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Law Applicable to Contractual Obligations and Non-Contractual Obligations (Amendment etc.) (EU Exit) Regulations 2019

Volume 796: debated on Monday 25 March 2019

Considered in Grand Committee

Moved by

That the Grand Committee do consider the Law Applicable to Contractual Obligations and Non-Contractual Obligations (Amendment etc.) (EU Exit) Regulations 2019.

My Lords, as before, this instrument forms part of the Government’s ongoing work to ensure that there are functioning domestic laws in the event that the United Kingdom leaves the European Union without a future deal on civil judicial co-operation. Of course, as I have indicated before, the Government’s priority is to secure that we leave the European Union with an agreement that will address these matters. This instrument relates solely to the situation in which we have to accommodate no-deal exit preparations. In the event that we enter an agreement and there is an implementation period, the coming into force of this instrument will be deferred until the end of that implementation period. Of course, its terms and applicability would be considered in the light of any future agreement secured during the implementation period.

The instrument relates to the existing European Union rules that determine which country’s laws apply when citizens have cross-border obligations, such as when they are buying or selling goods and services. They apply to both contractual and non-contractual matters. An example of a cross-border contractual matter would be a contract for the sale of goods by a company in France to a company in England. An example of a non-contractual matter would be the duty of care owed by a party in one EU country to a client based in another—for example, not to give negligent advice that causes financial loss. The rules are known as applicable law or conflict of law rules, and are entirely separate and distinct from the jurisdiction rules that determine which country’s courts should hear a cross-border dispute. They are an important part of the EU civil judicial co-operation framework and they enhance legal certainty, which in turn underpins trade and commerce between member states—and, indeed, between member states and the rest of the world.

The EU applicable law rules are currently found in two main instruments: the Rome I and Rome II regulations. The Rome I regulation on the law applicable to contractual obligations is a directly applicable EU regulation. It applies to contracts formed on and after 17 December 2009. It is the current law in all EU member states other than Denmark, which opted out of this regulation. I should note that the Rome I regulation was preceded by the 1980 Rome Convention on the Law Applicable to Contractual Obligations, a treaty to which the UK and a number of now-EU member states are still contracting parties. That treaty came into force in the United Kingdom on 1 April 1991 and was implemented through the Contracts (Applicable Law) Act 1990. It continues to apply to any contracts entered into between April 1991 and 16 December 2009. Of course, such contracts might conceivably still be in force today; also, it still applies to contracts with Denmark because it opted out of the subsequent regulation. The Rome II regulation on the law applicable to non-contractual obligations is also a directly applicable EU regulation. It commenced on 11 January 2009 and, like Rome I, is the law in all EU member states other than Denmark.

If I may, I will refer simply to the “Rome rules” in addressing this matter. In each case, the Rome rules start from the premise that parties subject at least to certain limitations are entitled to choose the country’s law that applies to their contractual or non-contractual obligations. They operate so that, provided that the requirements of the rules are complied with, their choice of law is valid, will be respected by the courts of a participating EU member state and will be applied to determine any dispute. Where the parties have not chosen a country’s law, the Rome rules lay down a set of default rules to enable parties and the courts to determine which country’s laws will apply.

There are both general and specific default rules. For contractual matters, the general default rule in Rome I is that the applicable law should be the law of the country with which the contract is most closely connected. For non-contractual matters under Rome II, it is the law of the country in which the damage occurs. In addition, special rules apply to particular types of contractual and non-contractual matters. For example, Rome I contains rules specific to insurance contracts, consumer contracts and employment contracts, while Rome II contains rules specific to product liability, unfair competition and environmental damage.

Although part of the EU civil judicial co-operation framework, the Rome rules differ from the other EU rules in that framework in one important respect. The Rome rules do not, for the most part, rely on reciprocity to operate effectively between member states. Participating EU member state courts must apply the applicable law determined by the rules, irrespective of whether that law is the law of an EU member state or a non-EU country. For example, if you are in France, the French courts are obliged to apply those rules even though your choice of law may be Russian, American or that of any other state outwith the EU. That is essentially why we are able to retain these rules in domestic law going forward.

This statutory instrument implements the Rome rules in the event that we leave without a deal by retaining the rules as domestic law, post exit. Of course, a benefit of that is ensuring that UK citizens, businesses and consumers continue to have clear and workable rules on which law applies to cross-border situations they may find themselves in. Consequently, when we leave the EU and in the event that we do so without a deal, the Rome I and II regulations will effectively be retained as domestic law; under the provisions of the withdrawal Act 2018, they will become retained European law.

However, certain amendments are required because there will be some differences in how the Rome rules are applied by courts in the United Kingdom and those in EU member states, post exit. Due to the way in which the EU rules are constructed, EU member states may treat UK cases slightly differently in some specific instances, for example where Rome I and II refer specifically to member states or the European community. We will have to accommodate that when we bring the matter into domestic law; we have therefore amended these references. Our status as a contracting party will alter but we will have those rules in our domestic law as retained European law.

However, the position regarding the Rome convention —the earlier convention—is different because our status as a contracting party to it will terminate as a matter of international law once the UK has left the EU. The convention will no longer be binding on the United Kingdom. The approach taken in this instrument is that the substantive rules of the convention will continue and are brought into domestic law but, as I noted before, they apply only to contracts entered into up to 16 December 2009 and in respect of Denmark. One change to the convention provisions will be that UK courts will no longer be in a position under the convention rules to refer questions of interpretation of the 1980 Rome convention to the Court of Justice of the European Union.

An impact assessment has been prepared for this instrument and published. It concluded that the impact on business and other bodies will be negligible. The amendments to retained EU law and domestic legislation in this instrument merely correct EU exit-related deficiencies with regard to the Rome I and Rome II provisions, and will continue to be applied in the United Kingdom as domestic law, post exit.

I should also mention consultation. There is a large measure of support from the Law Society and the Bar Council of England and Wales with regard to this matter. The draft instrument was published and deposited in the House Library in March 2018. A small number of comments were received in response to that publication. Those comments focused on areas where the retained version of the rules in the UK will diverge from the rules as they apply in EU member states. The comments made in that context have been taken up. One example is in the context of the derogations from the Rome rules; for example, a derogation in respect of insurance contracts if the relevant insurance is in a member state. We will cease to be a member state, so we have had to take out the reference to “member state” and put in “a relevant state”; a relevant state is a member state or the United Kingdom for those purposes. Of course, if the rules continue to apply in the EU 27, that does not include the United Kingdom because it will no longer be within the relevant definition.

Our approach has been to retain in domestic law as far as conceivably possible the relevant Rome I and Rome II provisions, and to apply the provisions of the convention. I beg to move.

My Lords, I think it very appropriate that the Ministry of Justice should decide as a principle as far as possible to preserve the existing rules as they currently apply in the UK immediately after exit day. The purpose is,

“to provide maximum certainty and stability for businesses and individuals”.

However, I am concerned about the impact on business, even though the impact assessment does not throw up anything in particular. I am always very conscious of the strength of Hong Kong, which built its reputation and financial power on the fact that it uses English common law as the basis of its legal system. That means that contracts are readily made and understood, which has been of great economic benefit to Hong Kong. I notice that the impact assessment refers to the,

“strong international reputation as a centre of legal excellence”,

that this country currently enjoys. Anyone connected with the law knows that our legal profession has a great reputation, English law is frequently the preferred law and English courts are used even though a particular dispute has nothing to do with England, so this is a very profitable part of the legal world.

I shall take as an example one matter referred to in paragraph 7.7 of the Explanatory Memorandum, which refers to,

“the law applicable to non-contractual obligations arising from infringements of unitary EU intellectual property rights … Trade Marks … Design Rights and … Plant Variety Rights. These unitary EU IP rights will no longer apply in the UK … and UK courts will no longer hear proceedings relating to such rights after exit day”.

It seems to me that there is a whole area of law which may be cut out from the jurisdiction of English courts and the services of English lawyers.

That is compounded by the fact that these regulations remove the ability of UK courts to refer questions of interpretation of the 1980 Rome convention to the Court of Justice of the European Union—to my mind, that is a significant restriction—just as the interpretation of retained EU law generally cannot be decided by that court. We are going from a well understood legal system to something that is much more limited than we have been used to.

On the broad basis, however, the fact that the rights are generally retained is to be welcomed.

My Lords, in an attempt once more to be succinct, I can echo the point that the noble Lord, Lord Thomas, was making. The concerns from this side are essentially about regulatory diversion. I do not think anybody is going to object to these regulations; the concern is with ongoing regulatory divergence and its potential impact, whether it is on unfair competition cases or IP cases and so on. Perhaps the Minister might consider briefly that risk of regulatory divergence in his reply.

In relation to insurance, the Explanatory Memorandum says:

“The Government engaged with representatives of the insurance industry”,

in relation to “insurance risks”. Can the Minister outline the types of risks identified in that engagement? We are told that banks and insurers are shifting hundreds of billions of pounds in assets out of the UK ahead of exit day to keep their contracts and policies within the EU area. We have learned that Aviva, Britain’s second largest insurer, will transfer around £9 billion in assets to a new Irish company, for example. Does the Minister agree with having that sort of risk to our economy? Does this reflect the concern about different outcomes that could result from insurance contract cases being resolved differently in our courts and those of our EU partners in the future?

As I say, my general proposition is on the risks of regulatory divergence, but one can hardly object to the instrument itself.

I am obliged to the noble Lord and to the noble Baroness for their observations. As the noble Lord, Lord Thomas, observed, there will no longer be scope for a reference to the Court of Justice of the European Union over the construction or interpretation of the convention. Given that the convention has been there since 1980, that may already have happened but we cannot say that it would never have happened again. But I say to the noble Lord—and I address this to the noble Baroness, Lady Chakrabarti as well—that, although there is no longer a basis for a reference by a UK court to the Court of Justice, the UK courts may of course have regard to the decisions of the Court of Justice going forward. Quite sensibly, they would have regard to decisions that bore upon the interpretation of the convention, or of Rome I and II as well. That would be of relevance to the incorporation in domestic law of provisions which had their genesis in those European Union provisions.

The immediate matter of insurance is quite narrow and concerns one of the limited derogations from the freedom to choose your own law, as it were. There is a limitation about choice of law where an insurance contract contains provision to cover risks located in the European Union. Essentially, there cannot be an insurance contract that covers risks in an EU member state where the law of Russia is chosen as the relevant law for resolving the contract. The difficulty faced in drafting these regulations was that the reference under the derogation was to a risk in an EU member state. We were going to be concerned not only with a risk in an EU member state but with a risk in the United Kingdom. This is why we have had to move from reference to “member state” to “relevant state”, which is, in turn, defined by reference to member states and the United Kingdom. It is a fairly narrow move, which I do not believe is, of itself, going to impact on the choice or application of law with regard to the type of contract to any material extent. I do not see how it would impact on the transfer of assets such as was referred to by the noble Baroness, Lady Chakrabarti. This is not what this regulation is addressing.

I acknowledge that, if we leave the European Union without a deal—which is not this Government’s preferred option—there will be issues for banks, insurance companies and others with regard to their future arrangements in the European Union. No one would take away from that. That said, this is essentially implementing an existing scheme with just those changes necessary to make sure it operates in domestic law. I do not believe this is going to take away from the attractiveness of English law—or, indeed, Scots law—as a system for the resolution of commercial disputes. English law in particular remains the lingua franca for charter parties, major commercial contracts and so on. Because of the flexibility of common law, it will continue to be used for this reason. I do not see that this is going to result in any major change. No doubt there are options when it comes to choosing a common law system—such as the law of Hong Kong, Singapore or New York, for example. That already exists and we deal with it.

Noting all the observations that have been made, I beg to move.

Motion agreed.