Learning Outcomes
This article outlines the key pre-action consideration of determining which country's laws apply to potential cross-border claims in contract or tort. After reading this article, you should be able to identify the key principles governing choice of law, including party autonomy in contracts and the default rules derived from retained EU law (Rome I and Rome II Regulations). You will understand the distinction between applicable law and jurisdiction and be able to apply these concepts to SQE1-style problem questions, advising on the governing law in given scenarios.
SQE1 Syllabus
For SQE1, you are required to understand the mechanisms for determining which country's laws apply to contractual or tortious claims, particularly where there is a cross-border element. This involves applying principles from retained EU law and common law. Your ability to distinguish applicable law from jurisdiction is also assessed.
As you work through this article, focus your revision on:
- The principle of party autonomy in choosing the law applicable to a contract.
- The rules for determining the applicable law for contractual obligations when no choice is made (Rome I Regulation principles as retained EU law).
- The rules for determining the applicable law for non-contractual obligations/torts (Rome II Regulation principles as retained EU law).
- The fundamental difference between applicable law (governing law) and jurisdiction (the court's authority to hear a case).
- How to apply these rules to advise a client in a cross-border dispute scenario.
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
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In contractual disputes with a cross-border element, what is the primary principle determining the applicable law?
- The law of the country where the contract was performed.
- The law chosen by the parties (party autonomy).
- The law of the country where the damage occurred.
- The law of the court hearing the dispute (lex fori).
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A UK company contracts with a German company for the supply of goods. The contract does not specify a governing law. Under the rules derived from the Rome I Regulation (as retained in UK law), which country's law is most likely to apply?
- UK law (buyer's habitual residence).
- German law (seller's habitual residence).
- The law of the country where the goods are delivered.
- The law of the country where the contract was signed.
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In a tort claim involving parties from different countries, what is the general rule under the Rome II Regulation principles (as retained in UK law) for determining the applicable law?
- The law of the country where the wrongful act was committed.
- The law of the country where the parties are both habitually resident.
- The law of the country where the damage occurred (lex loci damni).
- The law chosen by the claimant.
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True or false? Jurisdiction refers to the specific laws that will be used to decide the substance of a legal dispute.
Introduction
When advising a client on a potential dispute involving parties, events, or subject matter connected to more than one country, a critical preliminary step is to determine the applicable law, also known as the governing law. This refers to the system of substantive law (e.g., English law, French law) that the court will use to decide the rights and obligations of the parties involved in the dispute. This is distinct from jurisdiction, which concerns the authority of a particular court (e.g., the High Court of England and Wales) to hear the case in the first place. Understanding which country's laws will apply is essential for assessing the merits of a potential claim or defence and advising the client appropriately before commencing proceedings.
Determining Applicable Law in Contractual Disputes
The rules for determining the applicable law for contractual obligations largely stem from the principle of party autonomy and rules derived from EU law, now retained in UK domestic law.
The Principle of Party Autonomy
The foundational principle for contractual applicable law is party autonomy. This means that the parties to a contract are generally free to choose the law that will govern their agreement.
Key Term: Party Autonomy
The freedom of parties to a contract to choose the law that governs their contractual obligations.
This choice is typically made explicit through a specific clause in the contract.
Key Term: Governing Law Clause
A contractual term explicitly stating which country's law will apply to interpret the contract and resolve disputes arising under it.
The choice of law can be express or, less commonly, implied with sufficient certainty from the terms of the contract or the circumstances of the case. UK courts will generally respect the parties' choice of law.
Absence of Choice: Rome I Regulation (Retained EU Law)
If the parties have not made a valid choice of law, the applicable law is determined by rules derived from Regulation (EC) No 593/2008, commonly known as the Rome I Regulation. These rules have been incorporated into UK domestic law following Brexit.
Key Term: Rome I Regulation
Originally an EU regulation, its principles regarding the law applicable to contractual obligations (in the absence of party choice) are now retained in UK law.
The Rome I rules provide default provisions based on the type of contract. Key examples include:
- Contracts for the sale of goods: Governed by the law of the country where the seller has their habitual residence.
- Contracts for the provision of services: Governed by the law of the country where the service provider has their habitual residence.
- Contracts relating to immovable property (e.g., tenancy agreements): Governed by the law of the country where the property is situated.
There are further specific rules for other contract types (e.g., franchise, distribution) and a general rule that applies if none of the specific rules fit: the contract is governed by the law of the country where the party required to effect the 'characteristic performance' of the contract has their habitual residence. If the applicable law cannot be determined by these rules, it will be the law of the country with which the contract is most closely connected.
Limitations on Choice
Party autonomy is not absolute. Certain rules, known as overriding mandatory provisions (e.g., specific consumer protection laws or employment regulations of a particular country), may apply regardless of the parties' chosen law if they are deemed necessary for safeguarding public interests. Furthermore, a court may refuse to apply a provision of the chosen foreign law if doing so would be manifestly incompatible with the public policy (ordre public) of the forum (the country where the court is located).
Worked Example 1.1
A tech company based in England enters into a software development contract with a company based in India. The contract includes a clause stating, "This agreement shall be governed by and construed in accordance with the laws of England and Wales." A dispute arises regarding the quality of the software delivered. Which country's law will apply to resolve the dispute?
Answer: The law of England and Wales will apply. The parties have made an express choice of law in their contract through the governing law clause. This choice will be respected by the court hearing the dispute, based on the principle of party autonomy.
Determining Applicable Law in Tortious Disputes
The rules for determining the applicable law for non-contractual obligations (including torts) are derived from Regulation (EC) No 864/2007, known as the Rome II Regulation, which has also been retained in UK domestic law post-Brexit.
Key Term: Rome II Regulation
Originally an EU regulation, its principles regarding the law applicable to non-contractual obligations (torts) are now retained in UK law.
The General Rule: Rome II Regulation (Retained EU Law)
The general rule under the Rome II principles is that the law applicable to a tortious claim is the law of the country in which the damage occurs, irrespective of the country in which the event giving rise to the damage occurred or the indirect consequences occurred. This is often referred to as lex loci damni.
Key Term: Lex Loci Damni
A legal principle meaning "the law of the place where the damage occurred". This is the general rule for determining the applicable law in tort claims under the Rome II Regulation principles.
Exceptions and Specific Rules
Rome II provides exceptions to the general rule:
- Common Habitual Residence: If the person claimed to be liable and the person sustaining damage both have their habitual residence in the same country when the damage occurs, the law of that country applies.
- Manifestly Closer Connection: If it is clear from all the circumstances that the tort is manifestly more closely connected with a country other than the one indicated by the general rule (or the common habitual residence rule), the law of that other country applies. A manifestly closer connection might be based on a pre-existing relationship between the parties, such as a contract, that is closely connected with the tort in question.
Rome II also sets out specific rules for certain types of torts, such as product liability, unfair competition, and environmental damage, which may point to a different applicable law than the general rule.
Worked Example 1.2
A tourist from the UK is injured in Spain due to the alleged negligence of a hotel owned and operated by a Spanish company. The tourist returns to the UK and considers bringing a claim. Which country's law will likely govern the substance of the negligence claim?
Answer: Spanish law is likely to govern the claim. Applying the general rule derived from the Rome II Regulation (lex loci damni), the applicable law is that of the country where the damage occurred, which in this case is Spain. The exceptions (common habitual residence or manifestly closer connection) do not appear to apply on these facts.
Distinguishing Applicable Law and Jurisdiction
It is essential not to confuse applicable law with jurisdiction.
Key Term: Jurisdiction
The power or authority of a specific court or court system (e.g., the courts of England and Wales) to hear and determine a legal case.
Applicable law determines which country's legal rules decide the case's outcome, whereas jurisdiction determines which country's courts have the power to hear the case. A court in England and Wales might have jurisdiction to hear a dispute but may need to apply French law (if that is the applicable law determined by the rules above) to resolve the substantive issues. Determining both jurisdiction and applicable law are distinct but equally important pre-action steps in cross-border disputes.
Exam Warning
A common pitfall is confusing the rules for determining jurisdiction with the rules for determining applicable law. Ensure you can distinguish between these concepts. For example, the fact that an English court has jurisdiction does not automatically mean that English law will be the applicable law governing the substance of the dispute. Always apply the distinct rules for choice of law (party autonomy, Rome I/II principles) separately from jurisdictional rules.
Key Point Checklist
This article has covered the following key knowledge points:
- Determining the applicable (governing) law is a critical pre-action step in cross-border disputes.
- Applicable law (which country's law governs the substance of the dispute) must be distinguished from jurisdiction (which country's courts can hear the case).
- In contractual disputes, the primary principle is party autonomy – the parties' choice of law, usually in a governing law clause, is of utmost importance.
- If no choice of law is made in a contract, rules derived from the Rome I Regulation (retained EU law) apply, often pointing to the law of the habitual residence of the party performing the characteristic obligation (e.g., the seller in a sales contract, the service provider).
- In tortious disputes, the general rule derived from the Rome II Regulation (retained EU law) is lex loci damni – the law of the country where the damage occurred applies.
- Exceptions to the general rules exist, such as common habitual residence or a manifestly closer connection to another country's law.
- Overriding mandatory provisions and public policy can limit the application of a chosen or determined foreign law.
Key Terms and Concepts
- Party Autonomy
- Governing Law Clause
- Rome I Regulation
- Rome II Regulation
- Lex Loci Damni
- Jurisdiction
