The Principle of Party Autonomy

The implementation of the Regulation by the Commission had the objective of the the adoption of uniform rules on the law applicable to contractual obligations to make judicial decisions more easily foreseeable. Basically, the solutions provided for in the proposed Regulation are the same as those contained in the Rome Convention. However, what previously constituted presumptions are now converted into fixed rules. Exception and reservation clauses are excluded. This is relevant with Article 8(3), which allows the Court to decide to apply foreign mandatory rules having regard to their nature, purpose and consequences of their application or non application.

The Rome I Regulation has been published in the Official Journal of the European Union. [1] Pursuant to its Articles 28 and 29, the regulation was applied from 17 December 2009, to contracts concluded after the same date. On the last report on the draft Regulation, the United Kingdom was still considering whether to opt in, but finally decided to do so. On 17 December 2009, the Rome I Regulation on the law applicable to contractual obligations came into force and it is directly applicable in all EU Member States with the exception of Denmark. To a large extent, Rome I replicates the provisions of the Rome Convention. In particular, Rome I preserves the parties’ right to choose the law that will govern their contract where this choice is expressly made or clearly demonstrated by the terms of the contract or the circumstances of the case. [2] Article 4(1) of the Rome I Regulation lists eight types of contract and the most important are contracts of carriage, insurance contracts and individual employment contracts. Despite the fact that Rome I Regulation’s rules do not differ significantly from those of Rome Convention and the fact that United Kingdom was skeptical on adopting it, there are some important changes which will have practical implications for commercial parties. The principle of party autonomy has a key role on Rome I Regulation. On the other hand, the Rome I Regulation is the current regime applicable to international contracts within the EU. The principle of party autonomy and the choice of law by the parties is currently the principal features governing international conyracts.

Rome Convention with its successor, the Rome I Regulation, appear to have no substantial changes, at least as far as party autonomy is concerned. In light of the coming into force of the Rome I Regulation, it seems useful, therefore, to recall some of the main characteristics of party autonomy under the Rome Convention.

The rather vague character of the rule of the proper law of a contract is explained by the need for flexibility in international contracts. As the rule does not fix any factor in advance, the judge may choose whichever factor he deems to be the closest and most real connection in the given transaction. This seems reasonable for common law contracts which are more complex than contracts governed by the laws of the continent. In common law contracts the characteristic performance is often difficult to ascertain. Consequently, the only guideline for the judge, when looking for the appropriate connecting factor, is the efficiency of the intended transaction. This is applied more easily under the flexible rule of the proper law of a contract than under the more rigid rule of characteristic performance.

The main criticism to be made of the rule of the proper law of a contract is that it is outdated. The rule of the law of characteristic performance is considered to be a superior replacement. Even the Giuliano-Lagarde report in 1980 stated with regard to the rule of the law of characteristic performance that “the objective concept seems to be receiving more and more support from legal writers and from case law”. [3] Its superiority consists in the fact that it defines the connecting factor of the contract from the inside, and not from the outside by elements unrelated to the essence of the obligation such as the nationality of the contracting parties or the place where the contract was concluded.

Further, it is objected that due to its vagueness the rule of the proper law of a contract is not a rule at all. French doctrine contends that it only formulates a fundamental principle of the solution for the conflict of laws whereas the substance of a conflict of laws rule is to determine by way of a particular connecting factor the applicable law which presents the closest connection with the type of the situation at hand. It is the very principle of a conflict of laws rule that it seeks to determine a particular connecting factor that represents in all cases the most significant factor. One might go even further and claim that the rule of the proper law of a contract is not even a legal principle, since it does not refer to any legal value or any fundamental right. The judge, in order to apply law properly, would in any case have to find the closest and most real connection even in if the rule of the proper law of a contract did not exist.

Finally, it is claimed that the rule of the proper law of a contract fails to fulfill the objective of the unification of conflict of law rules. If applied by the judges of the different Contracting States as a rule per se, it would not prevent them from applying a different governing law in identical cases, since the first sentence of Art. 4(2) give sufficient room to do that. As has been already shown above, Article 4 marries the rules of the law of characteristic performance with the rule of the proper law of a contract. The question is whether these two rules in a way as to generate a new conflict of laws rule or, taken more modestly, whether they can co-exist peacefully.

Despite this conflict, both rules have a common theoretical root, since they stem from the objective localization theory. Whereas under the subjective theory, the connecting factor is to be derived from the will of the parties, whether express or implied or even presumed, under the objective theory, the connecting factor is to be found by examining the contract itself. Although the application of the law which the contracting parties, as just and reasonable persons, ought to have intended if they had thought about the question when they made the contract, might suggest that the rule of the proper law of a contract requires nothing but to search for the implied intention of the parties.

English commentators as well as the Giuliano-Lagarde Report insist that the closest and most effective connection is to be determined from the objective facts. Objective theory circumscribes the search for the connecting factor to objectively determinable features of the contract. The conflict between the two rules lies in the relative importance of these features, while the rule of the proper law treats all the features of the contract equally. In other words, gives to each feature the same potential power to establish the attachment of the contract to a particular place the rule of characteristic performance, gives priority to one particular feature of the contract: the place of business of the party that provides the characteristic performance of the contract.

The basic rules, Articles 3 and 4 of the Regulation follow the pattern of English law. Normally party autonomy is allowed and in the absence of choice the proper or applicable law will be the law of the country with which the contract is most closely connected. This is but the third rule of the Proper Law doctrine. In England, three rules have been developed to assist the court in determining the proper law of a contract. Thus the traditional English approach is for the judge to enquire first whether there is an express selection of the proper law by the parties, secondly, if not, whether there is an implied selection, and thirdly, if not, with which system of law did the transaction have its closest and most real connection.

The Regulation attempts to make this third general principle more precise by use of presumptions, the most important of which is that of characteristic performance. At the end of the day, however, as this is only a presumption which may be displaced if the contract is more closely connected with another country the end result is much the same as that achieved at present by English law, but by a more complex route.

Starting just like the common law, by stating the generic principle in the absence of choice by the parties to a contract as regards its applicable law, as per which the latter shall be governed by the law of the country with which it is most closely connected, the Convention moves on to incorporate a few presumptions in respect of what that closest connection entails, which are, notably, neither comprehensive, nor conclusive. The most important and hence most controversial presumption is that of Article 4(2), which indicates that the contract is most closely connected with the country where the party who is to effect its characteristic performance has his habitual residence, central administration, principal place of business or other place of business, in case its performance is to be effected in a different place. Its controversy can only be enhanced by the possibility of its rebuttal propounded by Article 4(5), in case the characteristic performance cannot be determined or if the circumstances point to another country as being the one with which the contact is most closely connected.

In the past, Lord Wright’s formulation of the principle of part autonomy in the choice of the proper law has not met with universal approval it remains on the limits to be placed upon the parties’ freedom to choose the law to govern their contract. [4]

The characteristic feature of common law conflict of laws is that the court behaves as a responsible global citizen, but it does not act like an international policeman. The court’s primary role in choice of law is, subject to the fundamental law and policies and rules of procedure of the forum State, to give effect to principles of private justice between the litigants, and at the same time act with self-restraint bearing in mind considerations of international comity. Any country with a strong regulatory interest in an issue will provide for its own rules of jurisdiction and choice of law to protect its own interests. [5] The court of the forum should respect that foreign court accordingly as a court of competent jurisdiction, but in determining the merits of a dispute before it, the court is entitled to act according to its own conception of conflicts justice.

To sum up, the Rome I Regulation has followed in a way the English common law regime. The legal system under which a contract is created and by which it is governed is known as the proper law of the contract. Nevertheless, a significant feature of English law is the principle of party autonomy. English conflict rules accord to the parties to a contract a wide liberty to choose the law by which their contract is to be governed. The two of the most important articles of the Rome I Regulation, Article 4 and Article 3 seem to use the same approach. Normally, party autonomy, under the Regulation is allowed and on the choice of the proper or the applicable law will be the law of the country with which contract is most closely connected.