, according to any law applicable to the contract. According to the Rome I Regulation, the overriding mandatory rules provide for what must be applied in order to safeguard public interests (to ensure they are applied to any situation falling within their scope, irrespective of the law otherwise applicable to the contract).

Article 4 deals with the problem of the applicable law in the absence of choice, that is, the case in which the law applicable to the contract has not been chosen in accordance with Article 3. The law that governs the contract must be determined by considering the type of contract it is. The objective connecting factor must also be taken into account so that the most significant relationship with the transaction is the determining factor used to identify the law of the State that will govern it. In particular, for a contract for the sale of goods, the law of the country where the seller has his habitual residence must be applied; in the case of a contract for the provision of services, the law of the country where the service provider has his habitual residence is the one which must be applied; a contract relating to a right in rem in immovable property or to a tenancy of immovable property shall be governed by the law of the country where the property is situated; tenancy of immovable property, concluded for temporary private use for no more than six consecutive months, shall be governed by the law of the country where the landlord has his habitual residence; a distribution contract shall be governed by the law of the country where the distributor has his habitual residence; for a contract for the sale of goods by auction, the law of the country where the auction takes place (if such a place can be determined) must be applied; a contract concluded within an exchange or multilateral system, in accordance with non-discretionary rules and governed by a single law, shall be governed by that law. The term habitual residence refers to the location of the central administration of companies or other similar bodies. In cases where the contract is established in a branch, agency or any other establishment, the habitual residence refers to the place where the branch, agency or establishment is situated. Concerning individuals, the habitual residence of a natural person (acting in the course of his business activity) shall be his principal place of business. In the case of no choice of law, if the contract cannot be included in one of the categories stated before, it must be governed by the law of the country where the party is required to perform the characteristic basis of the contract. The Lugano Convention is a convention regarding the assignment of the jurisdiction in civil and commercial disputes. This convention was intended both to replace the old Lugano Convention of 1988 and also to integrate the Brussels I Regulation (the regulation governing the jurisdiction of civil and commercial disputes in EU), by collecting signatures from both EFTA member states and EU member states.

According to the Brussel Regime’s Article 2, persons domiciled in a Contracting State shall, regardless of their nationality, be sued in the courts of that State. Moreover, non-nationals of a State in which they are domiciled shall be governed by the rules of jurisdiction applicable to nationals of that State. The regulation aims at jurisdiction, i.e., determining which court or courts will have the ability to take the case. That does not mean the applicable law will be the law of the court. It is possible and frequent that a national court applies foreign law. In this context, “domicile” refers to a person’s habitual or ordinary residence. Furthermore, Article 25 affirms that if the parties, regardless of their domicile, have agreed that a court or the courts of a Member State are to have jurisdiction to settle any disputes which have arisen, or which may arise in connection with a particular legal relationship, then that court or those courts shall have jurisdiction. Such jurisdiction shall be exclusive unless the parties have agreed otherwise (or the agreement is null and void as to its substantive validity under the law of that Member State). There are some exceptions regarding the application of the Brussels Regime: where the principal matter of a dispute is one of family law, bankruptcy or insolvency, social security, or relates to arbitration, the case is not subject to these rules. A person domiciled in a Contracting State may, in another Contracting State, be sued for a contract issue, in the courts that govern the obligation in question; in matters relating to maintenance, in the courts for the place where the maintenance creditor is domiciled or is a habitual resident; in the courts where the harmful event occurred, in case of tort, delict or quasi-delict; with regard to a civil claim for damages or restitution (in the case of criminal proceedings), in the court managing those proceedings; where the branch, agency or other establishment is situated, in case of disputes arising out of the operations of a branch, agency or other establishments. However, the domicile is not relevant in some cases, such as proceedings regarding rights in rem in immovable property or tenancies of immovable property, for which the courts located in the Member State will have exclusive jurisdiction; proceedings regarding the validity of entries in public registers, where the courts of the Member State in which the register is kept has the exclusive jurisdiction; disputes concerning the registration or validity of intellectual property rights, governed by the courts of the State where they have been registered; proceedings concerned with the enforcement of judgments, the courts of the Member State in which the judgment has been or is to be enforced.

In conclusion, a judgment given in a Member State shall be recognized in the other Member States without any special procedure being required, while the enforceability of the judgment in the other Member States does not require any declaration of enforceability.