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Governing law: Unrelated Member State

in Law

Irish client contracting out assets for hire to Romanian customer seeks to put English law as governing law in its contract. Question. Can it? Our gut answer: Hell no! No nexus at all. What’s England got to do with it? Ireland got its independence long ago!

Good answer? No. Wrong advice! Here is why:

Romanian Civil Code (Article 2640 par. 1) refers to EU legislation by simply stating that the governing law for contractual obligations is to be determined in accordance with the legal framework of the European Union. Under Article 3 of the EU Regulation no. 593/2008 on the law applicable to contractual obligations (a.k.a. Rome I) (“Regulation”): “A contract shall be governed by the law chosen by the parties.  The choice shall be made expressly or be clearly reflected by the terms of the contract or the circumstances of the case.” The Regulation does not make any mention of nexus and thus it has been construed as allowing the parties to indicate the law of any jurisdiction from among the Member States of the European Union as the law governing their contract. Hence, the Irish client and its Romanian counterparty may choose English law as governing law even if it is unrelated to the subject of the contract.

Note, however, that this choice of law is not of absolute effect and courts may avoid it where they deem the local law as better situated to apply to the particular circumstance generatde by contract’s course of performance, e.g., foreclosures, seizure of assets, recordation with public registers, etc.  This interpretation results from the Regulation, Article 3 par. 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.”

But then there is this Brexit thing looming. If the UK exits from the Union, what becomes of our client’s choice of the English and Wales law? Will this choice of law continue to be a valid choice? Is the contract neutered of such clause and becomes one without a governing law, leaving to the courts the ultimate judgment of where the proper forum is (as per art. 4 of the Regulation)? Should the parties be advised to provide for a fall-back choice of law in case the first choice becomes invalid? In our case, this is probably the more cautious advice to provide.

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