CHANAKYA NATIONAL LAW UNIVERSITY

INTERNATIONAL TRADE LAW PROJECT WORK ON TOPIC:

CHOICE OF LAW FOR CONTRACTUAL AND NON CONTRACTUAL
OBLIGATIONS
PRESENTED BY: - SUDHAKAR MISHRA
B.A.LLB, 6th SEMESTER, 3rd YEAR
ROLL NO.:- 970
Date:-

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ACKNOWLEDGEMENT
Writing a project is one of the most significant academic challenges I have ever faced.
Though this project has been presented by me but there are many people who remained in
veil, who gave their support and helped me to complete this project.
First of all I am very grateful to my subject teacher, without the kind support of whom and
help the completion of the project was a Herculean task for me. He gave his valuable time
from his busy schedule to help me to complete this project and suggested me from where and
how to collect data.
I am very thankful to the librarian who provided me several books on the topic which proved
beneficial in completing this project.
I acknowledge my friends who gave their valuable and meticulous advice which proved to be
very useful and could not be ignored in writing this project. I want to convey a most sincere
thanks to my seniors for helping throughout the project.

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TABLE OF CONTENTS
1.
2.
3.
4.

Introduction: Choice of Law..4-5

Law Applicable to Contractual Obligations.6-10
Law Applicable to Non Contractual Obligations11-13
Conclusion........14

References

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1.Introduction: Choice of Law

Every legal system must either expressly or impliedly contain choice of law rules for
determining the substantive law to be applied to the merits of the dispute between the parties.
At the most simple level a legal system may contain the rule that the law of the forum should
be applied to all aspects of disputes coming before the courts, regardless of whether the
dispute is domestic or international. While the application of the law of the forum can be
justified in certain cases with a foreign element, the application of the law of the forum is
often likely to defeat the legitimate expectations of foreign litigants. It is not difficult to
envisage examples in which the application of the law of the forum seems inappropriate or
unjust.1
In view of the fact that there are significant differences between the systems of private law of
different countries, a choice of law rule which requires the application of the law of the forum
to international disputes leads to a situation where the outcome of a dispute may depend
entirely upon where the litigation takes place. It is to be expected that, if the courts of more
than one country are competent to entertain proceedings, one of the factors which is relevant
to the claimants choice of forum is the likelihood of the substantive claim being successful. 2
Although it is impossible in practice to bring about a situation where the result of a dispute is
the same irrespective of the forum in which it is litigated, a step can be taken in that direction
by the harmonization of choice of law rules. The Rome Convention on the Law Applicable to
Contractual Obligations, which was implemented in the United Kingdom by the Contracts
(Applicable Law) Act 1990, introduced an almost uniform code for contractual choice of law
questions throughout the Member States of the European Union; in 2008, this convention was
superseded by Rome I Regulation, which is closely modeled on the convention which it
replaced.
So, where as dispute arises out of an international contract, the courts of each of the member
states, bound by the Regulation apply the same rules for determining the law to govern the
substantive rights and obligations of the parties. As regards non-contractual obligations,
harmonization of choice of law rules at the European level has also taken place. Subject to a
1 J Hill, International Commercial Disputes in English Courts (Oxford, Hart
Publishing, 3rd ed, 2005 ), p.8-9.
2 Ibid.
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number of exceptions to which pre-existing national choice of law rules continue to apply,
choice of law with regard to non-contractual obligations is governed by the Rome II
Regulation.

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2. Law Applicable to Contractual Obligation

In the early 1990s the English choice of law rules relating to contractual obligations
underwent a revolution. For most practical purposes the period of common law development
came to a halt on 1st April 1991, when the Rome Convention on the Law Applicable to
Contractual Obligation was brought into force by the Contracts(Applicable Law) Act 1990.
The Rome Convention was Superseded by the Rome I Regulation on the law applicable to
contractual obligations. The Regulation came into effect on, and applies to contracts
concluded on or after, 17 December 2009.3
While the Rome I Regulation is different from the Rome Convention in a number of
significant respects, many of the conventions provisions are transposed virtually unchanged
to the Regulation. Thus, the body of English case law relating to the interpretation of the
Convention remains relevant for the interpretation of the Regulation for those provisions that
remain unchanged. 4
The Scope of the Rome I Regulation
The regulation is limited in both its material and its temporal scope. As regards contractual
obligations not governed by the Regulation either the Rome Convention or the common law
choice of law rules continue to apply.5
Material Scope
Article 1 sets out the Regulations material scope. The first paragraph, which determines the
outer limits of the Regulation, provides:
This Regulation shall apply, in situations involving a conflict of laws, to contractual
obligations in civil and commercial matters. Further, it provides that it shall not apply, in
particular, to revenue, customs or administrative matters.
3 J Hill, International Commercial Disputes in English Courts (Oxford, Hart
Publishing, 3rd ed, 2005 ), p.495.
4 Ibid.
5 Jason C.T.Chuah, Law of International Trade: Cross-Border Commercial
Transactions, Thomson Reuters, 4th ed,2009, p. 661-662.
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Exceptions
The material scope of the Regulation, as defined by the first paragraph of Article 1, is limited
by the exceptions set out in the second and third paragraphs. Those exceptions are as follows:

Choice of law questions concerning bills of exchange, cheques, and promissory notes
are excluded from the scope of the Regulations; 6 they are governed by the Bills of

Exchange Act 1882.

Article 1(2)(a) excludes questions involving the status or legal capacity of natural
persons. Sub paragraph (b) excludes obligations arising out of family relationships
and relationships deemed by the law applicable to such relationships to have
comparable effects, including maintenance obligations, while sub-paragraph (c) goes
on to exclude all remaining questions of family law. The net effect of these two subparagraphs is that issues of parentage, marriage, affinity and collateral relatives fall

outside the scope of the Regulation.

It is provided that the Regulation does not apply to arbitration agreements and

agreements on the choice of court.7

The regulation does not apply to questions governed by the law of companies and
other bodies corporate or unincorporated such as the creation, by registration or
otherwise, legal capacity, internal organization or winding-up of companies and other
bodies corporate or unincorporated and the personal liability of officers and members
as such for the obligations of the company or body.8 Acts which are necessary for the
creation of a company or firm and for the regulation of its internal organizations and

its winding up are all outside the scope of the Regulation.

The Regulation does not apply to the constitution of trusts and the relationship

between settlers, trustees and beneficiaries.9

Insurance contracts arising out of operations carried out by organizations other than
undertakings which are referred to in Article 2 of Directive 2002/83/EC on life

6 Art 1(2)(d).
7 Art1 (2)(e).
8 Art1 (2)(f).
9 Art1 (2)(h).
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assurance are also excluded.10 Insurance contracts that fall within the Regulations
scope are governed by either the general choice of law rules set out in Articles 3 and

4, or the special choice of law rules set out in Article 7.

As a general principle, questions of procedure are for the law of the forum, regardless
of the law which governs the substantive issues disputed by the parties. The
Regulation adheres to this traditional analysis by excluding evidence and
procedure.11

Territorial Scope
The territorial scope of the regulation has been provided in Article 2 of the Regulation. It
states that any law specified by this Regulation shall be applied whether or not it is the law of
a Member State. The Regulation is universal in scope in the sense that its rules could lead to
the application of the law of a non-EU Member State. This rule leads to the welcome
situation that the court needs to apply only one set of rules for both intra and extra EU cases.
Temporal Scope
Article 28 provides that the Regulation is to apply only to contracts concluded after 17 th
December, 2009. Other contracts will generally be governed by either the Rome Convention
or the common law rules. The Rome Convention will apply to any contractual obligation
entered into between 1 April 1991 and 16 December 2009, while the common law choice of
law rules will continue to apply in relation to any contractual obligation entered into prior to
1 April 1991.
The Applicable Law in Cases of Choice
Article 3 of the Rome I Regulation enshrines, as the cornerstone of the Regulation, the
principle of party autonomy in relation to choice of law. This principle, which was central to
the Rome Convention, is important in delivering the benefits of legal certainty in
international commerce. The terms of this provision are substantively the same as those in
Article 3 of the Rome Convention. However, the Rome I Regulation contains two useful
clarifications. First, it has been clarified that a choice of law by the parties need not be made
only in express terms. It is now considered sufficient for the choice to be clearly
10 Art1 (2)(j).
11 Art1 (3)
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demonstrated by the parties by reference to the terms of the contract or the circumstances of
the case. Clarity on this additional flexibility for parties to a contract is useful and reflects
commercial practice in some instances. The position under the Rome Convention had not
been entirely clear on this point. Secondly, Recital 14 clarifies the position that where parties
to an agreement confer exclusive jurisdiction on one or more courts in the event of a dispute
under the contract, this factor will be taken into account when determining whether a choice
of law was demonstrated. Generally, this reflects the current position under English law.
Overall, the clarifications provided in Article 3 of the Regulation represent an improvement
on the Rome Convention position. The effect of Article 3 of the Regulation should result in
there being very little difference to that of the Rome Convention.12
Applicable Law in the Absence of Choice
Article 4 contains the general choice of law rules that operate where the parties have failed to
choose an applicable law to their contract under Article 3. At first sight, with its lengthy list
of types of contracts, the provisions appear to differ widely from the equivalent rules in the
Rome Convention. However, its effect in practice is not likely to be significantly different
from the way in which the UK courts applied the Rome Convention provision.
The Rome Convention provision was based on a test involving the application of the law with
which the contract was most closely connected. This test was then subjected to various
presumptions. In addition, the Rome Convention provided that these presumptions would not
apply if it appeared from the circumstances of the case as a whole that the contract was more
closely connected with another country. This conceptual structure was complex and
inherently uncertain. It allowed national courts in Member States to interpret the provision in
divergent ways according to their differing national traditions which in turn led to
uncertainty, in particular as to how the provision might be ultimately interpreted by the
European Court of Justice. These problems should not arise in such an acute form under
Article 4 of the Regulation which adopts a different approach and a much simpler structure. It
proceeds initially by applying various specific choice of law rules for particular types of
contract (Article 4(1)). Where these rules are inconclusive, they are then subject to a general
rule in Article 4(2). Further general displacement rules are also included in Articles 4(3) and
12 Guidance to the law applicable on Contractual Obligation, available at
http://webarchive.nationalarchives.gov.uk/20110201125714/http:/www.justice.go
v.uk/publications/docs/guidance-law-contractual-obligations-romei.pdf.
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(4)(4). The purpose of these provisions is to create the necessary degree of flexibility for
those situations where the application on its own of one of the specific choice of law rules
would not, for whatever reason, produce an appropriate result. This mixture of specific rules,
coupled with rules of displacement, strikes an appropriate and reasonably predictable balance
between the competing objectives of certainty and flexibility. As such, the Regulation is an
improvement on the equivalent provision contained in the Rome Convention and should
represent a benefit for both business and legal practitioners. Two aspects of Article 4 deserve
special mention. The first is the choice of law rule in Article 4(1)(h) which creates a specific
rule for certain types of financial contracts as defined by the Markets in Financial Instruments
Directive. This instrument provides a harmonised regulatory regime for investment services
across the Member States of the European Economic Area (EEA). Article 4(1)(h) ensures
certainty as to the applicable law in this area (through the application of a single law
governing such financial transactions). This will aid the retention of the certainty needed by
financial systems. The second aspect arises out of Article 4(3). This provides a rule of
displacement for situations where it is clear from all the circumstances of the case that a
contract is manifestly more closely connected with a country other than that indicated by
Article 4(1) of the Regulation (i.e. one that is identified in accordance with the specific
choice of law rules) or Article 4(2) (the rule to displace the choice of law rules in Article 4(1)
in certain specific situations in favour of the law of the country of habitual residence of the
party who is to effect the characteristic performance of the contract). The rule in Article 4(3)
provides for the application of the law of the country of closest connection. This should be
of particular value in the context of related contracts where it is of commercial importance for
a single law to be applied to the whole transaction rather than having different laws applying
to each of the component parts of the transaction. Cases of this kind routinely arise in the
context of letters of financial credit or bank indemnities. Further useful clarification of this
issue is provided in Recitals 20 and 21.13

13 Guidance to the law applicable on Contractual Obligation, available at

http://webarchive.nationalarchives.gov.uk/20110201125714/http:/www.justice.go
v.uk/publications/docs/guidance-law-contractual-obligations-romei.pdf.
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3.Law Applicable to Non-Contractual Obligation

The general rule under Rome II is that the law applicable to non-contractual obligations will
be the law of the country in which the relevant damage occurs. There are a number of
circumstances in which this general rule will be disapplied. The most relevant situation, in the
context of governing law clauses, is that, by virtue of Article 14 of Rome II, parties "may
agree to submit non-contractual obligations to the law of their choice". 14 This regulation
brings greater legal certainty as to the law applicable with respect to non-contractual
obligations, in particular in cases of tort (a wrong under civil law) and delict (civil liability).
Non-contractual

obligations

can

include

tortious

claims,

such

as

negligence,

misrepresentation and pre-contractual deceit or claims in respect of restitution or unjust

enrichment. As a result, parties conducting cross-border business with a number of
counterparties risk the possibility that an act committed in one country causing damage in a
number of jurisdictions may give rise to multiple claims governed by a number of different
applicable laws, with an attendant increase in litigation complexity and cost.15
Scope of the Law Applicable
The law applicable to non-contractual obligations governs in particular:16
14 Ashurst London, Guide to governing law clauses: the impact of Rome II,
available at file:///C:/Users/w8.1/Downloads/11699982_2.pdf.
15 Choice of Law Clauses for Non Contractual Claims: Impact of Rome II,
available at http://www.lexology.com/library/detail.aspx?g=d3149ef4-8fde-451c8646-942f1fbf17cb.
16 The Law Applicable to Non Contractual Obligations, Summaries of EU
Legislation, available at http://eur-lex.europa.eu/legal-content/EN/TXT/?
uri=URISERV%3Al16027.
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1.The basis and extent of liability, including determining who may be held liable;
2.The grounds for exemption from liability and the limitation or division of liability;
3.The existence, nature and assessment of damage and the remedy claimed;
4.The measures the court may take to prevent or terminate injury or damage and ensure
compensation;
5.The manner in which an obligation may be extinguished and the rules relating to
prescription or limitation;
6.The question as to whether the right to seek compensation can be transferred to someone
else, including by inheritance;
7.Persons entitled to compensation for damage they have sustained;
8.liability for the acts of another person.

Non-contractual matters can also be submitted to law of choice

Of course, disputes can also occur in respect of non-contractual matters. Common examples
include misrepresentation in the context of pre-contractual negotiations, or breach of a postcontractual duty of care in tort. These non-contractual matters have caused difficulties in the
past because there was no clear authority whether they, too, could be covered by a governing
law clause. Under Rome II, as a general rule, the law applicable to non-contractual
obligations will be the law of the country in which the relevant damage occurs. This general
rule, however, can be disapplied in a number of situations. Of these, one of the most
significant is where the parties "agree to submit non-contractual obligations to the law of
their choice" (Article 14).
The basic change introduced by Rome II is that the applicable law for the resolution of noncontractual disputes is determined on the basis of where the damage occurs, or is likely to
occur, regardless of the country or countries in which the act giving rise to the damage
occurs. This is subject to certain exceptions where that would be inappropriate, for example if
the situation only has a tenuous connection with the country where the damage has occurred.
It will not always be obvious where the place the damage occurred is, particularly in claims
for financial loss caused by certain commercial torts. For example, in a claim for negligent
representation this could be the place where an investor received and decided to act on the
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representation, or the place where the resulting investment was made or the loss discovered.
Although judges will decide on a case by case basis, analogies may be drawn with earlier
cases dealing with jurisdiction or previous choice of law rules.
The place of damage is the place where "damage occurs irrespective of the country in which
the event giving rise to the damage occurred and irrespective of the country or countries in
which the indirect consequences of that event occur". The difference between 'direct' and
'indirect' damage has previously been considered under the Brussels Regulation. A parent
company could not claim to have suffered damage in France where it felt the loss in its
accounts of the insolvency of two German subsidiaries, allegedly caused by somebody else's
wrongdoing, as the place of damage would be Germany, not France. However it may be that
for the purpose of Rome II, a distinction could be drawn between any claim of the
subsidiaries and the claim of the parent.

The place of damage rule is subject to few exceptions:17

if the parties have the same habitual residence at the time of damage, the

law of that country shall apply to the exclusion of the law of the place of damage.
There need be no further meaningful connection between the place of mutual habitual
residence and the damage in question. There is no definition of 'habitual residence' generally
in Rome II, but it is defined in three circumstances:

the habitual residence of companies and other bodies, corporate or unincorporated, is

the place of their central administration;

where the event giving rise to the damage occurs, or the damage arises, in the course
of operation of a branch, agency or any other establishment, the place where the branch,
agency or other establishment is located shall be treated as the place of habitual residence;

the habitual residence of a natural person acting in the course of his or her business
activity shall be his or her principal place of business.

17 Governing Law and Jurisdiction: Rome II, available at http://www.outlaw.com/topics/dispute-resolution-and-litigation/arbitration-and-internationalarbitration/governing-law-and-jurisdiction-rome-ii/.

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if the tort is manifestly more closely connected with another country. This exception
will allow for displacement of either the law of the place of damage or the law of the place of
mutual habitual residence, and in the case of the latter may mean reinstating the law of the
place of damage. The requirement of a "manifestly" closer connection is intended to convey
the exceptional nature of this rule it cannot be lightly invokes to displace the law otherwise
applicable.

4.CONCLUSION
Resolving disputes which arise between parties can be complicated where they are based in
different countries. It is important to establish what law will apply before parties into any
type of contract or binding agreement. The Regulations provides uniform choice of law rules
applicable in contractual obligations and non-contractual obligations.
A commercial contract sets out the terms on which the contracting parties will conduct
business. The interpretation and effect of those terms may, however, vary significantly
depending upon which country's laws govern them. The purpose of a governing law clause is
to express the parties' choice as to what that law should be and this problem is very well
taken into account by both Rome I and Rome II Regulations.
These both regulations are very progressive steps in the field of International trade and
commercial transaction and endeavour should be further made to effect the implementation of
the Rome regulations on Contractual and Non Contractual obligations. It is submitted that in
order to preserve their freedom of choice, commercial parties entering into international
transactions should incorporate an express choice of law clause into their contracts.
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References:
Books

J Hill, International Commercial Disputes in English Courts (Oxford, Hart Publishing,

3rd ed, 2005.

Jason C.T.Chuah,

Law

of

International

Trade:

Cross-Border

Commercial

Transactions, Thomson Reuters, 4th ed,2009.

Internet Sources

http://webarchive.nationalarchives.gov.uk.
http://www.lexology.com.
http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=URISERV

%3Al16027.
http://www.out-law.com.

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