Posts Tagged Rome Convention

Martins v Dekra Claims. Limitation periods as ‘overriding mandatory rules’ under Rome II.

Case C‑149/18 Martins v Dekra Claims gave the Court of Justice an opportunity (it held end of January) essentially to confirm its Unamar case-law, specifically with respect to limitation periods.

The Portuguese claimant’s vehicle was damaged in an accident in Spain in August 2015. He issued proceedings in Portugal in November 2016 to recover his uninsured losses. Under Portuguese law, the lex fori, the limitation period is 3 years. Under Spanish law, the lex causae per Rome II, limitation is fixed at 1 year.

The Court first of all re-emphasises the importance of co-ordinated interpretation of Rome I and II, here with respect to the terminology of the two Regulations which in the French version in particular differs with respect to the use of the term ‘lois de police’ (Article 9 Rome I) and ‘dispositions impératives dérogatoires’  (Article 16 Rome II). The lois de police of Rome I (albeit with respect to the Rome Convention 1980) had already been interpreted in Unamar, leading to the first of the two conditions discussed below.

The Court effectively held there is little limit content-wise to the possibility for courts to invoke the lois de police /overriding mandatory law provision of Article 9 Rome II. Despite Article 15 Rome II verbatim mentioning limitation periods as being covered by the lex causae (but see the confusion on that reported in my post on Kik this week), limitation periods foreseen in the lex fori may be given priority.

This is subject to two conditions:

firstly, the national court cannot interpret any odd lex fori provision as being covered by the lois de police exception: here the Court re-emphasises the Rome I /II parallel by making the Unamar test apply to Rome II: at 31: ‘the referring court must find, on the basis of a detailed analysis of the wording, general scheme, objectives and the context in which that provision was adopted, that it is of such importance in the national legal order that it justifies a departure from the applicable law.’ Here, the fact that limitation periods are mentioned in so many words in Article 15, comes into play: at 34: given that express reference, the application of the overriding mandatory law exception ‘would require the identification of particularly important reasons, such as a manifest infringement of the right to an effective remedy and to effective judicial protection arising from the application of the law designated as applicable pursuant to Article 4 of the Rome II Regulation.’

secondly, and of course redundantly but worth re-emphasising: the rule at issue must not have been harmonised by secondary EU law. As Alistair Kinley points out, the Motor Insurance Directive (MID) 2009/103 is currently being amended and a limitation period of minimum 4 years is being suggested – subject even to gold plating. That latter prospect of course opens up all sorts of interesting discussions particularly viz Article 3(4) Rome I.

Geert.

(Handbook of) European Private International Law, 2nd ed. 2016, Chapter 3, Heading 3.2.8, Heading 3.2.8.3.

 

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Danilina v Chernukin: how a very Russian case triggers the proper law of the contract under the Rome Convention.

A little bit of factual background is required to understand [2019] EWHC 173 (Comm) Danilina v Chernukin. It concerns a valuable site in Central Moscow (readers of the blog and students of mine will now no longer wonder why this is being litigated in England) which is, indirectly, the subject of a Shareholder Agreement dated 31 May 2005 (the “SHA”). The issue is whether Vladimir Chernukhin, who is not named as a party to the SHA is in fact party to the SHA as a disclosed principal of Lolita Danilina, who is named as a party to the SHA. Mr. Chernukhin and Mrs. Danilina had been in a relationship; it is Mr. Chernukhin’s case that she was a named party because she was acting as his nominee or agent.

That is the purely business side of the litigation – there is also a family assets angle: Ms Danilina has a claim arising out of what she argues to have been an agreement between her and Mr. Chernukhin in 2007 for the division of their assets after their relationship had come to an end.

The latter issue is the ‘2007 Agreement’ and it is this which is of interest to the blog: Teare J at 324: Mrs. Danilina seeks to prove alleges the following, quite detailed, agreement: a) TGM would remain (as it always was) as an asset belonging to Mrs. Danilina and her alone; b) the assets accumulated between them jointly and which they regarded as family assets would be distributed between them on an effectively equal basis with: i) Mrs. Danilina retaining and/or taking those residential real property assets located within Russia, ii) Mr. Chernukhin having those residential real property assets located outside of Russia and iii) save for certain chattels such as cars and the weapon collection (which were to be owned by Mr. Chernukhin) and jewellery and artwork in Russia (which were to be owned by Mrs. Danilina), the balance of their assets would be split equally and Mrs. Danilina’s 50% share held in a trust for her benefit; c) a new structure would be required to reflect these agreements; and d) Mr. Chernukhin would be responsible for taking the necessary steps to give effect to the agreement.

Teare J starts with the bootstrap /von Munchausen: at 325: it is necessary to begin by considering what would be the governing law of the 2007 agreement, if it was made on the terms alleged by Mrs. Danilina. The reason for this is that it is submitted on behalf of Mr. Chernukhin that the agreement, if made, would be governed by Russian law, and that there are provisions of Russian law that affect the admissibility of witness testimony in proving the existence of an oral agreement. Being a contract entered into prior to 16 December 2009, the proper law of the 2007 Agreement would be determined under the Rome Convention on the law applicable to contractual obligations – not the later Rome Regulation.

Was there choice of law “expressed or demonstrated with reasonable certainty by … the circumstances of the case’ (per Article 3(1) Rome Convention? [I have included Articles 3 and 4 in relevant part below]

At 327 are cited (i) the fact that “Mr. Chernukhin had fled Russia in 2004 in an effort to make a clean break from Russian law and jurisdiction”; (ii) that Mrs. Danilina assisted him in moving to England, including by sending legal documents there; (iii) in 2007 Mr. Chernukhin was seeking English matrimonial law advice in relation to his assets, prior to his marriage to Mrs. Chernukhin. With Teare J I do not think this is sufficient to amount to a choice for the purposes of article 3. They do not amount to a positive choice of law “expressed or demonstrated with reasonable certainty.”

Consequently Article 4 is engaged.

Presumption of characteristic performance. It was submitted on behalf of Mrs. Danilina (at 328) that England is the “most closely connected” country, under the presumption in article 4(2). It is said that the characteristic performance under the agreement was to create the relevant trust structure for dividing, managing and investing the assets. The performer of these obligations was Mr. Chernukhin, who was and is resident in England. Teare J agrees: at 330: the characteristic performance of the agreement was primarily to be performed by Mr. Chernukhin. On Mrs. Danilina’s case, Mr. Chernukhin was entrusted to divide, invest and structure significant liquid and illiquid assets, of which Mrs. Danilina was in large part unaware.

Displacement of the presumption? Mrs. Danilina then submits that this presumption should not lightly be displaced.

This section discusses a core challenge to Article 4, which is the continental European but mostly EU-driven quest for predictability, with the more common law oriented search for the ‘proper’ law of the contract. In Article 4 terms (similarly under the current Article  Rome I): per Samcrete Egypt Engineers v Land Rover Exports Ltd [2001] EWCA Civ 2019, at [41], “unless art.4(2) is 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.” Nonetheless, “the presumption may most easily be rebutted in those cases where the place of performance differs from the place of business of the party whose performance is characteristic of the contract” (See Bank of Baroda v Vysya Bank Ltd. [1994] 2 Lloyd’s Rep 87, 93, in the context of a bank’s place of central administration).

Teare J leans on Samcrete Egypt Engineers and rejects the suggestions made (at 329) to displace the presumption. There were that “the principal subject-matter was assets based in Russia / assets acquired using money generated in Russia and while the parties were resident in Russia.” Further, the Agreement is said to be “akin” to a divorce arrangement pursuant to the Russian Family Code, and of a relationship which occurred primarily or exclusively in Russia. Finally, the Agreement as alleged would have involved performance by both Mrs. Danilina and Mr. Chernukhin, distributing (including, where relevant, by re-registration of shares and real property) their various assets. However (at 330) ‘there are indeed some factors that might otherwise point to Russia being “most closely connected” (and other factors pointing to other jurisdictions, such as the use of Channel Islands trusts and the fact that the agreement was allegedly concluded in Zurich), these factors are not, in my judgment, sufficient to displace the presumption in article.4(2).’

Proper law of the contract is English law (discussion of the Russian oral evidence issue is made obiter at 332 ff). Tear J does signal at 331 that per Article 4(3) at the merits stage, provision may have to be made for Russian law as the lex rei sitae, for some parts of the agreement. Eventually the High Court finds on the basis of English law that there was no 2007 Agreement – although there is an issue of breach of a trust agreement and that may be litigated.

Fun with Rome.

Geert.

(Handbook of) European Private International Law, 2nd ed. 2016, Chapter 3, Heading 3.2.4, Heading 3.2.6.

 

 

Article 3 Freedom of choice

1. A contract shall be governed by the law chosen by the parties. The choice must be expressed or demonstrated with reasonable certainty by the terms of the contract or the circumstances of the case. By their choice the parties can select the law applicable to the whole or a part only of the contract.

2. …

3. The fact that the parties have chosen a foreign law, whether or not accompanied by the choice of a foreign tribunal, shall not, where all the other elements relevant to the situation at the time of the choice are connected with one country only, prejudice the application of rules of the law at the country which cannot be derogated from by contract, hereinafter called ‘mandatory rules`.

4. …

Article 4 Applicable law in the absence of choice

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. 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. 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. …

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.

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KA Finanz. The CJEU finds it does not need to entertain the corporate exception in European PIL and turns to EU corporate law instead.

Thank you, Matthias Storme, for alerting me late last night that judgment was issued in Case C-483/13 KA Finanz AG. The CJEU is asked to clarify the ‘corporate exception’ to the Rome Convention and subsequent Regulation on the law applicable to contractual obligations. The two main questions ask whether the ‘company law’ excepted area includes (a) reorganisations such as mergers and divisions, and (b) in connection with reorganisations, the creditor protection provision in Article 15 of Directive 78/855 concerning mergers of public limited liability companies, and of its successor, Directive 2011/35. I have a little more on the background in previous posting and I expressed my disappointment with Bot AG’s Opinion here.

The Court, like the AG, justifiably rejects a great deal of the questions as inadmissible, mainly due to the secondary law, interpretation of which is sought, not applying ratione temporis, to the facts at issue. It then in essence simply turns to European company law, in particular Directive 2005/56, to settle the issue. Why exhaust oneself with analysis of the corporate exception, if a different piece of EU law exhaustively regulates the issue? At 56 ff

It is stated in Article 2(2)(a) of Directive 2005/56 that a merger by acquisition is an operation whereby one or more companies, on being dissolved without going into liquidation, transfer all their assets and liabilities to another existing company, namely the acquiring company.

As regards the effects of such an operation, it is stated in Article 14(2)(a) of Directive 2005/56 that a cross-border merger brings about, from the date when the merger takes effect, the transfer of all the assets and liabilities of the company being acquired to the acquiring company.A merger by acquisition therefore entails the acquisition by the acquiring company of the company being acquired in its entirety, without extinguishing the obligations that a winding-up would have brought about, and, without novation, has the effect of substituting the acquiring company for the company being acquired as party to all of the contracts concluded by the latter. Consequently, the law which was applicable to those contracts before the merger continues to be applicable after the merger. It follows that EU law must be interpreted as meaning that the law applicable following a cross-border merger by acquisition to the interpretation of a loan contract taken out by the acquired company, such as the loan contracts at issue in the main proceedings, to the performance of the obligations under the contract and to how those obligations are extinguished is the law which was applicable to that contract before the merger.

(here: German law).

I appreciate the narrow set of facts upon which the CJEU holds allows one to distinguish. The spirit of the Court’s judgment in my view must however be what I have advocated for some time. Other than for a narrow set of issues immediately surrounding the very creation, life and death of the merged company, for which lex societatis applies, European private international law upholds lex contractus (often: lex voluntatis: the law so chosen by the parties) for the considerable amount of contractual satellites involving a merger and similar operations. Rome I is fully engaged for these contracts, including its provisions on third party impact of a change in governing law (this is relevant where the parties to the merger, decide to amend applicable law of the inherited contracts).

Geert.

 (Handbook of) EU private international law, 2nd ed. 2016, Chapter 2, Heading 2.2.6.5, Chapter 3, Heading 3.2.2 .

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Happy days!: ‘closest and most real connection’ for identifying lex contractus. Ontario CA in Lilydale v Meyn.

Lilydale v Meyn at the Ontario Court of Appeal (held April 2015 but only reaching me now – thank you to Michael Shafler and colleagues for flagging) is a useful reminder of the common law approach to determining lex contractus in the absence of choice of law. (Here of course an inter-State conflicts issue between Ontario and Alberta). Laskin JA refers in support to english precedent, summarised in quoted passage of Cheshire’s Private International Law:

The court must take into account, for instance, the following matters: the domicil and even the residence of the parties; the national character of a corporation and the place where its principal place of business is situated; the place where the contract is made and the place where it is to be performed; the style in which the contract is drafted, as, for instance, whether the language is appropriate to one system of law, but inappropriate to another; the fact that a certain stipulation is valid under one law but void under another … the economic connexion of the contract with some other transaction … the nature of the subject matter or its situs; the head office of an insurance company, whose activities range over many countries; and, in short, any other fact which serves to localize the contract.

The motion judge’s findings on the relevant criteria were held to be reasonable, as was her overall conclusion that the closest and most real connection to the contract was Ontario.

The case is an interesting reminder of what in the Rome I Regulation is now the final resort, should none of the relevant presumptions in Article 4 apply.

An interesting point in the judgment is the main reason why parties prefer one law over the other: at 3: ‘The issue is important because Alberta and Ontario have different ultimate limitation periods. Even taking into account discoverability, Alberta’s ultimate limitation period is 10 years; Ontario’s is 15 years. The parties agreed that Lilydale’s cause of action arose no later than August 31, 1994. Therefore, as Lilydale did not sue until January 2006, if Alberta law applied, its action was statute-barred; if Ontario law applied, it was not.’

Aren’t statutes of limitation under Canadian conflict of laws, covered by lex fori, as procedural issues, and not, as is seemingly accepted here, lex causae?

Geert.

 

 

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Winter has truly arrived. Bot AG skates around lex societatis issues in KA Finanz.

In Case C-483/13 KA Finanz AG, the CJEU is asked to clarify the ‘corporate exception’ to the Rome Convention and subsequent Regulation on the law applicable to contractual obligations. The two main questions ask whether the ‘company law’ excepted area includes (a) reorganisations such as mergers and divisions, and (b) in connection with reorganisations, the creditor protection provision in Article 15 of Directive 78/855 concerning mergers of public limited liability companies, and of its successor, Directive 2011/35. I have a little more on the background in previous posting. The Opinion itself has a complete overview of the issues at stake.

I suggested in my previous posting that lest the complete file posted with the Court give more detail, quite a few of the preliminary questions might be considered inadmissible due to a lack of specification in the factual circumstances.

Bot AG, who opined yesterday (at the time of posting, the English version of the Opinion was not yet available), has considerably slimmed down the list of questions eligible for answer, due to the (non-) application ratione temporis of secondary EU law at issue: this includes the Rome I Regulation. However he also, more puzzlingly, skates around the question concerning the application of the corporate exception of the 1980 Rome Convention, despite the judgment which is being appealed with the referring court, having made that exception the corner piece of its conflicts analysis. In particular, it considered that the consequences of a merger are part of the corporate status of the company concerned and that the transfer of assets within the context of a merger consequently need to be assessed viz-a-viz the company’s lex societatis: Austrian law, and not, as suggested by claimants, German law as the lex contractus relevant to the assets concerned (bonds issued by the corporate predecessor of the new corporation).

The AG focuses his analysis entirely on the specific qualification of the contract at issue (conclusion: sui generis), and on Directive 2005/56. In paras 47-48, he suggests that contractual obligations of the bank’s predecessor, per Directive 2005/56, are transferred to the corporate successor, including the lex contractus of those agreements. One can build an assumption around those paras, that the AG suggests a narrow interpretation of the corporate exception to the Rome Convention, etc. However it is quite unusual for one to have to second-guess an AG’s Opinion. Judicial economy is usually the signature of the CJEU itself, not its Advocate Generals.

I am now quite curious what the CJEU will make of it all.

Geert.

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Hague principles on Choice of law in international commercial contracts. A quick and dirty comparison with Rome I.

I have delayed reporting on the Hague Principles on choice of law in international commercial contract for exam reasons. The principles (and accompanying commentary) have not taken the form of a classic Hague convention, rather, it is hoped that they inspire practice. Bottom-up harmonisation, in other words. For the EU, the Rome I Regulation evidently already harmonises choice of law hence the principles must not be followed where Rome I applies. However in particular given the principles’ ambition to be applied by arbitral tribunals, they may have some effect in the EU, too.

I asked my students to compare the Principles with the Rome I Regulation. Such quick and dirty scan, without wishing to be complete, reveals the following: (I take a bullet-point approach such one might follow in an exam setting. = refers to similarities; to differences

  • ≠ The Hague principles concern choice of law principles only. Rome I covers applicable law in the wider sense (it also determines applicable law if no choice of law has been made).
  • ≠: The Principles apply to courts and arbitral tribunals. General consensus is that arbitral panels subject to the laws of an EU Member State as the lex curia are not bound by Rome I.
  • ≠The Hague principles only apply B2B, not B2C. They deal with international ‘commercial’ contracts only. Famously Rome I includes and indeed pampers B2C contracts.
  • Purely domestic contracts are covered by Rome I, with choice of law being corrected to a considerable degree. ≠ Hague principles: these do not cover purely domestic contracts because they are not ‘international’.
  • = party autonomy and depecage are supported in both.
  • = universal character: Parties may choose any law, they or the contract need not have any material link with that law.
  • ≠ rules of law. Rome I probably allows choice of State law only (its recitals are inconclusive, as is its legislative history). Hague Principles: allows parties to opt for non-State law.
  • Tacit choice of law is effectively dealt with the same in both.
  • Scope of the chosen law: while more or less similar, one obvious ≠ is that the Hague Principles cover culpa in contrahendo. In the EU, this is subject to the Rome II Regulation.
  • Article 11 of the Hague Principles allow for a wider remit for courts and tribunals to apply overriding mandatory law that is not that of the forum.
  • Article 9(2): formal validity of the contract may be established by many a law that might have a bearing on it. Favor negoti, in other words: as in Rome I.

A fun exercise, all in all. I for one am curious how arbitral tribunals will approach the principles.

Geert.

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KA Finanz: On the ‘corporate exception’ of European private international law

In Case C-483/13 KA Finanz AG, the ECJ is asked to clarify the ‘corporate exception’ to the Rome Convention and subsequent Regulation on the law applicable to contractual obligations. The two main questions ask whether the ‘company law’ excepted area includes (a) reorganisations such as mergers and divisions, and (b) in connection with reorganisations, the creditor protection provision in Article 15 of Directive 78/855 concerning mergers of public limited liability companies, and of its successor, Directive 2011/35.

(Creditor protection, incidentally, was also addressed in C-557/13 Lutz, judgment held last week, within the context of insolvency proceedings. I shall have a posting on that case soon).

Reuters tells me ‘KA Finanz was split off from nationalised lender Kommunalkredit in an attempt to secure a sustainable future for the rest of the public sector finance specialist firm following the global financial crisis’. KA Finaz therefore is what is generally referred to as a ‘Bad Bank’.

The referring court, Austria’s Oberster Gerichtshof, would seem to be hedging its bets on whether the Rome Convention or the Regulation applies to the contract, and ditto for the 1978 Directive or the 2011 Directive aforementioned. The file may reveal more factual detail than the application as published, however the questions as phrased (namely quite speculatively rather than file related) probably will run into trouble on the admissability front, I imagine.

At the time of adoption of the convention, the Giuliano Lagarde Report went into a bit more detail as to what is and is not excluded:

Confirming this exclusion, the Group stated that it affects all the complex acts (contractual administrative, registration) which are necessary to the creation of a company or firm and to the regulation of its internal organization and winding up, i. e. acts which fall within the scope of company law. On the other hand, acts or preliminary contracts whose sole purpose is to create obligations between interested parties (promoters) with a view to forming a company or firm are not covered by the exclusion.

The subject may be a body with or without legal personality, profit-making or non-profit-making. Having regard to the differences which exist, it may be that certain relationships will be regarded as within the scope of company law or might be treated as being governed by that law (for example, societe de droit civil nicht-rechtsfahiger Verein, partnership, Vennootschap onder firma, etc.) in some countries but not in others. The rule has been made flexible in order to take account of the diversity of national laws.

Examples of ‘internal organization’ are: the calling of meetings, the right to vote, the necessary quorum, the appointment of officers of the company or firm, etc. ‘Winding-up’ would cover either the termination of the company or firm as provided by its constitution or by operation of law, or its disappearance by merger or other similar process.

At the request of the German delegation the Group extended the subparagraph (e) exclusion to the personal liability of members and organs, and also to the legal capacity of companies or firms. On the other hand the Group did not adopt the proposal that mergers and groupings should also be expressly mentioned, most of the delegations being of the opinion that mergers and groupings were already covered by the present wording.

This explanation does not necessarily of course clarify all. For instance, the Report would seem to suggest that ‘mergers and groupings’, at issue in KA Finanz, are covered by the exception. Presumably, given the nature of the remainder of the exception, this is limited to the actual final agreement creating the JV or merged company, and not to the complex set of agreements leading up to such creation, such as Memoranda of Understanding (MOUs), or non-disclosure agreements (NDAs). Along those lines and without at this time having revisited relevant scholarship outside my own, I would suggest creditor protection is not covered by the exception.

The Gerichtshof also seeks clarification on whether there areany requirements concerning the treatment of mergers in relation to conflict of laws to be inferred from European primary law such as the freedom of establishment under Article 49 TFEU, the freedom to provide services under Article 56 TFEU and the free movement of capital and payments under Article 63 TFEU, in particular as to whether the national law of the State of the outwardly merging company or the national law of the target company is to be applied?’ Again, without having seen more reference to fact in the actual referral, this question to me seems far too academic to prompt the ECJ into entertaining it.

The Court’s ledger shows the application as having been lodged on 31 October 2014. That means some movement on it ought to be expected soon.

Geert.

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