Testing legal certainty under Rome I

The application of overriding provisions of the law of a particular state under Article 9 of Rome I is a threat to the governing law chosen by the parties to a contract.  Article 9 came under the spotlight at the height of the Greek economic crisis, when concerns arose as to whether there were circumstances in which Greek emergency legislation might be taken into account by Member State courts, thereby undermining the insulatory effect of a choice of English law in many loan and other commercial agreements.  Whilst the facts of this case (involving a teacher’s employment contract) are quite narrow, the CJEU’s ruling on the scope of Article 9 is of more general interest.  

Facts

The claimant was a Greek national employed as a teacher at a Greek primary school in Germany. His contract of employment commenced in 1996. It was agreed that the contract had since been amended and that it was governed by German law. In response to the economic crisis in Greece, the European Council issued a decision requiring Greece to reduce its public wage bill. The resulting measures introduced by the Greek legislature (new Greek laws) had the effect of reducing the claimant’s annual salary, for the period October 2010 to December 2012, since under Greek law the claimant was considered a public-sector employee of the Hellenic Republic. The claimant started proceedings in the German courts seeking to recover his loss in salary on the grounds that his employment relationship was conducted in Germany and subject only to German law.

The dispute thus raised the question of whether the new Greek laws applied – and the wider question of whether and to what extent the laws of a third state can apply to a contract which is expressed to be governed by another law.

Did Rome I apply to the contract?

Article 28 of Rome I provides that the Regulation applies to contracts concluded after 17 December 2009. The first question the CJEU had to consider was whether the claimant’s employment contract, which was concluded in 1996, but was now continuing on amended terms, fell within the scope of Rome I.

The CJEU ruled that a contract which was concluded before 17 December 2009 may be subject to Rome I but only if, after that date, the contract was varied to such an extent that the amendment amounted to a new legal relationship between the parties, one which effectively replaced the older agreement. Whether the amendment is of sufficient magnitude is a matter to be evaluated by the domestic court.

Could overriding mandatory provisions of a third state apply?

Under Article 9, overriding mandatory provisions are provisions of the law of a particular state that are regarded as crucial by the state to safeguarding its public interests. A Member State court may give effect to the overriding mandatory provisions of its own law (ie the law of the forum) (Article 9(2)) or of the law of the state where the obligations arising out of the contract have to be or have been performed (Article 9(3)). These provisions are interpreted restrictively since they derogate from the principle that the parties have freedom to choose the applicable law of the contract: Unamar (C-184/12).

The CJEU considered whether Article 9 could allow a domestic court to give effect to the mandatory laws of a third state (here, Greece – which was neither the forum nor the place of performance). The CJEU concluded that Article 9 precluded the court from applying, as legal rules, overriding mandatory provisions other than those of the state of the forum or of the state where the obligations arising out of the contract had to be or have been performed. Consequently, since Mr Nikiforidis’s employment contract has been performed in Germany, and the referring court is German, the German court could not in this instance apply, directly or indirectly, the Greek overriding mandatory provisions in question under Article 9.

However, the CJEU went on to state that Article 9 does not preclude overriding mandatory provisions of the law of a state other than the state of the forum or the state where the obligations arising out of the contract have to be or have been performed from being taken into account as a matter of fact, in so far as this is provided for by a substantive rule of the law that is applicable to the contract pursuant to Rome I.  This is because, the CJEU said, Rome I harmonises conflict-of-law rules concerning contractual obligations and not the substantive rules of the law of contract. In so far as the latter (in this case the substantive rules of German law) provide that the court of the forum is to take into account, as a matter of fact, overriding mandatory provisions of the legal order of a state other than the state of the forum or the state of performance of the contractual obligations, Article 9 cannot prevent the court seised from taking that matter of fact into account.

The German Labour Court had stated in its reference that it could apply the relevant German employment law while taking the Greek provisions into account as a matter of fact. 

Did the principle of sincere cooperation in Article 4(3) TEU influence the interpretation of the scope of Article 9?

The CJEU held that its interpretation of Rome I was unaffected by the principle of sincere cooperation enshrined in Article 4(3) of the Treaty on European Union which could not be used to circumvent a proper interpretation of the Regulation.

Comment

Parties need to be able to predict with certainty how to determine the law that applies to their contract, and whether their choice of law will be in any way limited by the application of laws of another state (eg overriding mandatory provisions of another state). This judgment is a helpful one in that it confirms that there are clear limits on the extent to which European conflicts of law rules will allow laws other than the laws chosen by the parties to be taken into account by Member State courts. It is also a useful reminder of the limits of the protection provided by those rules given the recognition that the substantive law rules of some jurisdictions may allow the courts to consider other laws as a matter of fact.  The CJEU’s ruling also goes some way to clarify when Rome I applies to contracts that predate Rome I but are amended after its entry into force.   However, there remains uncertainty as to the extent of the amendment required to a contract for it to amount, in effect, to a new legal relationship.   

Given this uncertainty, does it really matter whether a contract is within the scope of Rome I or covered by its predecessor – the Rome Convention? The answer is yes.  For example, the mandatory rules provisions of the Rome Convention on the face of it are wider than those in Rome I. Article 7(1) Rome Convention provides that the mandatory rules of another country (that is, a country other than the forum) with which the situation has a "close connection" may apply in addition to those of the forum.  As the CJEU confirms, Rome I only allows mandatory rules of the forum or the place of performance to apply.  However, while Article 7(1) is applied in some Member States, it was not incorporated into English law because it was felt that it would create too much uncertainty.

The German Labour Court had stated in its reference that it could apply the relevant German law while taking the Greek mandatory laws into account as a matter of fact. By agreeing with this approach, the CJEU has recognised that under some laws, there may be wider scope to have regard to third State laws than others. 

Footnote:  

Further information

This case summary is part of the Allen & Overy Litigation and Dispute Resolution Review, a monthly publication. For more information please contact Amy Edwards at amy.edwards@allenovery.com.

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