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10 The Applicable Law in the Absence of Choice

From: The Rome I Regulation on the Law Applicable to Contractual Obligations

Michael McParland

Content type:
Book content
Product:
Private International Law [PRIL] — International Commercial Law [ICML]
Published in print:
19 March 2015
ISBN:
9780199654635

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2023. All Rights Reserved. Subscriber: null; date: 06 June 2023

(p. 335) 10  The Applicable Law in the Absence of Choice

Article 4

Applicable law in the absence of choice

  1. 1.  To the extent that the law applicable to the contract has not been chosen in accordance with Article 3 and without prejudice to Articles 5 to 8, the law governing the contract shall be determined as follows:

    1. (a)  a contract for the sale of goods shall be governed by the law of the country where the seller has his habitual residence;

    2. (b)  a contract for the provision of services shall be governed by the law of the country where the service provider has his habitual residence;

    3. (c)  a contract relating to a right in rem in immovable property or to a tenancy of immovable property shall be governed by the law of the country where the property is situated;

    4. (d)  notwithstanding point (c), a tenancy of immovable property concluded for temporary private use for a period of no more than six consecutive months shall be governed by the law of the country where the landlord has his habitual residence, provided that the tenant is a natural person and has his habitual residence in the same country;

    5. (e)  a franchise contract shall be governed by the law of the country where the franchisee has his habitual residence;

    6. (f)  a distribution contract shall be governed by the law of the country where the distributor has his habitual residence;

    7. (g)  a contract for the sale of goods by auction shall be governed by the law of the country where the auction takes place, if such a place can be determined;

    8. (h)  a contract concluded within a multilateral system which brings together or facilitates the bringing together of multiple third party buying and selling interests in financial instruments, as defined by Article 4(1), point (17) of Directive 2004/39/EC, (p. 336) in accordance with non-discretionary rules and governed by a single law, shall be governed by that law.

  2. 2.  Where the contract is not covered by paragraph 1 or where the elements of the contract would be covered by more than one of points (a) to (h) of paragraph 1, the 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.

  3. 3.  Where it is clear from all the circumstances of the case that the contract is manifestly more closely connected with a country other than that indicated in paragraphs 1 or 2, the law of that other country shall apply.

  4. 4.  Where the law applicable cannot be determined pursuant to paragraphs 1 or 2, the contract shall be governed by the law of the country with which it is most closely connected.

A.  ‘Choosing’ in the Absence of Choice

10.01  If the parties to a cross-border contract have not exercised their right to choose the law that governs their contract, then a ‘choice’ of law has to be made for them. Article 4 is the latest attempt by the EU legislator to provide general rules that, for most contracts, are intended to enable this selection to be made on a uniformly predictable basis. Because of its role, Article 4 has been described as ‘the most important provision in the whole Regulation’.1

10.02  Article 4 is the direct successor to Article 4 of the Rome Convention, a provision described as ‘a complicated combination of flexibility and inflexibility’,2 that produced a ‘conceptual structure [that] is undesirably complex and inherently uncertain’.3 Article 4 of the Rome I Regulation has been described as ‘a radical break’4 with the approach of its predecessor, and an unexpectedly radical solution to the problem.5 However, after some important revisions during the negotiations it has been said that ‘[f]rom the perspective of England the new Article 4 is a great improvement over its predecessor’,6 and the problems experienced in the application of Article 4 of the Convention, ‘should not arise in such an acute form under Article 4 of the Regulation’.7 Even so, in practice, Article 4, like its Convention predecessor, may well be the provision that is most cited in disputes before the courts of Member States. As the French delegation to the Rome I Committee noted:

Most decisions relating to the Rome Convention handed down by European courts concern the question of determining the applicable law in the absence of choice, on the basis of the clues that can help to establish where the contract is located.8

10.03  Given its importance within the overall scheme of the Regulation and in practice, an understanding of the operation of the new Article 4 must pay due regard to its history and legislative development.

(p. 337) B.  The Search for a Uniform Solution

10.04  When the Expert Group started work in 1970 there was no commonly accepted solution to determining the governing law of a contract in the absence of an effective choice by the parties.9

The civil law solutions

10.05  French and Belgian10 courts looked for various ‘pointers’ (indices)11 capable of showing the country in which the contract was located.12 This ‘localization’ process was sometimes regarded subjectively (as being equivalent to the probable wishes of the parties had their wish been expressed), and increasingly, objectively, with a view to establishing the country with which the transaction was most closely connected. In the 1955 decision of Soc Jansen v Soc Heurtey, the Paris court had held that the applicable law in the absence of choice was to be:

determined objectively by the fact that the contract is located by its context and economic aspects in a particular country, the place with which the transaction is most closely connected being that in which the contract is to be performed in fulfillment of the obligation characteristic of its nature.13

10.06  German courts had adopted a similar search for ‘pointers’ capable of showing the ‘hypothetischer Parteiwille’ (the presumed will of the parties), a concept that paid regard to the general interests at stake in each case. Case law indicated this did not involve seeking the supposed intentions of the parties, but instead represented an equitable and reasonable objective evaluation of the interests involved with a view to determining the applicable law.14

10.07  The Benelux countries had been moving towards a rule in default of party choice of law based on the principle that the law of the country with the closest connection should be adopted. Article 13 of the unimplemented 1969 Benelux Uniform Law, specifically provided that in default of a choice by the parties ‘the contract shall be governed by the law of the country with which it is most closely connected’,15 but ‘when it is impossible to determine that country, the contract shall be governed by the law of the country in which it was concluded’.16

10.08  Italy had adopted a different approach.17 Save for some special categories of contracts, the applicable law selected in the absence of party choice would be the national law of the (p. 338) contracting parties, if that law was common to them. In the absence of a common national law of the parties, then the applicable law would by the law of the place where the contract was concluded, the lex loci contractus.18

10.09  The Danish Supreme Court (Højesteret) had followed an approach found elsewhere in contemporary Scandinavian law, which tended to support the law of the country with which a contract was most closely connected.19 But this approach remained very fact specific, with Danish courts showing a marked reluctance to adopt presumptions.20

The proper law of the contract

10.10  At common law, in the absence of party choice, the law applicable to the contract was governed by its ‘proper law’, ie ‘the system of law by reference to which the contract was made or with which the transaction had its closest and most real connection’.21 In determining the law, not the country,22 with which the contract had its closest and most real connection, an English judge did not seek to ascertain the actual intentions of the contracting parties, because such intentions were non-existent.23 In so doing, the court had to consider all the circumstances of the case. A wide range of factors had be taken into account, such as the place of residence or business of the parties, the place of performance, the place of contracting and the nature and subject-matter of the contract. No one factor was decisive, though the intended place of performance was always of great weight.24 No presumptions had been established by the courts, despite suggestions by some scholars they should.25

10.11  English courts had adopted ‘a flexible and yet predictable approach’26 in respect of a large number of varied contracts: such as sale of goods,27 land,28 charterparties,29 carriage of (p. 339) goods and persons,30 agency,31 loans,32 and debentures floated abroad,33 to liability arising from loans secured by mortgages,34 relations between banks and customers,35 and between companies and shareholders.36 In general terms, both Scots and Irish law had adopted a similar approach.37

Competing approaches

10.12  To creating a uniform rule the Expert Group were therefore faced with two competing approaches.38

10.13  The first was a ‘subjective approach’. This involved looking at the circumstances surrounding the formation and execution of a particular contract and then, by considering factors such as the place of negotiation, the language of the contract, the place of performance, and the location of any choice of contractual dispute resolution clause, it might be possible to demonstrate ‘a clear preponderance of contacts’ which pointed to a certain ‘centre of gravity’ of a contract, that could indicate the appropriate law to be applied to it. It was considered that this subjective approach offered the prospect of achieving the most satisfactory solution in some cases, but that advantage had to be weighed against the ‘inconvenience of unforeseeability in the majority of cases’. It was also recognized that in many cross-border contracts such factors could be ambiguous; often pointing in part to the laws of several countries. There could also be difficulties in deciding whether the identified factors indicated a clear preponderance of connections sufficient to justify the application of a country’s laws, as ‘the boundaries between clear preponderance, slight preponderance and arbitrary location are not easily established’.39

10.14  The second was an ‘objective approach’. This involved selecting from among the many factors found in any particular contract, the one factor which should be regarded as the decisive factor in determining the applicable law in the absence of party choice. This objective approach could be achieved by adopting one of two methods: either (i) by appointing one decisive element for all contracts—that would require a choice to be made between the place of conclusion of the contract (the lex loci contractus) or the place of its performance (the lex loci solutionis); or (ii) by making a distinction between different types of contract and indicating the element that ‘characterizes’ each type of contract. It was recognized that ‘while the so-called objective approach does ensure foreseeability, it does not always guarantee an adequate solution’.40

(p. 340) C.  Article 4 of the Rome Convention

10.15  The solution adopted in Article 4 of the Rome Convention41 was a ‘hybrid’:42 a compromise between the traditional conflicts of law methods that relied on a usually territorial, fixed connecting factor and a more flexible process based on a determination of the most appropriate law. Professor North saw it as a compromise between those who sought certainty and predictability in the determination of the applicable law, and those, like English lawyers, who saw merit in the flexibility of a general rule of closest connection but saw little merit in rebuttable presumptions as to where that place should be.43

10.16  Article 4 of the Rome Convention 1980 provided:

Applicable law in the absence of choice

  1. 1.  To the extent that the law applicable to the contract has not been chosen in accordance with Article 3, the contract shall be governed by the law of the country with which it is most closely connected. Nevertheless, a separable part of the contract which has a closer connection with another country may by way of exception be governed by the law of that other country.

  2. 2.  Subject to the provisions of paragraph 5 of this Article, it shall be presumed that the contract is most closely connected with the country where the party who is to effect the performance which is characteristic of the contract has, at the time of conclusion of the contract, his habitual residence, or, in the case of a body corporate or unincorporate, its central administration. However, if the contract is entered into in the course of that party’s trade or profession, that country shall be the country in which the principal place of business is situated or, where under the terms of the contract the performance is to be effected through a place of business other than the principal place of business, the country in which that other place of business is situated.

  3. 3.  Notwithstanding the provisions of paragraph 2 of this Article, to the extent that the subject matter of the contract is a right in immovable property or a right to use immovable property it shall be presumed that the contract is most closely connected with the country where the immovable property is situated.

  4. 4.  A contract for the carriage of goods shall not be subject to the presumption in paragraph 2. In such a contract if the country in which, at the time the contract is concluded, the carrier has his principal place of business is also the country in which the place of loading or the place of discharge or the principal place of business of the consignor is situated, it shall be presumed that the contract is most closely connected with that country. In applying this paragraph single voyage charter-parties and other contracts the main purpose of which is the carriage of goods shall be treated as contracts for the carriage of goods.

  5. 5.  Paragraph 2 shall not apply if the characteristic performance cannot be determined, and the presumptions in paragraphs 2, 3 and 4 shall be disregarded if it appears from the circumstances as a whole that the contract is more closely connected with another country.

The principle of closest connection

10.17  The first sentence of Article 4(1) of the Convention adopted a rule of closest connection based on the principle of proximity. This sentence had been taken directly from Article 13 (p. 341) of the unimplemented 1969 Benelux Uniform Law, that provided, in default of a choice by the parties ‘the contract shall be governed by the law of the country with which it is most closely connected’.44

10.18  No attempt was made to define the concept of closest connection in the Convention, and the vagueness for which it had been criticized by some was acknowledged in the Giuliano–Lagarde Report.45 Instead, its adoption was justified by a brief survey of the laws of the Member States:

The foregoing survey has shown that, with the sole exception of Italy, where the subsidiary law applicable to the contract is determined once and for all by hard-and-fast connecting factors, all the other Community countries have preferred and continue to prefer a more flexible approach, leaving the judge to select the preponderant and decisive connecting factor for determining the law applicable to the contract in each specific case among the various elements of the contract and the circumstances of the case.46

10.19  When this principle of closest connection was first proposed for draft article 4(1) of the 1972 Draft Convention, it was seen by some scholars as the adoption of ‘the centre of gravity method’ and ‘a proposal which in many respects will meet the needs of the modern economy’.47 Others were more critical. Professor Kahn-Freund argued that the ‘so-called rule’ of the closest connection amounted to the substitution of the reason for making a rule for the rule itself, and argued it lacked the necessary precision to base a system of conflict of laws on.48 The criteria to be used in determining the closest connection was unclear to some. At the 1974 Copenhagen Colloquium, Professor Lagarde emphasized that if the closest connection formula was taken in a broader sense it would comprise all the methods of finding a connecting factor based on the objective circumstances of the transaction.49

10.20  For some, the closest connection principal in Article 4 was seen as a ‘just and sound one’.50 Although the principle of closest connection was declared to be Article 4’s principal connecting factor,51 in practice it was intended to play second fiddle to the presumptions contained in Articles 4(2)–(4) which were to give it some substance and form.52

‘Dépeçage‎’ (severance)

10.21  Article 4(1) of the Rome Convention, seen as an amended version of the original 1972 text, contained a significant new second sentence:

In the absence of an express or implied choice of law, To the extent that the law applicable to the contract has not been chosen in accordance with Article 3, the contract shall be governed by the law of the country with which it is most closely connected. Nevertheless, a separable part of the contract which has a closer connection with another country may by way of exception be governed by the law of that other country.

(p. 342) 10.22  This second sentence represented the arrival of ‘dépeçage’ (severance). Absent any applicable party of choice of law, Article 4(1) now allowed a court selecting the country of closest connection to take a ‘separable part’ of the contract and apply the law of another country to it ‘by way of exception’, and under ‘certain conditions’.53 The examples given where this might arise were of contracts for joint ventures, or ‘complex contracts’. It was also emphasized that the words ‘by way of exception’ in the second sentence of Article 4(1) were ‘to be interpreted in the sense that the court must have recourse to severance as seldom as possible’.54 It was a ‘strictly limited exception in favour of severability’.55

10.23  The only other guidance on the operation of the principle of closest connection given was that:

In order to determine the country with which the contract is most closely connected, it is also possible to take account of factors which supervened after the conclusion of the contract.56

10.24  This differed from the contemporary English position, under which the courts could not use the subsequent conduct of the parties as an aid to interpretation of the contract, save as evidence of a variation of the contract or the creation of a new one.57 But what such supervening factors might be, or how they should be taken into account, was not discussed.

Swiss solutions: the doctrine of ‘characteristic performance’

10.25  Underpinning the search for the country with the closest connection with a contract in Article 4 of the Convention was the concept of ‘characteristic performance’, the ‘performance of which is characteristic of the contract’.58

10.26  The concept of ‘characteristic performance’ was borrowed directly from Switzerland, where it had evolved to resolve an idiosyncrasy of Swiss private international law. In selecting the applicable law in the absence of party choice, Swiss law had traditionally distinguished between (a) issues concerning the conclusion and validity of a contract, which were governed by the law of the place where the contract was made, the lex loci contractus; and (b) issues concerning either party’s performance of their obligations under the contract, which were determined by the law of the place of performance (the lex loci solutionis).59 This resulted in two laws governing a cross-border contract, and was known as the ‘great-split’ or ‘great scission’ (grosse Vertragsspaltung). To try to seal this split, the Swiss Federal Tribunal began to adopt a single solution; preferring the application of the lex loci solutionis. In part, this reflected the traditional view of von Savigny and others that performance should be regarded as the most (p. 343) relevant element in contractual relationships. But in trying to resolve this great split, the Swiss courts succeeded in creating a second split in cases of bilateral contracts where each of the parties’ performance of their obligations was of equal importance to the contract but were not in fact performed in the same country. Where the location of performance differed, depending on the obligation in issue, this could result in different laws being applied. This second split became known as the ‘small split’ or ‘small scission’ (kleine Vertragsspaltung).

10.27  Having created two problems out of one, the Swiss Federal Tribunal tried to resolve matters by adopting a concept of the ‘objective hypothetical intention’ of the parties. This involved determining what law the parties could be said to have chosen, based primarily on what a typical, ordinary businessmen would have done in that type of contract. Professor Adolph Schnitzer60 argued that Swiss law should focus on one law only, and proposed establishing a presumption in favour of the law of the domicile or place of business of the party who was to perform the ‘characteristic obligation of the contract’.61 Having failed to achieve a one-law solution by using their (soon abandoned) ‘objective hypothetical intention’ theory, the Swiss Federal Tribunal switched to a restrictive interpretation of the concept of the country with the ‘closest connection’ to the contract. Prima facie, as Professor Schnitzer had argued, this was to be the country where the party owing the ‘characteristic performance’ under the contract resided or operated. In their famous Arret Schevalley decision of 12 February 1952,62 the Swiss Federal Tribunal declared:

By virtue of the rules of Swiss Private International Law and in the absence of a choice of law by the parties, the law applicable to an obligation of an international character is that of the country with which the contract presents the closest territorial relationship, normally that of the domicile of the party whose prestation (i.e. performance) is characteristic of the contract in issue.63

10.28  For Swiss law, the principle of the characteristic performance focused on analysing the contractual rights and duties that could be characterized as its ‘social function’. This was ‘normally characterised by the “non-pecuniary performance” involved in a contract’, the performance for which money was paid, rather than the payment of money itself.64 Swiss courts first identified the relevant performance, and then the contractual party who was its performer. Once the characteristic performer was identified, then the applicable law was localized to the country of his residence or business operations. It was said that ‘[t]he application of the law at the residence of the performer of the characteristic obligation therefore attempts to take into account the typical interests of the parties’.65

10.29  By 1970, the Swiss Federal Tribunal had interpreted the concept of characteristic performance in a number of cases that identified the aspects of contractual performance regarded (p. 344) as ‘characteristic’ for particular types of contract.66 For example, in contracts for the sale of goods, in the absence of party choice, the law of the seller’s residence or place of business was to be applied.67 For private loan contracts, it was the law of the lender’s residence or place of business.68For a guarantee, it was the law of residence, place of business, or seat of the promisor.69 In insurance contracts, it was the law of the insurer’s place of business or branch.70 In contracts of carriage, it was the law of the carrier’s seat.71 In contracts for the sale of land, the principle of lex rei sitae (lex situs) normally applied.72

10.30  The Swiss law theories had proved attractive to some European scholars searching for new solutions in private international law within the European Economic Community (‘EEC’). Professor Drobnig, for example, had suggested considering the Swiss solution in the 1960s, arguing that in developing of conflict-of-laws rules for the European Community:

The Court of Justice should be free to develop the best rule possible, using the most progressive methods available in Europe, whether derived from member states or not; particular attention should be paid to the Swiss formula based on the ‘characteristic performance’, i.e., to that particular place where obligations of a certain kind are most typically performed.73

10.31  The Swiss courts’ focus on the non-pecuniary performance and the ‘social function’ of a contract was adopted, lock, stock, and barrel by the Expert Group in draft article 4 of the Draft 1972 Convention, which they recognized constituted ‘une certaine innovation’ in the laws of the Six Member States.74

The Giuliano–Lagarde Report’s guidance on Article 4

10.32  The justification and explanation given for Article 475 emphasized the concept of characteristic performance defined by 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’.76 The Report also emphasized that it was possible to relate the concept of characteristic performance to an even more general idea, namely the idea that this ‘refers to the function which the legal relationship involved fulfils in the economic and social life of any country. The concept of characteristic performance essentially links the contract to the social and economic environment of which it will form a part’.77

(p. 345) 10.33  Those words in the Giuliano–Lagarde Report could have been written by Swiss lawyers. Professor Schnitzer had argued that linking a contract with the country of its characteristic performance involved placing the contract ‘dans le cadre de l’ordre juridique dans lequel le rapport déploie sa fonction dans la vie économique et sociale’.78 Professor Vischer had said at the London Colloquium that the concept of characteristic performance identified the country ‘in whose social-legal sphere the contract is embedded’, or ‘the social order in which the economically or sociologically most essential obligation is performed’.79 Claims of this nature for the concept of characteristic performance were described by Professor Diamond, as ‘extravagant’: ‘[w]hatever these statements mean, it is far from clear that moving on from the characteristic performance to the principal place of business of the characteristic performer serves the same function’.80

10.34  As for identifying the characteristic performance of a contract, the Giuliano–Lagarde Report considered that while this ‘obviously presents no difficulty in the case of unilateral contracts’, but in relation to bilateral (reciprocal) contracts:

whereby the parties undertake mutual reciprocal performance, the counter-performance by one of the parties in a modern economy usually takes the form of money. This is not, of course, the characteristic performance of the contract. It is the performance for which the payment is due, i.e. depending on the type of contract, the delivery of goods, the granting of the right to make use of an item of property, the provision of a service, transport, insurance, banking operations, security, etc., which usually constitutes the centre of gravity and the socio-economic function of the contractual transaction.81

10.35  Seen by some as indicative of a tendency to ‘gloss over the problem of characteristic performance’,82 the intention was clear. It was the producer/supplier who was to be the characteristic performer of a contract, not the person who merely paid for their goods or services. It was the producer/supplier’s country that was to provide the law to govern it. But how was that country to be located?

The Rome Convention: the Article 4(2) presumption

10.36  Article 4(2) of the Rome Convention contained a presumption for geographically locating the characteristic performance of the contract. Article 4(2) declared that, subject to Article 4(5), it was to be presumed that the contract was most closely connected with the country where the party who was to effect the performance of the contract had, at the time of conclusion of the contract, his habitual residence, or, in the case of a body corporate or unincorporate, its central administration. If, however, the contract had been entered into in the course of that party’s trade or profession, that country shall be the country in which the principal place of business is situated or, where under the terms of the contract the performance is to be effected through a place of business other than the principal place of business, the country in which that other place of business is situated.

(p. 346) 10.37  The Giuliano–Lagarde Report emphasized that:

for each category of contract it is the characteristic performance that is in principle the relevant factor in applying the presumption for determining the applicable law, even in situations peculiar to certain contracts, as for example in the contract of guarantee where the characteristic performance is always that of the guarantor, whether in relation to the principal debtor or the creditor.83

10.38  In applying the solution adopted in Article 4(2) to geographically locate the characteristic performance, only the place of habitual residence or of the central administration or of the place of business of the party ‘providing the essential performance’ was ‘decisive in locating the contract’.84 For example:

in a banking contract the law of the country of the banking establishment with which the transaction is made will normally govern the contract. It is usually the case in a commercial contract of sale that the law of the vendor’s place of business will govern the contract. To take another example, in an agency contract concluded in France between a Belgian commercial agent and a French company, the characteristic performance being that of the agent, the contract will be governed by Belgian law if the agent has his place of business in Belgium.85

10.39  To prevent changes in the geographic connecting factor occurring by reason of a subsequent change of habitual residence or principal place of business of the characteristic performer (‘conflits mobiles’), Article 4(2) emphasized that the contract is to be geographically located ‘at the time of the conclusion of the contract’.86

10.40  The use of the presumption in Article 4(2) was ‘intended to combine a degree of certainty and uniformity (rigidité) with the overall principle of flexibility (souplesse) in Article 4(1)’.87 The Working Group’s view of Article 4(2) was optimistic:

In conclusion, Article 4(2) gives specific form and objectivity to the, in itself, too vague concept of ‘closest connection’. At the same time it greatly simplifies the problem of determining the law applicable to the contract in default of choice by the parties. The place where the act was done becomes unimportant. There is no longer any need to determine where the contract was concluded, with all the difficulties and the problems of classification that arise in practice. Seeking the place of performance or the different places of performance and classifying them becomes superfluous.88

The Rome Convention: Article 4(3) and (4) presumptions

10.41  Two alternative presumptions were created under Article 4(3) and (4) for particular contracts relating to real property and for the carriage of goods.

10.42  Article 4(3) declared that the characteristic performance presumption in Article 4(2) did not operate to the extent that the subject of the contract was a right in, or a right to use, immovable property. In such cases it was to be presumed that the contract was most closely connected with the country in which the immovable property was situated. This rule may have related to immovable property, but it was not set in stone. It was anticipated (p. 347) this presumption might be rebutted under Article 4(5) if two parties, resident in the same country (eg Belgium) entered into a holiday letting contract for a property in another country (eg Italy). In such cases, it might be thought the contract was more closely connected with Belgium than with Italy.89

10.43  Article 4(4) applied a separate (and not uncontroversial) presumption for contracts for the carriage of goods. Contracts for the carriage of goods were defined in Article 4(4) as including ‘single-voyage charter-parties and other contracts the main purpose of which is the carriage of goods’. Article 4(4) took some of these contracts outside the general presumption in Article 4(2) where, on the facts, a particular combination of geographical connecting factors existed between the parties and/or the performance of the contract.90 If, at the time a contract for the carriage of goods was concluded, the carrier’s principal place of business was situated in the same country as either (a) the place or loading, and/or (b) the place of discharge, and/or (c) the principal place of business of the consignor, then the contract was presumed to be most closely connected with that country. Article 4(4) only applied to contracts for the carriage of goods. Contracts for the carriage of passengers remained subject to the general presumption in Article 4(2).91

The Rome Convention: Article 4(5)

10.44  All of the presumptions in Article 4(2)–(4) were subject to two rules in Article 4(5). The first rule found in the first sentence of Article 4(5) declared that Article 4(2) would not apply if the characteristic performance of the contract could not be determined. In such circumstances, the case would then fall directly under Article 4(1) and the contract would be governed by the law of the country with which it was most closely connected.92 This was the default, fall-back position when attempts to use the concept of characteristic performance produced no result.

10.45  The second rule, in the second sentence of Article 4(5), contained what has been variously described as a ‘get-out clause’,93 an ‘exception clause’,94 or now an ‘escape clause’.95 It provided for the possibility of disregarding the presumptions in Article 4(2)–(4) ‘if it appears from the circumstances as a whole that the contract is more closely connected with another country’.

10.46  Any fixed legal rule may produce unforeseen, unjust results. But excessive flexibility may mean that there is no uniformity of application and without uniformity, no rule. Right from the beginning of the Rome project there was a concern to adopt uniform rules that still permitted sufficient judicial flexibility to produce the right result on the facts of a particular case, while not allowing so much flexibility that it undermines their unifying function. The 1972 Expert Group considered the determination of the applicable law of contract on the basis of such a vague connection as that of the country with which the ‘contract has the closest connection’ or that ‘the contract is most closely related’ could itself result in practice in (p. 348) the determination of the applicable law being left to ‘the wisdom or arbitrary choice of the judges’ (à la sagesse qu’à l’arbitraire des juges). This was something they were keen to avoid, not least because any such solution would not be readily acceptable to countries like Italy which traditionally favoured rather rigid connecting factors.96

10.47  While draft article 4 of the 1972 Draft Convention contained what appeared to be rather firm rules for determining the applicable law absent party choice, draft article 4 (third paragraph) contained an escape clause, which was to be applied if it was clear from all the circumstances the contract was ‘more closely connected with another country’ (‘qu’il résulte de l’ensemble des circonstances que le contrat présente des liens plus étroits avec un autre pays’). That provision was described as being the ‘margin of discretion for the judge’ (Marge d’appréciation du juge).97

10.48  The explanation for the escape clause in Article 4(5) of the Rome Convention was essentially the same given for its 1972 draft predecessor. The Giuliano–Lagarde Report explained the reason for this provision was that, given the entirely general nature of the conflict rule contained in Article 4,98 ‘it seemed essential to provide for the possibility of applying a law other than those referred to in the presumptions in [Article 4] paragraphs 2, 3 and 4 whenever all the circumstances show the contract to be more closely connected with another country’. It was said that Article 4(5):

obviously leaves the judge a margin of discretion as to whether a set of circumstances exists in each specific case justifying the non-application of the presumptions in paragraphs 2, 3 and 4. But this is the inevitable counterpart of a general conflict rule intended to apply to almost all types of contract.99

10.49  This was seen by some as dealing with the danger of an over-zealous application of Article 4(5) in a ‘somewhat lame fashion’.100

10.50  No explanation was given how this margin of judicial discretion was to be excised. The text of the enacted Rome Convention showed it had eschewed the ‘menu’ approach adopted in § 188 of the US Restatement (Second) Conflict of Laws (1971) for determining the most significant relationship to the transaction and the parties. They had good reason for doing so.101 But in its place, neither the Rome Convention nor the Giuliano–Lagarde Report indicated what the connecting factors should be; or what, if any, relative weight should to be given to any of them. There was no guidance of how a court was to determine when the ‘more closely connected’ line had been crossed. Some contemporary commentators argued that Article 4(5) should only override the general presumption in Article 4(2) in ‘exceptional circumstances’, and this should obviously be (p. 349) the case ‘where it is clear from the surrounding circumstances that the parties themselves must have assumed that some other law would govern’ [emphasis added], or where the only ‘foreign’ element was one of the parties.102 Some simply thought that Article 4(5) was ‘too loosely worded’.103

Criticism of the concept of characteristic performance

10.51  Article 4 of the 1972 Draft Convention was seen as ‘clearly one of the most controversial provisions’.104 The concept of characteristic performance did, and still does, have supporters, some of whom believe that ‘[i]t follows a clearly discernible concept and gives valuable guidance to the otherwise unguided’.105 But few would suggest this Swiss import was unreservedly welcomed into European private international law.

10.52  The concept of characteristic performance was described by some European scholars as ‘nothing but pure arbitrariness, a fashionable fad propagated by legal window dressers’.106 For Professor Jessurun d’Oliveira, it was a doctrine that unduly favoured the large producer over the smaller consumer, and was predicated on untried and highly malleable economic and social justifications that were based on an implicit value judgment that ‘it is more blessed to produce than to consume’. At root it appeared to be nothing more than:

a reflection of the prejudices of Helvetian hotel-keepers and cuckoo-clock makers, prejudices that will not be shared in countries that export tourists and import cuckoo clocks, and whose economy will be just as much involved.107

10.53  In the United Kingdom, the Law Commissions saw article 4 of the 1972 Draft Convention as importing novel concepts that were ‘unfamiliar to English and Scots lawyers…[and] which may be difficult to apply in practice and which are capable of leading to unsatisfactory results’.108 A real concern was whether ‘the theory’ of characteristic performance was capable of producing reasonably predictable results. To the Law Commissions this seemed ‘doubtful’. They were sceptical about the claimed advantages of the concept especially in more complex contractual arrangements, and believed its use would be detrimental to rights of consumers.109 Lord Collins of Mapesbury, considered the concept of characteristic performance to be ‘radically different’ to English law, and ‘most unsatisfactory’ especially in commercial contracts which represented the vast bulk of contracts containing a foreign elements, and would achieve no more satisfactory results.110

(p. 350) 10.54  A number of scholars were unhappy about the ability of the concept to deal with complex cases. It was ‘manifestly too narrow to cover all types of contract’, especially those containing an element of mutual confidence and collaboration, as in ‘contracts of cooperation, sales concession and collaboration’.111 The belief that the money obligation (and thus the law of the country of the paying party) was subordinated to that the performance obligation was criticized by many, especially where the obligations centred on purely financial transactions.112

10.55  At the London Colloquium in 1976, Professor Vischer, the Swiss scholar whose work was influential in the Convention’s adoption of the concept,113 accepted that the principle of characteristic performance contained a certain degree of conceptualism: ‘Formulated so to be easily applicable it contains the danger of a mechanical application. The principle can degenerate into a meaningless dogma where the contractual situation does not fit into the underlying rationale.’114

10.56  The subsequent negotiations that produced Article 4 of the Rome Convention made substantial changes to the use of the concept of characteristic performance: the most important being the exclusion of consumer and individual employment contracts from the operative scope of Article 4 which removed many objections of it favouring the economically powerful over the weak. From a British perspective, the changes were made in a way that ‘will make it even more acceptable to English lawyers’, even though the essential structure was still the same.115

10.57  Among key British negotiators it was recognized that the concept of characteristic performance involved, in Professor North’s words, ‘uncertainty…and there is no real experience in the legal system of any of the Member States of the EEC in the application of this concept’.116 Trying to gain a firm grip on the concept had proved elusive. Professor Diamond wryly observed that he had realized the flexibility inherent in the doctrine of characteristic performance ‘when its leading Swiss exponent told me that although the seller’s performance was usually characteristic of a contract of sale, it could be the buyer’s performance’.117 Professor Diamond concluded that ‘characteristic performance’ was:

a mysterious, almost a mystical concept, which seems to believe that, because we talk of a contract of sale rather than a contract of purchase, the performance by the seller is characteristic of the contract and therefore is a proper focus for a connecting factor.118

(p. 351) 10.58  One thing that both proponents119 and opponents120 of the solution in Article 4 of the Rome Convention shared was a belief that ultimately the Convention would ‘effect no fundamental change in English law’.121 But for some ‘there are important areas in practice in which the Convention will be difficult to apply’.122

10.59  Even after the Rome Convention was signed, Article 4 remained unpopular among many commentators. At the Newcastle Colloquium in 1981, the American scholar, Professor Juenger,123 suggested that ‘the characteristic performance test is bound to disappoint the hopes of certainty it raises. Paradoxically, although the concept is simplistic, its practical application is far from simple’. Professor Juenger subsequently described the concept as a ‘Swiss gimmick’.124 Characteristic performance was subsequently criticized for being both technical and mechanical.125 It was famously labelled a ‘jigsaw’,126 and ‘clear…like German metaphysics’.127 It has even been suggested that discontent in Member States over the possible operation of Article 4 may have contributed to the long duration between the signing of the Rome Convention and its coming into force in 1991.128

D.  The Rome Convention in Operation (1991 to the 2003 Green Paper)

10.60  Questions over the operation of the concept of characteristic performance in Article 4 became a regular issue before the courts of Member States after 1991. In the United Kingdom, in the years running up to the Rome I Green Paper in 2003, the courts dealt with a steady diet of cases where issues arose.129 While it was recognized that there was (p. 352) limited guidance from the Giuliano–Lagarde Report,130 from a mixture of that guidance and judicial rulings, it could be said that:

  1. (1)  In contracts for the sale of goods, the characteristic performance was that of the seller,131 as ‘usually in the case of a commercial contract of sale that the law of the vendor’s place of business would govern the contract’.132

  2. (2)  In contracts for the supply of services, whether ‘professional’ or otherwise, then the characteristic performance was that of the service provider.133

  3. (3)  In contracts between a bank and their (non-consumer) customers, the characteristic performance would be that of the bank, and the country of the bank establishment with which the transaction was made would normally apply.134 In ‘a bank to bank agreement’ which, on the facts was independent of the surrounding loan transactions which gave rise to it, and which contained an obligation by one bank to either pay or give a warranty that there had been no default under the loan agreement, then that bank was providing the characteristic performance.135

  4. (4)  In contracts of insurance,136 the characteristic performance was that of the insurer.137 In re-insurance contracts, the performance characteristic of the contract was provided by the reinsurer.138 In a contract between an insurance broker and a client seeking and obtaining reinsurance in the London Market, the characteristic performance was that of the insurance broker.139

  5. (5)  In loan contracts, the courts favoured classifying the characteristic performance as being that of the lender.140

  6. (6)  In a contract of agency, the characteristic performance was that of the agent.141(p. 353)

  7. (7)  In a contract of guarantee, the characteristic performance was provided by the guarantor.142

  8. (8)  In a ‘contract of gift’ or ‘act of gift’, it was the habitual residence of the donor.143

10.61  As had been anticipated by scholars, greater difficulties arose in more complex financial transactions, including involving documentary credit transactions,144 or even something as commonplace as a distribution agreement, as was the case in Print Concept GmbH v GEW (EC) Ltd.145

The operation of the escape clause?

10.62  While there were disputes about identifying the characteristic performance and the characteristic performer of particular contracts, it was the operation of the escape clause under Article 4(5) of the Convention that perhaps caused most problems. A clear divergence emerged in practice between the courts of Member States as to when it was appropriate to apply Article 4(5) and disregard the presumptions in Article 4(2)–(4). That divergence reflected ‘differing national traditions’ and uncertainty as to how the provision would be interpreted by the Court.146

10.63  In Société Nouvelle des Papeteries de l’Aa SA v BV Machinefabriek BOA,147 the Netherlands’ Hoge Raad held that the law selected under the presumption in Article 4(2) should not be disregarded unless the habitual residence of the characteristic performer had no real significance as a connecting factor. In Société Nouvelle the only connection with the Netherlands was that it was the place of business of the characteristic performer under a contract to be performed in France. Under the presumption in Article 4(2), Dutch law applied, and the Hoge Raad refused to disapply it. From the Dutch perspective, the presumption in Article 4(2) was as a ‘strong’ one that should be rarely displaced. Higher German courts also showed a tendency towards this ‘strong presumption’ analysis.148 There was also support for this view in Scotland.149

(p. 354) 10.64  Initially the courts in England and Wales considered the presumption in Article 4(2) to be ‘very weak’;150 a view that seems to have been shared at one stage by the Danish Supreme Court151 English courts gradually gave greater weight to the general presumption in Article 4(2), while still rejecting the Dutch position. In Samcrete Egypt Engineers and Contractors SAE v Land Rover Exports Ltd, Potter LJ said that unless Article 4(2) was regarded ‘as a rule of thumb which requires a preponderance of contrary connecting factors to be established before that presumption can be disregarded, the intention of the convention is likely to be subverted’.152 While the Netherlands approach in Societe Nouvelle was rejected as being too rigid, the Court of Appeal held the presumption in Article 4(2) should only be disregarded ‘in circumstances which clearly demonstrate the existence of connecting factors justifying [it]’.153 The ultimate English position was that the displacement of the country selected under the presumptions in Article 4(2) required a ‘preponderance of contrary connecting factors’,154 based upon circumstances which clearly demonstrated the existence of connecting factors that could properly justify disregarding the presumption.155

10.65  In France, the Cour de Cassation still favoured ‘weak’ presumptions: with the delivery of transported goods in France being held sufficient to disregard the presumption in Article 4(4) of the Convention and apply French law to the underlying maritime contract of carriage.156

10.66  Ultimately, the question of when Article 4(5) of the Convention should be applied would be answered (after a fashion) by the Court in 2009 after the Rome I Regulation had been enacted. The opportunity for the Court to give an opinion arose in a reference from the Hoge Raad itself in the case of Intercontainer Interfrigo SC (ICF) v Balkenende Oosthuizen BV (ICF).157

(p. 355) E.  The Court’s Decision in ICF

10.67  In ICF158 the claimants were a company established in Belgium. The defendant companies, Balkenende Oosthuizen BV (‘Balkenende’) and MIC Operations BV (‘MIC’) were established in the Netherlands. In relation to a projected rail link for the transport of goods between Amsterdam and Frankfurt, ICF agreed to provide railway wagons to Balkenede on behalf of MIC. ICF was to carry out the rail transport of the goods, and bought locomotives and services for that purpose. MIC leased the loading capacity it had available to third parties and was to oversee the operational phase of the transport.

10.68  ICF had sent a draft contract that contained a clause designating Belgian law as the applicable law. That draft was never signed by any of the parties, and no written contract was concluded. During a limited period of just over two months, the parties did ‘give effect to what had been agreed between them’. As a result, ICF sent two invoices for their services to MIC, who paid the second but not the first. Almost three years after the first invoice was rendered, ICF sued the defendants in the Netherlands for the sums due under it.159 In reply, the defendants contended the applicable law was the law of the Netherlands and under it ICF’s claim was time-barred. In response, ICF argued that the contract was governed by Belgian law, and under Belgian law their claim had been issued in time.

10.69  The Rectbank te Haarlem (Local Court, Haarlem) held that Netherlands law applied and declared the action time barred. The Gerechtshof te Amsterdam (Regional Court of Appeal, Amsterdam) dismissed ICF’s appeal, rejecting the argument that the parties had chosen Belgian law as the contract sent to the defendants had never been signed by them. But ICF also argued that, if Article 4(4) did not apply to a contract, then the contract should be governed by the general presumption in Article 4(2): thus Belgian law applied because the principal place of business of ICF, the party engaging in the characteristic performance under the contract, was in Belgium. The Gerechtshof te Amsterdam applied the escape clause in Article 4(5) and concluded that the contract was more closely connected with the Netherlands than with Belgium, thereby disregarding the presumption in Article 4(2). ICF further appealed, and the Hoge Raad referred five questions to the Court of Justice of the European Union (‘CJEU’).160 Those questions fell into three categories relating to (a) the scope of Article 4(4);161 (b) the possibility of applying severance to a contract by reason of the second sentence of Article 4(1), and (c) a fifth question that related to the operation of the escape clause in Article 4(5).162 The Court was asked in this fifth question whether this second limb of the Article 4(5) must be interpreted in such a way that the presumptions in Articles 4(2), (3), and (4) of the Rome Convention did not apply:

only if it is evident from the circumstances in their totality that the connecting criteria indicated therein do not have any genuine connecting value, or also if it is clear therefrom that there is a stronger connection with some other country.

(p. 356) 10.70  In asking the question in those terms, the Hoge Raad was effectively seeking the approval of the Court for their ruling in Societe Nouvelle. In their submissions to the Court the Netherlands argued that a ‘slight’ connection with another country selected under the presumptions in Article 4(2)–(4) could not justify derogating from the criteria contained in them. Derogation might only be justified if the criteria selected in the presumptions had ‘no genuine connecting value and that the contract is predominantly connected with another country’.163 The Czech government did not regard Article 4(5) as a lex specialis in relation to the presumptions in Articles 4(2)–(4), but instead saw it as a separate provision which related to a situation where it was ‘very apparent’, from all the circumstances of the case and the overall contractual relationship, that the contract was ‘much more closely connected with another country’.164 The European Commission argued that Article 4(5) had to be interpreted strictly, and claimed it should only be applied ‘where the criteria provided for in Article 4(2) and (4) have no genuine connecting value’.165

10.71  Advocate-General Bot considered the various submissions and developments in (some of) the Dutch, Scottish, English, and French cases, before declaring that the presumptions in Article 4 were ‘intended to designate the law of the country which is deemed to have the strongest connections with the contract’.166 In his view, the use of Article 4(5) to rebut the presumptions was only justified if the court considered that the law designated under the presumption ‘does not have genuine connections with the contract’.167

10.72  The Court of Justice implicitly disagreed with the Advocate-General, the Netherlands, and the Commission, and (to a lesser degree) with the Czech Government. The Court emphasized that the structure of presumptions in Article 4(2)–(4) were intended ‘to ensure a high level of legal certainty in contractual relationships’.168 Those presumptions provided for a set of criteria upon which it was possible to presume which country the contract was most closely connected with. The Court cited the discussion of Article 4(5) in the Giuliano–Lagarde Report, and concluded the:

objective of article 4(5) is to counterbalance the set of presumptions stemming from the same article by reconciling the requirements of legal certainty, which are satisfied by article 4(2) to (4), with the necessity of providing for a certain flexibility in determining the law which is actually most closely connected with the contract in question.169

10.73  Given that the primary objective of Article 4 was that the law of the country with which the contract was most closely connected, Article 4(5) had to be interpreted as allowing a court:

to apply, in all cases, the criterion which serves to establish the existence of such connections, by disregarding the ‘presumptions’ if they do not identify the country with which the contract is most closely connected.170

10.74  The Court therefore considered the competing contentions whether those presumptions may be disregarded ‘only where they do not have any genuine connecting value’ or more (p. 357) generally, where ‘the court finds that the contract is more closely connected with another country’.171 The Court chose the latter, more flexible alternative, declining to follow the Advocate-General’s advice, and holding that while a court of a Member State ‘must always determine the applicable law on the basis of those presumptions’ because they satisfy the requirements of foreseeability and legal certainty,172 a court could apply the escape clause in Article 4(5):

where it is clear from the circumstances as a whole that the contract is more closely connected with a country other than that identified on the basis of the presumptions set out in article 4(2) to (4) of the Convention, it is for that court to refrain from applying article 4(2) to (4).173

10.75  The Court’s analysis, with the addition of the word ‘clear’ to the text of Article 4(5), fully respected the scope of the discretion granted to a forum court by the terms of the Convention free from the glosses that the Netherlands, and the Commission would prefer. In Haeger & Schmidt GBH, the Court of Justice would subsequently reaffirm their analysis in ICF.174

F.  The Call for Change

The Green Paper

10.76  The existence of issues that would come to a head in ICF had already influenced the Commission. In the Rome I Green Paper,175 the Commission raised the question of what was the ‘strength’ of the general presumption in Article 4(2), and asked whether Article 4 should be redrafted to compel the court to begin by applying the presumption in Article 4(2) and only then to rule out the law thereby selected if that law was ‘obviously unsuited to the case before it’.176 The other problem highlighted concerned the application of the special presumption in property matters in Article 4(3) of the Convention, as it related to holiday leasing agreements.177 The Commission noted that the European Group for Private International Law (‘GEDIP’) had suggested that a revised Article 4(3) should contain a specific rule on short-term holiday tenancy, along the lines of Article 22(2) of the Brussels I Regulation.178

The Rome I Proposal

10.77  The Commission’s proposed amendments to Article 4 in the Rome I Proposal was far more radical than anything they had suggested in their Green Paper or had been raised in the responses to it.179

10.78  The Rome I Proposal saw Article 4 being reduced to two paragraphs. Draft article 4(1) listed a catalogue of eight specific categories of contracts, and then specified what the applicable (p. 358) law in the absence of party choice should be for each of them. The proposed draft article 4(2) simply declared that where contract had not been specified in paragraph 1, then such contracts were to be governed by the law of the country in which the party who was required to perform the service characterizing the contract has his habitual residence. Where that service could not be identified, then the final sentence indicated that it shall be governed by the law of the country with which it is most closely connected.

10.79  But most controversially for many was that the escape clause in Article 4(5) of the Convention was missing from the text of the Proposal. The new rules in draft article 4(1) were meant to be essentially fixed and set.180 This new proposal was, as Professor Lagarde noted, repudiating all flexibility in the name of legal certainty.181 The Commission’s Explanatory Memorandum,182 justified their proposal as follows:

The rule in the Convention, whereby the applicable law is the law of the place where the party performing the service characterising the contract has his habitual residence, is preserved, but the proposed changes seek to enhance certainty as to the law by converting mere presumptions into fixed rules and abolishing the exception clause. Since the cornerstone of the instrument is freedom of choice, the rules applicable in the absence of a choice should be as precise and foreseeable as possible so that the parties can decide whether or not to exercise their choice.

Regarding the solutions for the different categories of contracts, only those proposed at points (g) and (h)183 have come up for discussion and prompted court decisions in the Member States in relation to determination of the characteristic performance. The solutions are based on the fact that Community law seeks to protect the franchisee and the distributor as the weaker parties.

Paragraph 2 retains the characteristic performance criterion for contracts for which paragraph 1 lays down no special rule, such as complex contracts that are not easy to categorise or contracts involving mutual performance by the parties in terms that can be regarded as characteristic on both sides.

Something borrowed, something East German?

10.80  While draft article 4(1) of the Rome I Proposal was a radical departure from Convention, the idea behind a catalogue of types of contract, where the applicable law in the absence of choice was specified, was anything but new. Such a catalogue had been a common feature of the Eastern European private international law codifications in the 1960s in Czechoslovakia and Poland, and most significantly in the East German Rechtsanwendungsgesetz statute of 5 December 1975 (‘RAG’),184 a development had been the subject of considerable scholarly interest during the (p. 359) drafting of the Rome Convention.185 In addition, the 1978 Austrian International Private Law Act (‘IPRG’) of 15 June 1978186 had contained a list of characteristic performers in certain specified contracts, as had the Hungarian Private International Law Act of 1979.187 During the course of the development of the Rome Convention, a 1978 draft of the proposed Swiss statute on private international law was known to the Working Group.188 The draft Swiss statute contained a catalogue of designated characteristic performers.189 It would be enacted as Article 117(3) of the Swiss Federal Code on Private International Law (‘CPIL’) of 18 December 1987 with a revised list of characteristic performers.190

10.81  Article 12 of the 1975 East German RAG statute had been particularly comprehensive, with a catalogue of 14 categories of contract where the applicable law in the absence of choice was declared to be the principal place of business of one party or another.191 For other contracts outside that list, Article 12(2) of the 1975 RAG called for the direct application of the principle of characteristic performance, by applying the law of the principal place of business of the ‘characteristic performer’. It was only if that could not be determined that the law of the state in which the acceptance of the offer was received would be applied as a last resort.192

(p. 360) 10.82  The idea of enumerating a catalogue of contracts of particular importance and indicating the applicable law had been suggested by Professor Sieher in 1973 by reference to a draft of the East German RAG.193 It was raised again by Professor von Overbeck at the 1974 Copenhagen Colloquium, when he drew attention to the Czechoslovakian Act and the Austrian draft law.194 At the 1976 London Colloquium, Professor Lipstein pointed out that the 1972 Draft Convention had refrained from specifically designating the characteristic obligation by enumerating individual categories of contract of the kind undertaken in Eastern European codes.195 Professor Diamond subsequently described the 1975 RAG as being ‘of some interest since in adopting the doctrine of characteristic performance Article 12 sets out a list of relevant parties to contracts, some of whom are clearly regarded as “the party whose performance determines the character of the contract”’.196

10.83  The Rome Convention chose not to follow that approach. The Rome I Proposal was closer in structure to the Eastern European Codes of the 1960s and 1970s, with the result that Professor Lagarde described it as a ‘regression into the Sixties’.197 Even in its revised version, Article 4 of the Rome I Regulation is closer to the East German 1975 RAG than to the Rome Convention.

G.  Article 4: General Observations

10.84  Before considering Article 4 in detail, some general observations should be made.

The adoption of a catalogue

10.85  The story of the legislative development of Article 4 is largely about reintroducing the concept of flexibility into the scheme suggested in draft article 4 of the Rome I Proposal, and then refining further the types of contract for which specific rules are necessary. The adoption of a catalogue of specified contracts in draft article 4(1) met with some objections from both the European Parliament and from commentators such as the Max Planck Institute, who would have preferred presumptions. But the general principle found greater favour among the delegations to the Rome I Committee, especially once an escape clause in the form now found in Article 4(3) was restored to the text of the Regulation. With that provision in place the provision eventually enacted in Article 4(1) (shown below as an amendment to the text of the Rome I Proposal) bears much of the Commission’s original stamp:
Article 4 of the Rome I Regulation (Revisions from the Rome I Proposal).

Article 4—Applicable law in the absence of choice

  1. 1.  To the extent that the law applicable to the contract has not been chosen in accordance with Article 3 and without prejudice to Articles 5 to 8, the contract shall be governed by the law determined as follows:

    1. (a)  a contract of sale shall be governed by the law of the country in which where the seller has his habitual residence;(p. 361)

    2. (b)  a contract for the provision of services shall be governed by the law of the country in which where the service provider has his habitual residence;

    3. (c)  a contract of carriage shall be governed by the law of the country in which the carrier has his habitual residence;

    4. (c) (d) a contract relating to a right in rem or right of user in to a tenancy of immovable property shall be governed by the law of the country in which where the property is situated;

    5. (d)  (e) notwithstanding point (d) (c), a tenancy of immovable property lease for the temporary personal use concluded for temporary private use for a period of no more than six consecutive months shall be governed by the law of the country in which where the owner landlord has his habitual residence, provided the tenant is a natural person and has his habitual residence in the same country;

    6. (f)  a contract relating to intellectual or industrial property rights shall be governed by the law of the country in which the person who transfers or assigns the rights has his habitual residence;

    7. (e)  (g) a franchise contract shall be governed by the law of the country in which where the franchised person franchisee has his habitual residence;

    8. (f)  (h) a distribution contract shall be governed by the law of the country in which where the distributor has his habitual residence.

    9. (g)  a contract for the sale of goods by auction shall be governed by the law of the country where the auction takes place, if such a place can be determined;

    10. (h)  a contract concluded within a multilateral system which brings together or facilitates the bringing together of multiple third party buying and selling interests in financial instruments, as defined by Article 4(1), point (17) of Directive 2004/39/EC, in accordance with non-discretionary rules and governed by a single law, shall be governed by that law.

The deleted proposals

10.86  Draft article 4(1) of the Proposal contained two suggested rules which were deleted during the course of the Rome I negotiations.198 The first, at draft article 4(c) of the Proposal, had suggested that a contract of carriage shall be governed by the law of the country in which the carrier has his habitual residence. This controversial provision was removed from Article 4 and a new rule created (Article 5) that dealt with both contracts of carriage of goods and carriage of passengers. This is dealt with in Chapter 11. The second proposed rule, at draft article 4(1)(f) of the Proposal was in the field of intellectual property. It was proposed that a contract relating to intellectual property rights should be governed by the law of the country in which the person who transfers or assigns the rights has his habitual residence. The treatment of that proposal is dealt with in Section S below.

Theoretical underpinnings

10.87  The principal of closest connection remains the basic connecting factor underpinning all of these eight categories of contract in Article 4(1). Four of the categories of contract specified (in Articles 4(1)(c)–(d), (g)–(h)) establish the country of closest connection by the location of immovable property and/or the parties to certain contracts relating to the same are located, or where the transaction occurred. The other four categories (Articles 4(1)(a)–(b), (d)–(e)) identify the country of closest connection to the contract by locating the habitual residence of the (now designated) characteristic performer of the contract, as under the Convention; though, in the case of franchise and distribution contracts, this designated (p. 362) characteristic performer may be different from the way some Member States’ courts analysed equivalent contracts under Article 4(2) of the Convention. The use of the concept of closest connection remains fundamental, even though, on the face of the Regulation, this concept appears to be ‘demoted’ from its declaratory role in Article 4(1) of the Convention to a back-stop role in Article 4(4) of the Regulation. Without it as a justification, the rules in Article 4(1) have no particular theoretical foundations.

‘Habitual residence’

10.88  For contracts categorized as falling within in Articles 4(1)(a), (b), (d), (e), and (f), then the Rome I Regulation’s core geographical connecting factor (or criterion) of ‘habitual residence’ is used. The applicable law will be the law of the country of habitual residence of:

  1. (i)  a seller in a contract for the sale of goods;

  2. (ii)  a service provider in a contract for the provision of services;

  3. (iii)  a franchisee under a franchise contract;

  4. (iv)  a distributor under a distribution contract; and

  5. (v)  a landlord who grants a private tenancy of immovable property for a period of no more than six consecutive months to a tenant, who is a natural person, where both landlord and tenant have their habitual residence in the same country.

10.89  Where that identified party is either a legal person, or a natural person acting in the course of their business activities, then their habitual residence will be defined in accordance with the provisions of Article 19 (‘Habitual Residence’).199 For a legal person this will usually be the place of their central administration at the time the contract was concluded.200 If the contract was concluded in the course of operations of a branch, agency or other establishment, or if under the contract performance is the responsibility of such a branch, agency or other establishment, then the place where that branch, etc is located shall be treated as the place of habitual residence.201 For further consideration of the concept of habitual residence, see Chapter 5.

Limited application of Article 4

10.90  Although a general rule, operation of Article 4 is still limited. Article 4 is expressed to be ‘without prejudice to Articles 5 to 8’ of the Regulation. Those four Articles make special provision for (i) contracts for the carriage of goods and passengers (Article 5); (ii) consumer contracts (Article 6); (iii) insurance contracts (Article 7); and (iv) individual employment contracts (Article 8). Each of them contain their own special rules for the applicable law in the absence of party choice. Save for limited aspect of the consumer contract provisions in Article 6,202 Article 4 has no application to such contracts.

10.91  Second, Article 4 (like any other provisions in the Regulation) ‘shall not prejudice’ the application of international conventions to which one or more Member States are parties at the time when the Rome I Regulation was adopted and which ‘lay down conflict-of-laws rules relating to contractual obligations’.203 Of particular significance are the rules in the (p. 363) Hague Convention on the Law Applicable to the International Sale of Goods (1955). Under the 1955 Hague Convention, in default of a choice of law by the parties, an international sale contract is governed by the domestic law of the country in which the vendor had his habitual residence at the time he received the order. If the order was received by a branch office of the vendor, then the law of the country where that branch office was located is to govern.204 This provision is subject to two exceptions. Under Article 3(2) of the 1955 Hague Convention, the substantive law of either (a) the country in which the purchaser had his habitual residence, or (b) in which the branch of his [ie the purchaser’s] business was situated that had placed the order, was to be the governing law if the order had been received in that country either by the vendor or by his representative agent. The second exception is found in Article 3(3) of the 1955 Convention.205 This provides that a sale effected at an exchange (d’un marché de bourse)206 or at an public auction (d’une vente aux enchères) was governed by the domestic law of the country in which the exchange was located or in which the auction took place.

10.92  The 1955 Hague Convention remains in force in Finland, France, Italy, and Sweden (who are subject to the Rome I Regulation) and in Denmark, Norway, Switzerland, and Niger, who are not.207 In an international sale of goods case before a French court, if a French buyer places their order with an agent of a Swedish company in France, then absent party choice, prima facie, French law as the law of the habitual residence of the buyer will apply under the 1955 Hague Convention, rather than Swedish law, as the law of the habitual residence of the seller, which would have been the position under Article 4(1)(a) of the Rome I Regulation. While its operation may be limited, the 1955 Hague Convention makes no sense for EU Member States. To prevent conflicts with the Rome I Regulation, Finland, France, Italy, and Sweden should follow Belgium’s lead and denounce it.208

Hierarchy and structure

10.93  The final structure of Article 4 was reached after considerable debate among the Rome I Committee as to how a national court should approach its application. These discussions were resolved by the German Presidency’ proposal of 21 March 2007,209 which adopted the current structure now reflected in the text of the Regulation, and which was supported by all the delegations (apart from the Belgians) at the 27–28 March meeting of the Rome I Committee.210 That shows that the operation of Article 4 is based on a clear hierarchy.

10.94  The starting point of any selection of the choice of law absent party choice is whether ‘the particular type of contract’ falls within the rules provided in Article 4(1)(a)–(h).211 If so, the law selected under that rule should be applied unless circumstances indicate the ‘escape clause’ in Article 4(3) should be engaged to select a different law to govern the contract.

(p. 364) 10.95  Second, it is only when the contract cannot be ‘categorised’ as being one of the specified types in Article 4(1) or where ‘its elements’ fall within more than one category in Article 4(1), that Article 4(2) comes into play and the contract shall be governed by the law of the country where the characteristic performer has his habitual residence, which, in the case of a contract consisting of a bundle of rights and obligations capable of being categorized as falling into more than one of the specified types of contract in Article 4(1), then the characteristic performance of the contract ‘should be determined having regard to its centre of gravity’.212 Again, this is subject to the escape clause in Article 4(3).

10.96  Third, the escape clause in Article 4(3) should only be used where the contract is ‘manifestly more closely connected’ with a country other than one specified in Article 4(1)(a)–(h), or other than the country determined by applying the concept of characteristic performance in Article 4(2). In such circumstances, the law of that other country should apply. In determining that country, account should be taken, inter alia, of whether not the contract in question had ‘a very close relationship’ with another contract or contracts.213

10.97  Finally, it is only if the applicable law cannot be determined under Article 4(1) or (2); either because the contract cannot be categorized as one of the specified types in Article 4(1)(a)–(h), or because the country of the party required to effect the characteristic performance cannot be identified under Article 4(2), then the applicable law is selected by the court identifying the country with which ‘the contract is most closely connected’. As with the escape clause in Article 4(3), in order to determine that country, account should be taken, inter alia, of whether the contract in issue had a very close relationship with another contract or contracts.214

H.  Sale of Goods

10.98  Article 4(1)(a) of the Regulation provides that, to the extent that the law applicable to a contract has not been chosen in accordance with Article 3, then ‘a contract for the sale of goods shall be governed by the law of the country where the seller has his habitual residence’.

Recital (17)

10.99  Guidance on the proper interpretation of Article 4(1)(a) is given in Recital (17). This directs that the concept of ‘sale of goods’ should be ‘interpreted in the same way as when applying’ Article 5 of the Brussels I Regulation, in so far the concept of sale of goods is ‘covered’ by that Regulation. That reference to Article 5 should now be construed as a reference to Article 7(1) of the Brussels I Recast.215

10.100  Recital (17), which applies equally to the concept of ‘provision of services’ in Article 4(1)(b) of the Regulation, says:

  1. (17)  As far as the applicable law in the absence of choice is concerned, the concept of ‘provision of services’ and ‘sale of goods’ should be interpreted in the same way as when applying Article 5 of Regulation (EC) No 44/2001 in so far as sale of goods and provision of services are covered by that Regulation. Although franchise and distribution contracts are contracts for services, they are the subject of specific rules.

(p. 365) 10.101  Article 7(1) of the Brussels I Recast, as did its predecessor in Article 5 of the Brussels I Regulation, provides that:

a person domiciled in a Member State may be sued in another Member State,

  1. (1)  (a) in matters relating to a contract, in the courts for the place of performance of the obligation in question;

    1. (b)  for the purpose of this provision and unless otherwise agreed, the place of performance of the obligation in question shall be:

      • – in the case of the sale of goods, the place in a Member State where, under the contract the goods were delivered or should have been delivered.

      • – in the case of the provision of services, the place in a Member State where, under the contract, the services were provided or should have been provided.

    2. (c)  if point (b) does not apply then point (a) applies[.]

10.102  These special jurisdiction rules in matters relating to contract, supplement the basic rule that the courts for the place where the defendant is domiciled have jurisdiction. They reflect an objective of proximity, and the reason for them is the existence of a close link between the contract and the court called upon to hear and determine the case.216 Both limbs of Article 7(1)(b) have the same origin, pursue the same objectives and occupy the same place in the jurisdictional scheme of the Brussels Regime.217 The Court has emphasized that the criteria used in them should be defined autonomously to reinforce the objectives of unifying the rules of jurisdiction and for predictability.218

10.103  As neither the Brussels I Regulation in its original or recast form contain any definition of the concepts of ‘sale of goods’ or the ‘provision of services’, Recital (17) should be regarded as a direction that the interpretation of Article 4(1)(a) of the Rome I Regulation should effectively follow the Court’s case law on those equivalent jurisdictional provisions as far as practicable. In any question of interpretation, the Court will give an autonomous meaning to the concept of sale of goods (and ‘provision of services’), independent of the meanings given to those term under national laws, and which takes account of the purpose of both of the Brussels I and Rome I Regulations. The Court is likely to strive to provide a consistent, autonomous definition of the concept that can apply to both questions of jurisdiction and choice of law.

A negative interpretation

10.104  There are three aspects of any autonomous interpretation of ‘sale of goods’ under Article 4(1)(a). The first is essentially negative: with the meaning of the concept being limited by internal restrictions within the text of the Regulation itself.

10.105  First, contracts for the sale of goods that qualify as consumer contracts under Article 6 of the Regulation are excluded from the scope of operation of Article 4(1)(a).219

(p. 366) 10.106  Second, a contract for the sale of goods within the meaning of Article 4(1)(a) will not include:

  1. (a)  Any contract that forms part of a franchise contract within the meaning of Article 4(1)(e);

  2. (b)  Any contract that forms part of a distribution contract within the meaning of Article 4(1)(f);

  3. (c)  Any contract for the sale of goods by auction falling within the scope of Article 4(1)(g).

All of these provisions may well result in a choice of law that differs from the habitual residence of the seller in Article 4(1)(a), and the distinctions between them must be respected.

10.107  Third, any contract for the sale of goods that includes the provision of services within the meaning of Article 4(1)(b) of the Regulation will be excluded from Article 4(1)(a). Any ‘mixed’ contract that combines elements of both cannot fall within the operational scope of either, but must be referred to Article 4(2).220

Classification

10.108  The second aspect of interpretation in many contracts will be the need to decide whether the classification of the contract is best described as being for ‘the sale of goods’ as opposed to being for ‘the provision of services’. The solution adopted by the Court in its jurisdiction case law involves recourse to the concept of the ‘characteristic obligation of the contract’. In Car Trim,221 the Court drew a binary distinction between the sale of goods and the provision of services based on this concept of characteristic obligation; adopting an approach previously applied to the provision of services in Falco.222 A contract which has as its characteristic obligation the supply of a good would be classified as a ‘sale of goods’ within the meaning of Article 5(1)(b) of the Brussels I Regulation. A contract which has as its characteristic obligation the provision of services would be classified as a ‘provision of services’ within the meaning of Article 5(1)(b) of the Brussels Regime.223

10.109  In Car Trim, in interpreting the concept of sale of goods, the Court demonstrated a willingness to go beyond the text of the Brussels I Regulation and consider broader sources of European Union and international laws.224 In the context of the supply of goods to be manufactured or produced to the specific requirements of the client, the Court referred to (i) Article 1(4) of the Consumer Goods Directive 1999/44;225 (ii) Article 3(1) of the UN Convention on Contracts for the International Sale of Goods (‘CISG’);226 (iii) Article 6 of the 1974 UN Convention on the Limitation Period in the International Sale of Goods;227 and (iv) the Court’s own case law concerning public supply contracts under Directive 2004/18/EC.228 Not all had any potential application to the facts of Car Trim. But the (p. 367) Court was measuring its conclusions under the Brussels Regime against a broader framework of accepted norms in relation to contracts for the sale of goods; effectively using a ‘wide-angle lens’ to frame the subject of their analysis. This cheerfully syncretic approach is likely to be repeated by the Court in relation to the same concept in Article 4(1) of the Rome I Regulation.

Party labels?

10.110  For the purposes of classification within Article 4(1) of the Regulation, any label that the parties themselves have applied to a contract will not be determinative. That approach is also consistent with the case law on the CISG.229

A ‘positive’ autonomous interpretation

10.111  Having determined that a contract is not excluded from operation of Article 4(1)(a) by either the other provisions of the Regulation or by a process of classification, then there are three elements to consider in adopting ‘positive’ autonomous interpretation of the concept of ‘sale of goods’. The first is the concept of ‘goods’; the second is the meaning of ‘sale’, and the third is the meaning of ‘seller’.

‘Goods’

10.112  The Court of Justice is likely to define the concept of ‘goods’ as meaning any tangible, movable items, which can be valued in money and are capable, as such, of forming the subject of commercial transactions.

10.113  This proposed autonomous definition is based primarily on that found in Article 2(3) of the Consumer Rights Directive (2011/83/EC),230 and the Court’s decisions on the free movement of goods provisions of the Treaties. The latter appears appropriate to consider: after all, the whole European project was based on a customs union ‘which shall cover all trade in goods’.231 Even though the Court’s decisions on the free movement provisions of the Treaty may not be automatically applied to European private international law,232 they still provide a useful point of comparison. Under the Treaties, the terms ‘goods’ and ‘products’ are used interchangeably. While neither term has ever been defined within the Treaties themselves, there is a considerable body of case law on them.233

10.114  The concept of goods for Article 4(1)(a) of the Rome I Regulation will include agricultural products, foodstuffs, commodities, and livestock,234 as well as all manufactured products, (p. 368) or other objects of value. It will include objects considered desirable, such as articles of artistic, historic, archaeological, or ethnographic interest,235 and those which, if not exactly desirable, still have some social utility, such as recyclable and reusable waste.236 The concept of goods may also include those things which have no utility and are inherently undesirable; such as non-recyclable and non-reusable waste.237 Consistent with general international commercial expectations, ‘goods’ will include those which do not yet exist at the time of the conclusion of the contract.238

Manufactured to order

10.115  ‘Goods’ for the purpose of Article 4(1)(a) of Rome I will not be limited to those produced for the general market, but will also include products specifically manufactured to the buyer’s needs and specifications.239 Even though the purchaser has specified detailed requirements regarding the provision, fabrication and delivery of the goods to be produced, this, by itself, is not enough, to turn a contract for the sale of goods into one for the provision of services. If (i) the purchaser has not supplied the materials used to make the goods, and the supplier remains responsible for (ii) the quality of the goods they are producing, and (iii) for their compliance with the terms of the contract with the buyer, then such contracts will still be classified as ones for ‘sale of goods’ rather than for the ‘provision of services’. It is only if, by the provision of materials, supplies and directions, and by the buyer taking primary responsibility for the quality of the end product, as well their conformity with the contract, that the characteristic obligation of such a contract may be regarded as a contract for the provision of services rather than for the sale of goods.240

10.116  The decision in Car Trim indicates that the fact goods are produced or manufactured to the bespoke requirements of the purchaser will not stop a contract being for the sale of goods within the meaning of Article 4(1)(a) of the Rome I Regulation, unless, besides the purchaser’s specific directions and requirements for the production or manufacture:

  1. (a)  the purchaser supplies all or most of the raw materials (not just a substantial part of them as under Article 3(2) of the CISG),241 and

  2. (b)  the seller is only responsible for correctly implementing the purchaser’s instructions.

Likely exclusions

10.117  The Court will probably interpret the concept of ‘goods’ in Article 4(1)(a) of Rome I to exclude:

  1. (i)  intellectual property rights;242(p. 369)

  2. (ii)  money, in the sense of currently circulating currency,243 or any other means of payment, such as banknotes or bearer cheques;244

  3. (iii)  negotiable instruments, such as bills of exchange, cheques and promissory notes;245 or

  4. (iv)  stocks, shares, bonds and other investment securities (which in the language of the Rome I Regulation, will be ‘financial instruments’);246

  5. (v)  goods sold by way of execution or otherwise by authority of law;247

  6. (vi)  water, gas and electricity when they are not put up for sale in a limited volume or a set quantity.248

10.118  Contracts for the sale of ships, vessels, hovercraft, or aircraft are all excluded from the CISG.249 Absent any specific provision in the Rome I Regulation, there is no reason to exclude them from the scope of Article 4(1)(a). It will be uncommon for the courts to deal with such cases unless common standard form agreements are not used by the parties.250 But, as Mietz v Intership251 shows, people are prepared to enter into agreements to construct a yacht without either a contractually agreed jurisdiction clause, so it would be unwise to rule out the possibility of disputes concerning such sales reaching the courts.

(p. 370) ‘Sale’

10.119  Article 4(1)(a) of the Rome I Regulation only applies to contracts for the ‘sale’ of goods. A ‘sale’ is an essential element because Article 4(1)(a) requires the law of the country of the habitual residence of the ‘seller’ to be identified.

10.120  The concept of sale is likely to be interpreted by the Court as requiring a contract under which one party (the seller) transfers, or agrees to transfer, the ownership of goods to another party (the buyer), and the buyer is obliged to pay the price and accept the goods.

10.121  This autonomous definition is consistent with the CISG,252 with draft article 2 of the CESL,253 and with Article 2(5) of the Consumer Rights Directive (2011/83/EU) which defines a ‘sales contract’ as meaning:

any contract under which the trader transfers or undertakes to transfer the ownership of goods to the consumer and the consumer pays or undertakes to pay the price thereof, including any contract having as its object both goods and services.

10.122  The concept of ‘sale’ of goods for Article 4(1)(a) will likely include goods sold on a conditional sale agreement where, by virtue of a retention of title clause the seller retains property in the goods until paid in full. This is so, even though there is no immediate transfer of title to the buyer. To hold otherwise, would undermine retention of title clauses, whose importance to the Internal Market was highlighted by the decision of the European Union to legislate to require Member States to recognize such clauses and give effect to them if they have been expressly agreed by the parties before delivery of the goods.254

Leasing of goods

10.123  The requirement that only a contract for the ‘sale’ of goods falls within Article 4(1)(a) means it will not apply to any leasing arrangement, whether for a car,255 or an aircraft,256 or for any other form of hiring arrangement, where the characteristic obligation is the use of ‘goods’ in return for payment, and where there is no actual or intended transfer of title and ownership of the hired goods, which remain the property of the lessor. These arrangements will probably be considered contracts for the provision of services.

Gifts

10.124  The concept of a ‘sale’ of goods in Article 4(1)(a) excludes situations in which the goods and title to them are being transferred but not sold, as with a gift. Although obligations arising out of gifts that are contractual in nature may well fall within the scope of the (p. 371) Rome I Regulation, this does not necessarily convert a gift of goods into a sale of goods. The absence of any price or exchange being given for the gift should cause the Court to hold there is no ‘sale’ for the purposes of Article 4(1)(a). The applicable law will be determined under Article 4(2), as the law of the country where the party required to effect the characteristic performance of the contract has his habitual residence. Subject to Article 4(3), this is likely to be the country of habitual residence of the donor of the gift, which was the position under Article 4(2) of the Rome Convention.257

Is the payment of a ‘price’ in money required?

10.125  Can another form of consideration, other than money, still result in a contract being categorized as the sale of goods for the purposes of Article 4(1)(a)?

10.126  In favour of the argument that the price of the goods must be paid in money is that this requirement would be consistent with the generally accepted idea of a contract of sale, as opposed barter or exchange.258 It would be consistent with the definition of a ‘sales contract’ under Article 2(5) of the Consumer Rights Directive (2011/83/EU), which requires that a consumer ‘pays or undertakes to pay the price thereof’. It is also consistent the operation of the now repealed Distance Selling Directive (97/7/EC), under which (i) a consumers exercise of the right of withdrawal under Article 6(2) obliged the supplier ‘to reimburse the sums paid by the consumer’, and (ii) unless otherwise agreed, the consumer could not exercise the right of withdrawal in contracts for the supply of goods or services ‘the price of which is dependent on fluctuations in the financial market which cannot be controlled by the supplier’. This provision is preserved in Article 16(b) of the Consumer Rights Directive (2011/83/EU). It is also consistent with the definition of a contract of sale under draft article 2 of the proposed CESL, where the concept of ‘price’ is defined as meaning ‘money that is due in exchange for goods sold, digital content supplied or a related service provided’.259

10.127  The possibility that the Court could consider adopting a different view might find some support from their approach to interpreting the concept of ‘provision of services’ under the Brussels I Regulation. The Court has said while that requires that the party who provides the service carries out a particular activity in return for remuneration, the concept of ‘remuneration’ is not to be understood strictly as the payment of a sum of money, but may include ‘advantages’ which represent an economic value.260 Whether such a broad approach is translated to the concept of ‘sale of goods’ remains to be seen.

‘The seller’

10.128  Article 4(1)(a) requires there be a ‘seller’ whose country of habitual residence can be determined in order to apply its law as the applicable law of the contract. The concept of a ‘seller’ will be interpreted as the party to the contract who agrees to transfer ownership and title to the goods in question to the buyer. Unlike the consumer contract provisions of Article 6 of the Regulation, there is no requirement under Article 4(1)(a) that a seller should be someone (p. 372) acting in the course of their trade, business or profession.261 Article 4(1)(a) will include ‘private’ sellers who enter into cross-border contracts for the sale of goods. The fact that a seller is not a professional will take a contract for the sale of goods outside the scope of the purchaser friendly consumer contract provisions of Article 6 and back within the operative scope of Article 4(1)(a) of the Regulation.

Barter contracts

10.129  The requirement for a ‘seller’ to be identified means that barter contracts will not fall within Article 4(1)(a). In a barter (or exchange) contract, property is transferred, but the ‘price’ paid in return might be other goods, property, or even services. Under the Draft Common Frame of Reference (‘DCFR’), a barter contract was defined as a contract under which each party undertakes to transfer the ownership of goods, either immediately or on conclusion of the contract or at some future time, ‘in return for the transfer of ownership of other goods’.262 The DCFR included certain kinds of contracts for barter, with ‘appropriate modifications’, within the scope of contracts for the sale of goods.263 In so doing, the DCFR declared that in a barter contract, each party is considered to be the buyer with respect to the goods or assets to be transferred.264 But given the requirement under Article 4(1)(a) of the Rome I Regulation is to determine the habitual residence of the ‘seller’, the DCFR solution to barter contracts is probably unworkable and should not be followed. Under Article 4(2) any characteristic performance probably cannot be determined in a barter contract as both sides are performing equivalent obligations. In the context of the Rome I Regulation, barter contracts will therefore be excluded from the scope of Article 4(1)(a) and 4(2), and determining the applicable law will be left to Article 4(4), and the law of the country with which the contract is most closely connected.

Background to Article 4(1)(a)

10.130  Under the Rome Convention, the general presumption found in Article 4(2) required the identification of the party who was to effect the performance that was characteristic of the contract. For sale contracts, the courts of the Member States had been advised that ‘[i]t is usually the case in a commercial contract of sale that the law of the vendor’s place of business would govern the contract’.265 The Giuliano–Lagarde Report identified the vendor in such a contract as an example of ‘the party providing the essential performance’ of the contract.266 This advice was regularly followed by national courts in relation to a variety of contracts of sale.267

(p. 373) The legislative development of Article 4(1)(a)

10.131  The Rome I Proposal268 suggested incorporating this previous guidance in relation to a ‘contract of sale’ as the first of the Commission’s new catalogue of ‘fixed rules’:269

  1. (a)  a contract of sale shall be governed by the law of the country in which the seller has his habitual residence[.]270

10.132  The Regulation’s text was limited to contracts for the ‘sale of goods’ after an initial difference of opinion among the delegations to the Rome I Committee. Germany argued that draft article 4(1)(a) should be restricted to the sale of ‘movable items’.271 This was to distinguish it from contracts concerning the sale of immovable property, and was intended to prevent disputes as to which rule (and therefore which connecting factor) should be used when a contract concerned the sale of real property or property rights.272 Hungary also wanted to limit the provision to the sale of ‘movable goods’. They argued that unless this was done there could be difficulty in practices in deciding in cases involving the sale of immovable property which connecting factor was the ‘stronger’.273 These proposals were supported by Romania.274 In relation to Article 4(1)(a) this matter appears to have been the one that most engaged the Council.275

10.133  This issue was considered at the 26–27 October 2006 meeting of the Rome I Committee when delegations were split on the subject. Because of this division, the Presidencies 12 December 2006 amended Proposal tentatively added the words ‘of goods’ in square brackets to draft article 4(1)(a):

  1. (a)  a contract of sale [of goods] shall be governed by the law of the country where the seller has his habitual residence[.]276

10.134  The Presidencies noted in a footnote that if the phrase ‘of goods’ was added to the text then ‘[t]his provision could be brought in line with Article 5 paragraph 1 point b) of the Brussels I Regulation’. By the 17 January 2007 meeting of the Rome I Committee the majority of delegations favoured limiting draft article 4(1)(a) to the sale of goods.277 Eventually, in order to align the text with Article 5(1)(b) of the Brussels I Regulation. The limitation of draft article 4(1)(a) to contracts for the ‘sale of goods’ was formally proposed in the (p. 374) 30 March 2007 compromise package put forward by the German Presidency,278 and remained unchanged in the compromise package sent by the Presidency to COREPER and the Council on 13 April 2007.279 It also appeared in the proposed text of Amendment 22 in the European Parliament’s Compromise Amendments of 28 August 2007,280 and was adopted in the Regulation.

10.135  The concept of ‘sale of goods’ was itself a late addition to the text of Recital (17). The original version of that Recital referred only to the concept of the ‘provision of services’.281 The Danish delegation suggested including the term ‘sale of goods’ to ensure ‘coherence’ between Article 4(1)(a) and (b) of the Rome I Regulation and Article 5(1)(b) of the Brussels I Regulation.282 The text of Recital (17) was amended in line with the Danish proposal in the Portuguese Presidency’s 25 October 2007 revisions,283 and adopted.

I.  The Provision of Services

10.136  Article 4(1)(b) provides that, to the extent that the law applicable to a contract has not been chosen in accordance with Article 3, then ‘a contract for the provision of services shall be governed by the law of the country where the service provider has his habitual residence’.

10.137  Again, as with the concept of sale of goods in Article 4(1)(a), the concept of ‘provision of services’ is not defined in the text of the Regulation, but Recital (17) directs that it should be ‘interpreted in the same way as when applying’ the equivalent provisions of Article 5 of the Brussels I Regulation, now Article 7(1)(b) of the Brussels I Recast, in so far the concept is ‘covered’ by that Regulation. This permits special jurisdiction to be exercised in the case of ‘the provision of services’ in the place in a Member State where, under the contract, the services were provided or should have been provided. As the Brussels I Regulation in neither of its manifestations provides any further specific definitional guidance on the meaning of ‘the provision of services’, Recital (17) is a direction to follow the Court’s case law on the subject in crafting an autonomous interpretation.

Services: a negative interpretation

10.138  Defining the concept of ‘provision of services’ for the purposes of Article 4(1)(b) begins with recognizing and respecting the restrictions imposed by the other provisions of the Regulation. Many contracts can include elements of service, but contracts whose characteristic obligation falls within the scope of (1) the sale of goods under Article 4(1)(a);284 (2) the carriage of goods or persons under Article 5; (3) the consumer contract provisions of Article 6, or (4) the provision of insurance within the meaning of Article 7, are all excluded from Article 4(1)(b).

10.139  Recital (17) also clarifies that Article 4(1)(b) does not apply to franchise and distribution contracts, because ‘[a]lthough franchise and distribution contracts are contracts for services, (p. 375) they are the subject of specific rules’ contained in Articles 4(e) and (f) of the Regulation. The Court is also not likely to regard the granting a tenancy of immovable property as constituting the provision of services within the meaning of Article 4(1)(b).285 Contracts whose characteristic obligation relates to a right in rem or a tenancy of immovable property will fall within Article 4(1)(c) or (d) and not Article 4(1)(b). Equally, a contract for the provision of services is not a contract of employment.286

Classification of Services

10.140  The second factor to consider is the classification issue raised above in relation to the boundaries between contracts for the sale of goods and the provision of services, which will involve the search for the characteristic obligation of the contract discussed above under Article 4(1)(a).

A ‘positive’ autonomous interpretation

10.141  For those contracts which are not excluded, the Court will likely hold for the purpose of Article 4(1)(b) of Rome I that the concept of ‘services’, implies, at least, that the party who provides (or undertakes to provide) the service carries out a particular activity in return for remuneration.287

10.142  This definition requires two criterion to be satisfied. The first, the existence of an activity constituting the provision of services, must involve some particular activity or active conduct by the person providing the service. This requires the performance of positive acts, rather than mere omissions.288

10.143  The second criterion, namely the remuneration paid as consideration for that activity, is not to be understood strictly as the payment of a sum of money.289 It can include any consideration or advantage that represents an economic value to the recipient.290

10.144  The concept of ‘service’ is a key element of the freedom of movement provisions of the Treaty. Article 57 Treaty on the Functioning of the European Union (TFEU) (ex Art 50 TEC) declares that ‘[s]ervices shall be considered to be ‘services’ within the meaning of the Treaties where they are normally provided for remuneration, in so far as they are not governed by the provisions relating to freedom of movement for goods, capital and persons’.291 This definition had given rise to broad interpretations by the Court. The concept of services has been held to include:

  1. (a)  Medical and healthcare services;292