• Cross-border contracts after the revision of community law
  • December 8, 2010
  • Law Firm: Sibeth - Munich Office
  • Globalisation and the resulting growth in the number of international contracts is increasingly posing the question of the applicable national laws for any contractual relationship. The applicable law is fundamentally determined on the basis of the international private law of the relevant legal systems, or by bilateral or multilateral international treaties which are

    implemented in national law.


    Up to now, this also applied within the European Community. In the absence of any normative competence of the European Community, the applicable law for contractual agreements involving the laws of different European states was decided on the basis of international treaties between the European states in the Convention on the Law Applicable to Contractual Obligations of 1980. The German legislative body implemented this convention in German law in Articles 27 to 37 of the Introductory Act to the German Civil Code (EGBGB).


    EC Council Regulation No. 593/2008 on the law applicable to contractual obligations (Rome I)


    When the EC Council Regulation No. 593/2008 on the law applicable to contractual obligations (the Rome I Regulation) came into effect, it created a clear and consistent legal position on this matter, at least for the member states of the European Community. This Regulation represented a long awaited further step in the process of European harmonisation of international private and procedural law, which began in 1999 with the Treaty of Amsterdam.


    Since 17 December 2009, Rome I has been in force in all EU member states - with the exception of Denmark which does not participate in the measures to enhance judicial cooperation in civil law affairs. The Regulation defines what law is applicable to cross-border contracts. Articles 27 to 37 of the Introductory Act to the German Civil Code (EGBGB) were abolished.


    The Regulation retains most of the tried and tested provisions of the Convention on the Law Applicable to Contractual Obligations. Nevertheless, the fact that this matter is now governed by an EC Regulation strengthens the legal certainty for companies and consumers engaged in cross-border transactions. On the one hand, it is now equally and directly valid in the member states, and on the other hand the sometimes divergent rulings of national courts on the Convention on the Law Applicable to Contractual Obligations are now replaced by the jurisdiction of the European Court of Justice to rule in this area.


    Area of application and scope of the regulation


    Where contractual obligations involve the laws of different European member states, the applicable law for the respective transaction is based on the contractually agreed applicable

    law, i.e. it is governed by the provisions of the Regulation. The applicable law determined on this basis fundamentally governs the whole of the contractual relationship, especially the origination and effectiveness of the contract, the consequences of its invalidity, the interpretation of the contract, the fulfilment of the obligations created by the contract, the consequences of non-fulfilment, the lapse of obligations and the statute of limitations.


    But certain contractual relationships and individual issues which must be evaluated apart from the agreed law for the contract are explicitly defined as exceptions to the material scope of the Regulation. According to Article 1 (2) of the Regulation, matters such as contractual obligations in family cases, matrimonial property regimes, wills and trusts, precontractual

    negotiations, certain insurance policies, arbitration and place of jurisdiction agreements and certain obligations arising from bills of exchange, cheques and other tradeable securities are excluded from the area of application.

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    Other areas of law which are not covered in the provisions of the Regulation include civil status issues, questions involving the legal personality, legal capacity and capacity to act of natural persons, questions of company law and effective representation.


    Whether a contract has effectively been created must therefore be judged according to the relevant provisions of other legal systems, irrespective of the contractually agreed laws. For example, it is important to check carefully whether the person representing a foreign company was really effectively entitled to make undertakings for the company at the time of the contract under the relevant laws in the jurisdiction of that company.


    And according to Article 11 of the Regulation, the question of whether a contract has come into force in the correct form is also not exclusively decided under the contractually agreed law. Instead, the formal requirements of the state in which the contract is concluded may be applicable if all parties to the contract are in this state at the time when the contract is agreed. If this is not the case, the requirements may alternatively be based on the laws of the state in which a party to the contract has his/her habitual residence, or in which he/she is at the time when the contract is concluded.


    Potential for contract design


    Under Article 3 (1) sentence 1 of the Regulation, a contract is fundamentally subject to the free choice of law of the parties. This means that the decisive factor is the actual intention of the parties as it is explicitly or implicitly expressed in the contractual agreements. If the choice of law is not explicit or cannot be clearly derived from the provisions of the contract or the circumstances of the case, the applicable legal system is determined according to the provisions of Article 4 of the Regulation, or alternatively on the basis of prescribed objective criteria, some of which are typical for the type of contract, such as the habitual residence of a specific party to the contract, the location of a property or the place of the characteristic performance, although the legal system determined in this way may be corrected by proof of an obviously closer connection to some other legal system.


    An explicit statement of the contractually agreed legal system is therefore advisable for reasons of legal certainty.


    Apart from that, the subjective choice of law can take the special characteristics of the individual case into account. Instead of strict rules on connecting factors which link the case with a specific rule of law, an individual arrangement for the choice of law should be considered. According to Article 3 (1) 1 sentence 3 of the Regulation, the parties may make a choice of law for the whole contract or only for parts of the contract. If this is carefully examined and designed, it is therefore possible to subject different aspects of the contract to the legal system which the parties consider most favourable in individual areas. Differentiated solutions for various complexes such as the content of the contract, faulty performance, warranty and liability are therefore possible, and in view of the fundamental equivalence of contract law in the European countries and the largely optional nature of contractual provisions, they are generally no cause for misgivings. This freedom of contract design should be utilised.


    In view of the fact that Article 3 (2) of the Regulation also stipulates the basic principle of the free choice of law over time, the parties are also at liberty to agree on the applicable law at a later time, or to change a previously agreed choice of law by mutual agreement. The only issues not affected by the later agreement are the formal validity of the contract and the rights of third parties. It is worth considering this option from time to time for existing contracts.


    Limitations of the choice of law


    But care must be taken in relation to the limits of the choice of law which are stipulated by the Regulation.


    To protect the intrinsically “weaker” party, the Regulation limits the basic principle of a free choice of law for certain groups of persons. This especially applies to contracts with private consumers and employees. Even for these contracts there is no general prohibition of a choice of law. But according to Article 6 (2) sentence 2 of the Regulation, the choice of law must not lead to a situation in which the private consumer is deprived of the protection of the mandatory law of the state in which he has his habitual residence. This does not make the choice of law null and void, but the legal system of the consumer’s country of residence determines the minimum level of protection which must be afforded. This means that the principle of the more favourable law is applied. If the legal system chosen by the parties offers the private consumer greater protection, this legal system applies. According to Article 8 of the Regulation, the same applies to the choice of law in relation to individual contracts of employment, although here the connecting factor relates to the legal system of the state in which the employee normally carries out his work under the contract, or alternatively the state in which the branch is situated which employed the employee. The Regulation stipulates similar restrictions of the choice of law for transport contracts and insurance policies.


    In addition to these limitations based on connecting factores in relation to the parties to the contract, the Regulation also limits the content of the free choice of law in cases which mandatory national law is involved. Article 9 of the Regulation defines a special connecting factor in national intervention standards which govern the situation irrespective of the agreed choice of law. This applies to mandatory national provisions which the state regards as essential for the defence of its public interests, especially its political, social or economic organisation, so that they are applied to all matters which fall into their area of application, irrespective of the law that is applicable to the contract under the Regulation. One example of this is the provisions of antitrust law.


    In addition, Article 3 (3) of the Regulation provides for a limitation of the choice of law in cases in which there are no foreign connecting factors ¿ with the exception of the choice of law provision itself. In the event of such a purely domestic contractual situation, it is still possible to choose to apply the laws of another state, but these laws must not affect the mandatory provisions of the state with which the contract is exclusively connected. In Germany, for example, these mandatory requirements include the provisions for general terms and conditions and the provisions for door-to door transactions. In addition, Article 3 (4) of the Regulation stipulates a similar restriction in favour of community law.


    Changes in the transfer of receivables


    The Regulation envisages a significant change in the choice of law in any transfer of receivables. Under German law, the majority view was formerly that a free choice of law was only possible for the contractual transaction which creates the obligation, but that the material transfer agreement, i.e. the assignment or transfer itself, was not governed by the agreed law of the contract, but by the law of the state which had jurisdiction for the existence and cancellation of the receivable (applicable law for accounts receivable). In the future it will still be possible for the parties to make a free choice of the law governing the contractual transaction which creates the obligation. A new element is that Article 14 (1) of the Regulation now also envisages a free choice of law for the whole of the contractual relationship between the assignees and the assignor as the new creditor for the account receivable. This includes the material aspects of the transfer of the receivable. As a result, the parties can now freely choose the applicable law, even for the transfer of the receivable. And according to Article 14 (3) of the Regulation, this applies not only to the “complete” transfer of receivables, it also applies to the assignment of receivables for security purpose and the assignment of rights of lien or other security rights to receivables. Important partial rights are therefore placed on the same basis as the receivables.


    But the Regulation continues to deal with the question of transferability and the effects of the transfer on the debtor on the basis of the applicable law for the transferred receivable (Article 14 (2) of the Regulation). The background to this provision is that the content of the contractual relationship should not be changed by the transfer, so the applicable law should be retained in the interest of the debtor.


    The changes in the Regulation have now harmonised the legal situation in Europe in relation to the differences which previously arose from the different implementations of the separation between the contractual transaction which creates the obligation and the material transfer agreement. Especially from a German perspective, this means that the cross-border transfer of receivables can be designed with greater flexibility in future. In the absence of any explicit

    provision for the previously controversial effect of the transfer on third parties and the question of multiple transfers, there is still a need for interpretation even after the Regulation

    came into effect.




    The harmonisation of national provisions on the national law applicable to contractual relationships as a result of the Rome I Regulation increases the legal certainty for the parties

    to cross-border contracts. In the light of the scope offered by the Regulation, both new and old contracts should be reviewed for any possibility of a choice of law which is appropriate for the interests of the parties, taking into account the limitations defined by the Regulation. In particular, the possibility of the free choice of law for material transfer transactions which is granted in the Regulation offers potential for flexible contract design for the transfer of receivables.