Which Country's Law Governs Your Contract in the EU: Choice of Law, Default Rules and Consumer Protection (Rome I Regulation (EC) No 593/2008)

An Italian company buys machinery from a German manufacturer. A Dutch consultant advises a Spanish hotel group. A Belgian family rents a flat on the Portuguese coast for two months from a landlord who also lives in Belgium. An Austrian consumer orders furniture from a French online shop. In each case, before anyone can say whether the contract was breached or how much is owed, someone has to answer an earlier question: which country's law applies to the contract? In the courts of the EU Member States bound by it, the answer comes from the Rome I Regulation.

This guide is written for businesses and individuals who make contracts across borders inside the EU, and for their advisers. It follows the text of Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I), as published in the Official Journal (L 177, 4 July 2008). Rome I answers one question only: which law applies to a contract. Which court may hear a dispute is a separate question governed by other rules, and what the contract means in substance depends on the national law that Rome I points to.

What Rome I covers, where and from when (Articles 1, 2, 25 and 28)

Rome I applies, in situations involving a conflict of laws, to contractual obligations in civil and commercial matters (Article 1(1)). It does not apply, in particular, to revenue, customs or administrative matters.

Article 1(2) excludes a list of matters from the Regulation even where a contract is involved. The list includes: the status or legal capacity of natural persons (without prejudice to Article 13); obligations arising out of family relationships and relationships deemed by the law applicable to them to have comparable effects, including maintenance obligations; matrimonial property regimes and comparable regimes, wills and succession; obligations under bills of exchange, cheques, promissory notes and other negotiable instruments to the extent that they arise out of their negotiable character; arbitration agreements and agreements on the choice of court; questions governed by the law of companies and other bodies, such as their creation, legal capacity, internal organisation or winding-up and the personal liability of officers and members as such for the company's obligations; whether an agent can bind a principal, or an organ a company, in relation to a third party; the constitution of trusts and the relationship between settlors, trustees and beneficiaries; obligations arising out of dealings prior to the conclusion of a contract; and certain insurance contracts for occupational benefits described in Article 1(2)(j). Evidence and procedure are also excluded, without prejudice to Article 18 (Article 1(3)).

Two exclusions deserve attention. A jurisdiction clause or an arbitration clause in a contract is not governed by Rome I, even though the rest of the contract is. And liability for what happened during negotiations, before a contract was concluded, falls outside Rome I.

Rome I has universal application: any law it specifies is applied whether or not it is the law of a Member State (Article 2). A court in Milan may therefore apply the law of New York or of Türkiye to a contract if Rome I points there.

As to time, the Regulation applies to contracts concluded after 17 December 2009 (Article 28). As to place, Denmark did not take part in its adoption and is not bound by it or subject to its application (recital 46), while Ireland notified its wish to take part (recital 44). Rome I does not prejudice the application of international conventions to which one or more Member States were parties when it was adopted and which lay down conflict-of-law rules for contracts; as between Member States, it takes precedence over conventions concluded exclusively between two or more of them on matters it governs (Article 25).

Choosing the law: freedom of choice and its limits (Article 3)

The starting point is party autonomy. Under Article 3(1), a contract is governed by the law chosen by the parties. The choice must be made expressly or clearly demonstrated by the terms of the contract or the circumstances of the case. The parties may choose a law for the whole contract or for part of it only.

The choice can be changed. Under Article 3(2), the parties may at any time agree to subject the contract to a different law, whether the earlier law resulted from a previous choice or from the other rules of the Regulation. A change made after the conclusion of the contract does not prejudice its formal validity under Article 11 and does not adversely affect the rights of third parties.

There are two important limits on a chosen law in contracts that are, in substance, connected to one place. Under Article 3(3), where all other elements relevant to the situation at the time of the choice are located in a country other than the country whose law has been chosen, the choice does not prejudice the application of the provisions of that other country's law which cannot be derogated from by agreement. Under Article 3(4), where all other elements relevant to the situation at the time of the choice are located in one or more Member States, choosing the law of a non-Member State does not prejudice the application of provisions of Community law which cannot be derogated from by agreement, where appropriate as implemented in the Member State of the forum.

Whether the parties actually agreed on the choice of law, and whether that agreement is valid, is determined under Articles 10, 11 and 13 (Article 3(5)): the existence and validity of consent, formal validity and incapacity, which are discussed below.

No choice of law: the default rules for each type of contract (Articles 4 and 19)

To the extent that the parties have not chosen the law, and without prejudice to Articles 5 to 8, Article 4(1) assigns a law to eight types of contract:

(a) a contract for the sale of goods: the law of the country where the seller has its habitual residence; (b) a contract for the provision of services: the law of the country where the service provider has its habitual residence; (c) a contract relating to a right in rem in immovable property or to a tenancy of immovable property: the law of the country where the property is situated; (d) notwithstanding point (c), a tenancy for temporary private use for no more than six consecutive months: the law of the country where the landlord has its habitual residence, provided that the tenant is a natural person and has its habitual residence in the same country; (e) a franchise contract: the law of the country where the franchisee has its habitual residence; (f) a distribution contract: the law of the country where the distributor has its habitual residence; (g) a sale of goods by auction: the law of the country where the auction takes place, if such a place can be determined; (h) a contract concluded within a multilateral system for financial instruments, as defined in Article 4(1)(h): the single law governing that system.

Where a contract is not covered by paragraph 1, or where its elements would be covered by more than one of points (a) to (h), Article 4(2) applies the law of the country where the party required to effect the characteristic performance of the contract has its habitual residence.

Two further rules complete the picture. Under the escape clause in Article 4(3), where it is clear from all the circumstances of the case that the contract is manifestly more closely connected with another country than the one indicated by paragraphs 1 or 2, the law of that other country applies; recital 20 adds that account should be taken, among other things, of whether the contract has a very close relationship with another contract or contracts. And under Article 4(4), where the applicable law cannot be determined under paragraphs 1 or 2, the contract is governed by the law of the country with which it is most closely connected.

Because so much depends on habitual residence, Article 19 defines it. The habitual residence of companies and other bodies is their place of central administration; that of a natural person acting in the course of business activity is their principal place of business (Article 19(1)). Where the contract is concluded in the course of the operations of a branch, agency or other establishment, or performance is the responsibility of such an establishment, its location is treated as the habitual residence (Article 19(2)). The relevant time is the time of the conclusion of the contract (Article 19(3)).

Applied to the examples in the introduction, and absent a choice of law: the machinery sale points to the German seller's law (Article 4(1)(a)); the consultancy contract to the Dutch consultant's law (Article 4(1)(b)); and the two-month holiday letting can point to Belgian law, as both landlord and tenant live in Belgium and the tenant is a natural person (Article 4(1)(d)). In each case the escape clause in Article 4(3) remains available where the conditions of that paragraph are met.

Consumer contracts: the consumer's own law as a floor (Articles 6 and 11(4))

Article 6 protects consumers. Without prejudice to Articles 5 and 7, a contract concluded by a natural person for a purpose which can be regarded as being outside their trade or profession (the consumer) with another person acting in the exercise of their trade or profession (the professional) is governed by the law of the country where the consumer has their habitual residence, provided that the professional either (a) pursues its commercial or professional activities in that country, or (b) by any means directs such activities to that country or to several countries including that country, and the contract falls within the scope of such activities (Article 6(1)).

The parties may still choose a law under Article 3, but under Article 6(2) the choice may not have the result of depriving the consumer of the protection afforded by the provisions that cannot be derogated from by agreement under the law that would have applied without a choice, that is, the law of the consumer's habitual residence. If the conditions in points (a) or (b) of Article 6(1) are not met, the law applicable to a contract between a consumer and a professional is determined under Articles 3 and 4 (Article 6(3)).

Article 6(4) lists contracts to which paragraphs 1 and 2 do not apply: (a) a contract for the supply of services where the services are to be supplied to the consumer exclusively in a country other than the one in which the consumer has their habitual residence; (b) a contract of carriage, other than a contract relating to package travel within the meaning of Directive 90/314/EEC; (c) a contract relating to a right in rem in immovable property or a tenancy of immovable property, other than a contract relating to a right to use immovable properties on a timeshare basis within the meaning of Directive 94/47/EC; (d) rights and obligations which constitute a financial instrument, and terms governing the issuance, public offers and takeover bids of transferable securities and the subscription and redemption of units in collective investment undertakings, so far as these do not constitute a financial service; and (e) a contract concluded within a system of the type in Article 4(1)(h).

Form follows the same logic: the general alternatives for formal validity in Article 11(1) to (3) do not apply to contracts within Article 6, and the form of such contracts is governed by the law of the country where the consumer has their habitual residence (Article 11(4)).

For the Austrian consumer in the introduction, if the French shop directs its activities to Austria and the order falls within them, Austrian law applies under Article 6(1); the parties may choose French law under Article 6(2), but that choice cannot take away the protection of the Austrian provisions that cannot be derogated from by agreement.

Carriage and employment contracts (Articles 5 and 8)

Carriage of goods. To the extent that the law has not been chosen, a contract for the carriage of goods is governed by the law of the country of habitual residence of the carrier, provided that the place of receipt, the place of delivery or the habitual residence of the consignor is also situated in that country; if not, the law of the country of the place of delivery as agreed by the parties applies (Article 5(1)).

Carriage of passengers. Without a choice, the law of the country where the passenger has their habitual residence applies, provided that either the place of departure or the place of destination is situated in that country; if not, the law of the country where the carrier has its habitual residence applies (Article 5(2)). The parties' freedom to choose is restricted: they may choose only the law of the country where (a) the passenger has their habitual residence, (b) the carrier has its habitual residence, (c) the carrier has its place of central administration, (d) the place of departure is situated or (e) the place of destination is situated. For both types of carriage, where it is clear from all the circumstances of the case that the contract, in the absence of a choice of law, is manifestly more closely connected with another country, the law of that other country applies (Article 5(3)).

Individual employment contracts. An employment contract is governed by the law chosen by the parties, but the choice may not have the result of depriving the employee of the protection afforded by the provisions that cannot be derogated from by agreement under the law that would have applied without a choice (Article 8(1)). Without a choice, the law of the country in which or, failing that, from which the employee habitually carries out their work applies; temporary employment in another country does not change that country (Article 8(2)). Where that law cannot be determined, the law of the country of the place of business through which the employee was engaged applies (Article 8(3)), and where it appears from the circumstances as a whole that the contract is more closely connected with a country other than that indicated in paragraphs 2 or 3, the law of that other country applies (Article 8(4)).

Limits on the applicable law: mandatory rules, public policy and validity (Articles 9, 10, 11, 13, 20 and 21)

Overriding mandatory provisions. Article 9(1) defines them as provisions the respect for which is regarded as crucial by a country for safeguarding its public interests, such as its political, social or economic organisation, to such an extent that they are applicable to any situation falling within their scope, irrespective of the law otherwise applicable. Nothing in the Regulation restricts the application of the overriding mandatory provisions of the law of the forum (Article 9(2)). Effect may be given to the overriding mandatory provisions of the law of the country where the obligations have to be or have been performed, in so far as they render the performance of the contract unlawful; in deciding whether to give them effect, regard is had to their nature and purpose and to the consequences of their application or non-application (Article 9(3)). Recital 37 states that this concept is to be distinguished from provisions which cannot be derogated from by agreement, and construed more restrictively.

Public policy. The application of a provision of the law specified by the Regulation may be refused only if such application is manifestly incompatible with the public policy (ordre public) of the forum (Article 21).

No renvoi. The law of a country specified by the Regulation means the rules of law in force in that country other than its rules of private international law, unless the Regulation provides otherwise (Article 20).

Consent and material validity. The existence and validity of a contract, or of any term, is determined by the law which would govern it under the Regulation if the contract or term were valid (Article 10(1)). A party may nevertheless rely on the law of the country of their habitual residence to establish that they did not consent, if it appears from the circumstances that it would not be reasonable to determine the effect of their conduct in accordance with the law specified in paragraph 1 (Article 10(2)).

Formal validity. A contract concluded between persons, or their agents, in the same country is formally valid if it satisfies the formal requirements of the law governing it in substance or of the law of the country where it is concluded (Article 11(1)). If they are in different countries, it is formally valid if it satisfies the requirements of the law governing it in substance, of the law of either country where a party or agent is present at the time of conclusion, or of the law of the country where either party had their habitual residence at that time (Article 11(2)). For contracts on rights in rem in, or tenancies of, immovable property, the formal requirements of the country where the property is situated apply if that law imposes them irrespective of where the contract is concluded and of the law governing it, and if they cannot be derogated from by agreement (Article 11(5)).

Incapacity. In a contract concluded between persons who are in the same country, a natural person who would have capacity under the law of that country may invoke incapacity under another country's law only if the other party was aware of it at the time of conclusion or was not aware of it as a result of negligence (Article 13).

What the governing law decides (Articles 12 and 18)

Once the law is identified, Article 12(1) lists what it governs in particular: (a) interpretation; (b) performance; (c) within the limits of the powers conferred on the court by its procedural law, the consequences of a total or partial breach of obligations, including the assessment of damages in so far as it is governed by rules of law; (d) the various ways of extinguishing obligations, and prescription and limitation of actions; and (e) the consequences of nullity of the contract. In relation to the manner of performance and the steps to be taken in the event of defective performance, regard is to be had to the law of the country in which performance takes place (Article 12(2)).

Article 18 adds two rules on proof. The governing law applies to the extent that, in matters of contractual obligations, it contains rules which raise presumptions of law or determine the burden of proof (Article 18(1)). A contract or an act intended to have legal effect may be proved by any mode of proof recognised by the law of the forum or by any of the laws referred to in Article 11 under which it is formally valid, provided that the forum can administer that mode of proof (Article 18(2)).

The practical consequence of Article 12(1)(d) deserves emphasis: the limitation period for a contractual claim is taken from the law governing the contract, not automatically from the law of the court hearing the case.

Practical steps before you sign, and when a dispute starts

1. Write the choice of law into the contract. An express clause avoids arguments about whether a choice is clearly demonstrated by the terms or circumstances (Article 3(1)). If you want different laws for different parts, say so expressly.

2. Deal separately with the forum and arbitration. Rome I does not govern jurisdiction clauses or arbitration agreements (Article 1(2)(e)); draft them with the rules that do apply to them in mind.

3. Check where the habitual residence is. For companies it is the place of central administration, for a branch-concluded contract the branch, assessed at the time of conclusion (Article 19).

4. Selling to consumers in other countries? If you pursue activities in, or direct them to, the consumer's country and the contract falls within those activities, and it is not one of the contracts listed in Article 6(4), the protection of the consumer's law that cannot be derogated from by agreement applies whatever law you choose (Article 6(1), (2), (4)).

5. Employing staff across borders? Identify the law that would apply without a choice under Article 8(2) to (4), starting with the country where, or from which, the work is habitually carried out; a chosen law cannot deprive the employee of the protection of that law's provisions that cannot be derogated from by agreement (Article 8(1)).

6. When a dispute starts, check limitation under the governing law. Prescription and limitation follow the law of the contract (Article 12(1)(d)).

7. Get advice in both countries where needed. Rome I points to a national law; what that law says about the dispute needs a lawyer qualified in it. Brisamo helps you find a business lawyer in the relevant country.

Frequently asked questions

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