The relevance of the Rome I and Rome II Regulations for determining the law applicable to the merits of an international arbitration is a hotly-debated issue.
Within the European Union (“EU”), Regulation (EC) No. 593/2008 on the law applicable to contractual obligations (“Rome I”) and Regulation (EC) No. 864/2007 on the law applicable to non-contractual obligations (“Rome II”) override the national laws of EU states (excluding Denmark) and establish uniform rules for determining the law applicable to most civil and commercial matters, in the event of a conflict of laws (Section A).
The prevailing view in international arbitrational seems to be that tribunals are not bound by the Rome I and Rome II Regulations, which are in principle binding only on EU courts. Nevertheless, these EU instruments can serve as a useful guide for arbitrators when they are called to decide the law applicable on the merits of a dispute, in the absence of a choice-of-law by the parties (Section B).
By specifying the governing law in their contract, parties can prevent disagreements about the applicable law, thus saving time and costs, should a dispute arise (Section C).
A) Overview of Rome I and Rome II
– General Scope of Application
The Rome I Regulation applies “in situations involving a conflict of laws, to contractual obligations in civil and commercial matters” (Article 1(1) of Rome I). Timewise, it applies “to contracts concluded after 17 December 2009” (Articles 28 and 29 of Rome I). Contracts entered into before that date are governed by the predecessor instrument, i.e., the 1980 Convention on the law applicable to contractual obligations.
The Rome II Regulation is applicable “in situations involving a conflict of laws, to non-contractual obligations in civil and commercial matters” (Article 1(1) of Rome II). It governs “events giving rise to damage which occur after its entry into force”, i.e., from 11 January 2009 onwards (Articles 31 and 32 of Rome II).
– Party Autonomy to Select the Applicable Law
Both Rome Regulations recognize the freedom of parties to choose their own governing law:
“A contract shall be governed by the law chosen by the parties” (Article 3(1) of Rome I);
“The parties may agree to submit non-contractual obligations to the law of their choice” (Article 14(1) of Rome II).
– Applicable Law in The Absence of Choice
Where there is no valid choice of law made by the parties and there is a conflict of laws, the Rome Regulations provide general rules for determining which law shall apply, along with specific rules applicable to certain circumstances.
Under Article 4 of Rome I, the general rule is that a “contract shall be governed by the law of the country where the party required to effect the characteristic performance of the contract has his habitual residence”, and where such law cannot be determined, “by the law of the country with which it is most closely connected.”
Under Article 4 of Rome II, the general rule is that “the law applicable to a non-contractual obligation arising out of a tort/delict shall be the law of the country in which the 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.”
– Universal Application
Further, both Rome Regulations have a universal application. This means that, where an obligation falls within the scope of Rome I or Rome II, any law designated as applicable by their conflict-of-laws rules or by the choice of the parties “shall be applied whether or not it is the law of a Member State” (Article 2 of Rome I; Article 3 of Rome II). In other terms, under the Rome Regulations, EU courts may be called to apply non-EU law.
B) Rome I and Rome II in International Arbitration
– What the Text of Rome I and Rome II Envisages
Both Rome I and Rome II are silent on the issue of whether they bind international arbitrators seated in an EU State in determining the law applicable to the merits of a dispute.
Rome I merely excludes “arbitration agreements” from its scope of application (Article 1(2)(e) of Rome I). The wording of Rome I – referring specifically to “arbitration agreements” – recognizes the severability of the arbitration clause from the main contract. The exclusion of Article 1(2)(e) covers only the determination of the law applicable to the arbitration clause, i.e., an issue that may arise before both national courts (inter alia, in annulment and/or enforcement proceedings) and arbitral tribunals. It does not answer the question of whether tribunals are obliged to follow Rome I to decide the law applicable to the substance of a dispute, however, which is a different issue.
Unlike Rome I, Rome II does not expressly exclude arbitration clauses (nor arbitration in general) from its material scope. In fact, Recital 8 to Rome II provides that the Rome II “should apply irrespective of the nature of the court or tribunal seised.” The term “tribunal” is not defined in Rome II, and it appears only once in Recital 8, whereas elsewhere in the text of Rome II reference is made only to courts. Such term is more likely to refer to different divisions of EU State courts and not to arbitral tribunals. Rome II is silent on whether it binds arbitral tribunals seated in the EU.
– Why Rome I and Rome II Do Not Bind International Arbitrators
European Regulations are binding only on EU States and their national judges. International arbitrators are not organs of a particular State, however. Consequently, they are not, in principle, bound by the Rome I and Rome II Regulations.
This does not undermine the authority of those Regulations, however. In practice, international tribunals when determining the law applicable to the merits of a dispute are influenced by the widely-accepted rules contained in those instruments. They normally also take into account any overriding mandatory rules and public policy concerns, in light of their duty to render an enforceable award, as well as the supervisory role of EU courts in annulment and enforcement proceedings of an arbitral award.
– Laws and Institutional Rules on the Law Applicable to the Merits of An International Arbitration
The view that international arbitrators are not obliged to follow the conflict-of-laws rules of the Rome I and Rome II Regulation is reinforced, to a certain extent, by the European Convention on International Commercial Arbitration of 21 April 1961 (the “1961 Convention”), which binds many EU Member States, including France. Article VII(1) of the 1961 Convention which governs the law applicable to the substance of a dispute provides that, in the absence of a choice-of-law by the parties, “the arbitrators shall apply the proper law under the rule of conflict that the arbitrators deem applicable.”
Similarly, Article 28(2) of the UNCITRAL Model Law on International Commercial Arbitration (1985 version, amended 2006 version), upon which national legislation “in 84 States in a total of 117 jurisdictions” is based, stipulates that “[f]ailing any designation by the parties, the arbitral tribunal shall apply the law determined by the conflict of laws rules which it considers applicable.” Certain national arbitration laws go as far as to empower arbitrators to apply directly the law (or rules of law) they deem appropriate, thus displacing the need to follow the conventional conflict-of-laws path altogether (see, for instance, Article 1511 of the French Code of Civil Procedure and brief discussion here, question 6).
Most international arbitration institutions adopt similar provisions in their rules, allowing arbitrators to choose the law applicable to the merits, usually without having to follow any particular set of conflict-of-laws rules. For example, Article 21(1) of the 2017 ICC Rules (see also discussion on the 2021 revised ICC rules) provides that when the parties have not stipulated the law applicable to the merits of their dispute, “the arbitral tribunal shall apply the rules of law which it determines to be appropriate.” Similarly, under Article 22(3) of the 2020 LCIA Rules (see also a commentary on the recently revised 2020 LCIA Rules), if the parties have made no choice of law, “the Arbitral Tribunal shall apply the law(s) or rules of law which it considers appropriate.”
c) Advice to Commercial Parties: Include a Governing Law Clause in Your Contract
A governing law clause enables parties to specify the law governing the interpretation of the contract and any disputes which might arise under it. It is prudent for parties when negotiating a contract with an international element to include a governing law clause to achieve a higher degree of certainty and predictability in their contractual relationship and to avoid the time and cost of arguing over the applicable law, should a dispute arise.
In this respect, parties in international arbitration generally have considerable leeway to choose the law applicable to their contract, which is only one of the several choice-of-law issues that arise in international arbitration. Such law need not necessarily be the official law of a State. The arbitrators may also take into account rules of law, such as trade usages and lex mercatoria. In some instances, the tribunal may also be empowered to decide “ex aequo et bono” or as “amiable compositeur”, i.e., with the natural sense of justice, without being bound by any legal rules (see, e.g., Article 28(3) of 2006 UNCITRAL Model Law).
In sum, even though tribunals in international arbitrations seated in the EU are not directly bound by the Rome I and Rome II Regulations, both of which are formally binding only on national courts of EU Member States (excluding Denmark), they usually stand guided by them. This is explained by the fact that both instruments contain sophisticated and widely-accepted conflict-of-laws rules for determining the law applicable to the merits of a dispute, absent a choice by the parties. Ideally, it is advisable for parties to include a governing law clause in their contract, however, in order to avoid the potential hurdle of fighting over the applicable law altogether.