Derogating from party choice of applicable law under Rome I

Derogating from party choice applicable law in a contractual cross border claim – Banco Santander Totta Sa v Comphania Carris de Ferra de Lisboa Sa [2016] EWCA Civ 1267

The Court of Appeal has recently delivered judgment in a case concerning the correct approach to the applicable law where the laws of several countries are potentially applicable to a dispute concerning contract obligations.

English courts will apply one of 2 instruments to determine applicable law disputes depending on the date the obligations in dispute were entered into. For those entered into before 17^th December 2009 the Rome Convention 1980 applies. In cases in which the relevant obligations or obligations came into being after that date its successor Regulation EC No 593/2008 (‘Rome I’) applies. There is a continuity between the Convention and the Regulation in various respects, including the provisions at article 3 (1) of these instruments dealing with a choice of law made by the parties to the Agreement in which the relevant obligations are contained. Although the obligations at the basis of the appeal before the Court in this case were governed by the Rome Convention, the observations made by the Court are equally applicable where the contract dispute is governed by Rome I. For convenience references here shall be to Rome I however the analysis would be the same in a Convention case.

Articles 3 (1) and 3 (3)

The Court of Appeal was called upon to consider the correct approach to the application of Article 3 (3).  This article operates as a restraint on the autonomy of the parties to choose the law applicable to their contract. In particular Article 3 (3) provides that the fact that the parties have chosen an applicable law pursuant to Article 3 (1) shall not oust the application of mandatory laws of the forum ‘where all other elements relevant to the situation at the time of the choice are connected with one country only’.

The issue engaged by the proceedings before the Court of Appeal was as to the scope of Article 3(3) and the matters that a national court may take into account in determining its application. The issues arose in the context of litigation between the appellant Portuguese public transport companies and a bank and concerned several interest rate swap Agreements.  Article 3 (3) was relevant on the facts as Article 437 of the Portuguese law provides that:

If the circumstances on which the parties based their decision to enter into a contract have undergone an abnormal change, the injured party is entitled to termination of the contract or to modify it in accordance with principles of equity if fulfilment of that party's obligations under the contract would be a serious breach of the principles of good faith and if the abnormal changes do not form part of the risks covered by the contract

Circumstances had caused interest rates under the Swap Agreements to rise substantially. The appellant transport companies claimed that that the effect of Article 3 (3) of Rome I (the Convention) was that they were entitled to rely on Article 437 of the Portuguese law

 The issue for determination was whether ‘all other elements relevant to the situation’ were those which connect the contract with a particular country in a conflict of laws sense or whether 'elements' includes matters which point to the situation having an international character rather than a purely domestic one.

The High Court had concluded that a number of factors including the right to assign to a bank outside Portugal, the use of standard international documentation, the practical necessity for the relationship with a bank outside Portugal, the international nature of the swaps market in which the contracts were concluded, and the fact that back-to-back contracts were concluded with a bank outside Portugal in circumstances in which such hedging arrangements were routine, meant that Art. 3(3) of the Rome Convention was not engaged because all the elements relevant to the situation at the time of the choice were not connected with Portugal only.

On appeal the transport companies argued that the High Court had erred in the factors it had taken into account in deciding that Article 3 (3) was not engaged. They argued that ‘elements relevant to the situation’ in Article 3 (3) was confined to objective elements which would be relevant and determinative of the proper law had the parties not made an express agreement. Therefore connections not specific to a particular legal system were irrelevant. Accordingly factors such as the international nature of the swaps market should not have informed the judge’s reasoning.

The transport companies also argued that the judge's interpretation was unprincipled since it is impossible to know what elements can legitimately be taken into account, and that, in a globalised market, there is no scope or almost no scope for Article 3(3) to apply.

The Court of Appeal rejected these criticisms. The Master of the Rolls commented that there is no conflict between Article 1(1) of the Rome Convention and an interpretation of Article 3(3) consistent with the natural and ordinary meaning of its words, that “elements relevant to the situation” are not confined to factors connecting the contract to a particular country in a conflict of laws sense.

The Court of Appeal accepted that Article 3 (3) was properly to be viewed as a limited exception to the general rule at Article 3 (1) that the primary rule is party autonomy in the choice of applicable law. Article 3 (3) fell to be interpreted narrowly. The High Court’s interpretation that in determining the application of Article 3 (3) the court could have regard to whether the contract had an international character gave effect to the fundamental principle of party autonomy and the objective of certainty underlying the Rome Convention and is consistent with the actual wording of its provisions.

The Master of the Rolls observed that if it has been intended that “elements relevant to the situation” in Article 3(3) should be confined to factors of a kind which connect the contract to a particular country for the purpose of identifying the proper law in the absence of an express choice, the drafter could have used the familiar and simple conflict of laws language of “close connection” which one finds in Article 4

Significance of the Court of Appeal’s ruling

The practical effect of the ruling of the Court of Appeal in this case is to reinforce the principle that where the parties have chosen an applicable law pursuant to Article 3 (1) it will only be in very limited circumstances that a court may derogate from that choice and substitute it with a mandatory law under Article 3 (3). On the Court of Appeal’s interpretation the only question is whether the situation is entirely domestic. A court is entitled to have regard to factors which indicate the situation is international rather than domestic, even if those factors do not connect the country with a particular country in a conflict of laws sense.

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