Applicable law in international contracts: Rome I, Rome II and the CISG

The applicable law in an international contract is the national legal system that governs it, and commercial parties may in principle choose that law themselves. If they do not, the Rome I Regulation decides for them, and for the cross-border sale of goods the UN Sales Convention (CISG) often applies as well; the main limits are the mandatory protection of consumers and employees.

The applicable law decides how the contract is interpreted, what counts as a breach, which limitations of liability hold and how damages are calculated. Choosing a law is not the same as choosing a court, and a contract that regulates only one of the two is only half finished.

What does applicable law mean, and how does it differ from jurisdiction?

Applicable law answers the question which national law a court must apply; jurisdiction answers the question which court may hear the dispute. The two have separate rules, separate regulations and separate answers.

A Dutch court can perfectly well have jurisdiction in a case governed by German law, and a German court can apply Dutch law. Agreeing that disputes go to the court in Rotterdam therefore tells you nothing about whether Dutch law governs the contract.

The distinction matters commercially, because the applicable law decides the questions that determine the value of a claim. Does a penalty clause survive? Is an exclusion of consequential loss enforceable? How long does the limitation period run? May a party terminate for a minor breach, and who has to prove what? All of these are questions of substantive law. Two courts applying two different national laws to the same facts can reach genuinely different outcomes on the same contract.

Within the European Union, the law applicable to contractual obligations is determined by Regulation (EC) No 593/2008, known as Rome I. It has universal application: the law it points to is applied whether or not it is the law of an EU Member State. A Dutch court applying Rome I can therefore end up applying the law of England, Switzerland or Japan. Denmark is not bound by Rome I and continues to apply the 1980 Rome Convention, which produces similar but not identical results.

How do you choose the applicable law yourself?

You choose the law in the contract, preferably in an express clause. Article 3 of Rome I gives commercial parties broad freedom to do so.

The choice must be made expressly or be clearly demonstrated by the terms of the contract or the circumstances of the case. Parties may choose the law of a country that has no connection to the transaction. They may choose different laws for different parts of the contract, and they may change the chosen law later by agreement.

An express clause is always better than an implied one. Courts do accept an implied choice where, for example, the contract is drafted in the terminology of one legal system, refers to specific national statutes, or contains an exclusive jurisdiction clause for the courts of one country. But reading a choice out of such indications takes a hearing, evidence and costs, all of which one sentence in the contract would have avoided.

Two limits apply even to a valid choice.

• Where all other elements of the situation are located in a single country, the choice of a foreign law cannot set aside the mandatory rules of that country (Article 3(3) of Rome I).
• Where all other elements are located within the European Union, the choice of the law of a non-EU country cannot set aside mandatory EU law, as implemented in the country of the court (Article 3(4) of Rome I).

These limits stop a purely Dutch transaction from escaping Dutch or European law through a clause selecting the law of a distant country.

Which law applies if you have not chosen one?

If the contract is silent, Article 4 of Rome I applies. For the most common contracts, that is the law of the country where the seller or the service provider has its habitual residence.

Article 4 works through a list of contract types before falling back on a general test.

• A contract for the sale of goods is governed by the law of the country where the seller has its habitual residence.
• A contract for services is governed by the law of the country where the service provider has its habitual residence.
• A contract relating to a right in rem in, or a tenancy of, immovable property is in principle governed by the law of the country where the property is situated.
• A franchise contract is governed by the law of the country where the franchisee has its habitual residence, and a distribution contract by the law of the country where the distributor has its habitual residence.

Where the contract does not fit any of those categories, or fits more than one, it is governed by the law of the country where the party that must provide the characteristic performance has its habitual residence. The characteristic performance is the non-monetary one. Paying the price is what every contract has in common, so it is the delivery, the service, the licence or the transport that characterises the agreement.

For a company, habitual residence means its place of central administration. Where a branch or agency concludes the contract, it is the place where that branch or agency is located.

There is an escape clause. If it is clear from all the circumstances that the contract is manifestly more closely connected with another country, the law of that country applies instead (Article 4(3) of Rome I). This is a genuine exception, not an invitation to reargue the connecting factor, and courts use it sparingly. Where no characteristic performance can be identified at all, the contract is governed by the law of the country with which it is most closely connected.

Where are the limits of a choice of law?

A choice of law never removes the mandatory protection of consumers and employees, and it cannot set aside overriding mandatory rules or the public policy of the court’s country. Beyond those legal limits there is a practical one: an unfamiliar law is expensive to litigate.

Consumers

A choice of law never removes the protection that consumers enjoy under the law that would have applied without it. Under Article 6 of Rome I, where a business pursues its activities in, or directs them to, the country where the consumer has his habitual residence, the consumer keeps the benefit of the mandatory rules of that country, whatever the contract says. A Dutch webshop selling into Belgium cannot use a choice of Dutch law to strip Belgian consumers of Belgian protection, and the reverse is equally true.

Employees

Article 8 of Rome I does the same for employment contracts. The parties may choose a law, but that choice may not deprive the employee of the protection of the mandatory rules of the law that would apply without a choice. That is normally the law of the country in which, or from which, the employee habitually carries out the work, and a temporary posting abroad does not change that country.

In practice, this means an employer cannot contract out of Dutch dismissal protection for an employee who works in the Netherlands by choosing a more permissive foreign law.

Overriding mandatory rules and public policy

Beyond these protected groups sit the overriding mandatory provisions of Article 9 of Rome I. These are rules that a country regards as crucial for safeguarding its public interests, and they apply whatever law otherwise governs the contract. Sanctions and export controls, competition law, certain rules on agency and distribution and parts of financial supervision law can work in this way.

Finally, under Article 21 of Rome I a court may refuse to apply a provision of the designated foreign law if that would be manifestly incompatible with the public policy (openbare orde) of the court’s country. This is a narrow exception and is rarely successful, but it exists.

The practical limit

A separate limit is practical rather than legal. If neither party, neither adviser and no likely court knows the chosen law well, every dispute begins with expert evidence about foreign law before anyone reaches the merits. Choosing an unfamiliar neutral law to settle a negotiation is a decision with a price tag.

When does the Vienna Sales Convention apply?

For the international sale of goods between businesses, the United Nations Convention on Contracts for the International Sale of Goods (CISG), known in the Netherlands as the Weens Koopverdrag, often applies before national sales law does. It applies automatically unless the parties exclude it expressly.

The Netherlands is a contracting state, as are Germany, France, Belgium, Italy, Spain, China and the United States. The United Kingdom is not.

The Convention applies where the parties have their places of business in different contracting states. It also applies where the rules of private international law lead to the law of a contracting state. That second route surprises people: a choice of Dutch law in a contract with a supplier from a non-contracting state still brings the Convention into play, because the Convention forms part of Dutch law for international sales.

The Convention does not apply to consumer sales, sales by auction, sales of shares, securities, ships or aircraft, or contracts in which the main part of the seller’s obligations consists of supplying labour or other services.

Under Article 6 of the Convention, parties may exclude it entirely or in part, but the exclusion must be clear. A clause stating only that the contract is governed by Dutch law does not exclude it. A clause stating that the contract is governed by Dutch law, excluding the Vienna Sales Convention, does.

Whether excluding it is wise depends on which side of the transaction you are on. The Convention has a coherent system for conformity, notice of defects and termination (avoidance), which on some points works out more favourably for sellers than Dutch domestic sales law. Excluding it by reflex, as many sets of general terms and conditions still do, can be a decision that nobody actually took.

Which law applies to claims outside the contract?

Non-contractual claims, such as claims based on a wrongful act, are governed by the Rome II Regulation, and a contractual choice of law only covers them if the clause says so. As a rule, Rome II points to the law of the country where the damage occurs.

Tort, unjust enrichment, negotiations broken off in bad faith and product liability are governed by Regulation (EC) No 864/2007, known as Rome II. Its general rule is the law of the country in which the damage occurs, regardless of where the event that caused it took place and where indirect consequences are felt. If both parties have their habitual residence in the same country, the law of that country applies instead. There is an escape clause for a manifestly closer connection, which can include a connection through an existing contract between the parties.

Special rules apply in specific areas.

• Product liability follows a sequence of connecting factors that starts with the country where the injured person has his habitual residence, provided the product was marketed there.
• Unfair competition follows the law of the country where competitive relations are affected.
• Infringements of intellectual property rights follow the law of the country for which protection is claimed, and that rule cannot be set aside by agreement.

Rome II also allows parties to choose the law applicable to non-contractual obligations. Commercial parties can do so by an agreement freely negotiated before the event giving rise to the damage, or by any agreement after it.

The practical consequence is that a contractual choice of law clause should be drafted broadly enough to cover non-contractual claims arising out of or in connection with the contract. A clause limited to the contract itself leaves a claim in tort to be decided by rules the parties never considered.

Which court decides, and can you litigate in English?

Within the EU, the Brussels I bis Regulation decides which court has jurisdiction, and a written choice of court is in principle respected. In the Netherlands, the Netherlands Commercial Court hears international commercial disputes in English if the parties have agreed to that in writing.

Jurisdiction within the European Union is governed by Regulation (EU) No 1215/2012, the Brussels I bis Regulation. Article 25 gives effect to a choice of court agreement between the parties, made in writing or evidenced in writing. A court chosen in that way has exclusive jurisdiction, unless the parties agreed otherwise or the agreement is null and void as to its substantive validity.

Without a clause, the general rule is that a defendant is sued in the Member State where it is domiciled, with alternative courts for contract and tort. Where no European instrument applies, a Dutch court derives its jurisdiction from the Dutch Code of Civil Procedure (Wetboek van Burgerlijke Rechtsvordering).

The Netherlands offers a feature that is worth knowing about if the counterparty resists a Dutch court because of language. The Netherlands Commercial Court (NCC), a chamber of the Amsterdam District Court with an appeal chamber at the Amsterdam Court of Appeal, hears international commercial disputes in English and gives its judgments in English, provided the parties have agreed to this in writing. Court fees there are higher than in ordinary proceedings and are set by law, so check them before the clause is agreed.

Who pays the costs?

Costs work differently in the Netherlands than people often assume. The losing party is usually ordered to pay the winner’s court fee and bailiff’s costs, plus a contribution to the lawyer’s fees calculated on a fixed court scale (liquidatietarief) rather than on the actual invoice.

That contribution is usually well below the real cost of the case, so even a winning party rarely comes out cost-neutral. This is a material difference from countries where the losing party pays the full assessed costs, and it belongs in any comparison of courts.

Can the judgment be enforced?

Enforcement is the third question and the one most often forgotten. A judgment from an EU Member State can be enforced throughout the European Union without a declaration of enforceability. Outside the EU, enforcement depends on treaties or national rules, and a Dutch judgment against a party with all its assets in a country without an enforcement treaty may be worth little.

In that situation, arbitration is often the better answer, because the New York Convention on the recognition and enforcement of foreign arbitral awards binds the great majority of trading nations.

How do you draft a clause that actually works?

A workable clause names the governing law and extends it to non-contractual claims, deals with the CISG, names the court or arbitral institution, and makes clear that the reference is to substantive law. Then check it against the rest of the contract.

In concrete terms, a good clause does four things.

• It names the governing law and states that it applies to both contractual and non-contractual obligations arising out of or in connection with the agreement.
• If goods are involved, it states whether the Vienna Sales Convention applies or is excluded.
• It names the competent court, or the arbitral institution, the seat and the language.
• It makes clear that the reference is to substantive law and not to the conflict rules of that law. Rome I already excludes such a reference back (renvoi), but saying so avoids discussion in other forums.

Check the clause against the rest of the contract before signing. A choice of law in the main agreement combined with a different one in the attached general terms and conditions is a common and entirely avoidable source of disputes. So is a jurisdiction clause in one language version that does not match the other.

Where both parties refer to their own general terms, the battle of forms may mean that neither set applies. Under Dutch law, Article 6:225(3) of the Dutch Civil Code provides that the first set referred to prevails unless the other party expressly rejects it. The answer differs from country to country, which is exactly why the applicable law question comes first.

Finally, keep the clause proportionate. For a one-off purchase of standard goods, a short choice of Dutch law and the Dutch courts costs nothing and settles the question. For a long-term supply, licensing or joint venture arrangement, the choice deserves a real analysis of where the assets, the counterparties and the likely disputes are. Our corporate law guides cover the surrounding contractual issues in more detail.

What should you check as a seller or service provider?

Without a choice, Rome I usually points to your own law (Article 4). That default is useful, but only if the rest of the contract does not undo it.

• Check that the choice of law in the contract and in your general terms and conditions is the same.
• Decide deliberately whether the Vienna Sales Convention applies; a choice of Dutch law alone does not exclude it (Article 6 CISG).
• If you sell to consumers abroad, check the mandatory consumer rules of their country (Article 6 Rome I).
• Check whether a judgment can be enforced where the buyer’s assets are; if not, consider arbitration under the New York Convention.

What should you check as a buyer or customer?

Without a choice, the law of the other side usually applies. Check what that means before you sign, not after a defect appears.

• Check which law applies if the contract is silent, and whether you want to negotiate your own law instead.
• Under the Vienna Sales Convention, check the goods promptly and give notice of defects within a reasonable time (Articles 38 and 39 CISG).
• Check that the clause covers claims in tort as well as contract claims (Article 14 Rome II).
• Check where you would have to litigate and in which language, and what the court fees are.

What can we do for you with applicable law in international contracts?

Our contract lawyers advise businesses on the law and the court that govern their cross-border agreements; see also our corporate lawyer page.

• We draft choice of law and jurisdiction clauses that also cover non-contractual claims.
• We advise on whether to apply or exclude the Vienna Sales Convention for your sales.
• We check your contract against your general terms and conditions for conflicting clauses.
• We determine which law applies under Rome I or Rome II when no choice was made.
• We conduct proceedings in the Netherlands under Dutch or foreign law, including before the Netherlands Commercial Court.

Summary

• The applicable law and the competent court are two separate questions; regulate both in the contract.
• Commercial parties may choose the applicable law freely under Article 3 of Rome I; without a choice, the law of the seller or service provider usually applies.
• A choice of law cannot remove the mandatory protection of consumers and employees, or overriding mandatory rules.
• For the international sale of goods, the Vienna Sales Convention applies unless it is expressly excluded; a choice of Dutch law alone does not exclude it.
• Draft the clause so that it also covers non-contractual claims, and check that it matches your general terms and conditions.

Frequently asked questions