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All quiet on the choice-of-law front

The Brexit transition period is coming to an end. Whether or not it is still possible for the UK and the EU to reach a new trade agreement, many businesses operating on both sides can expect a number of uncertainties and challenges. Fortunately, one of the issues that will remain stable is the choice of law in contracts. Here Brexit will result in only technical changes.

From the point of view of Polish law (and other EU countries)

For more than 10 years, the issue of choice of law in contracts has been standardised in all EU countries (except for Denmark) by the regulation commonly known as “Rome I” (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 allows for a very wide and flexible choice of law applicable to a contract. For example, there need not be any element connecting some part of the factual state with the country whose law the parties wish to adopt for a given contract.

Example: A German company and a Polish company agree that the law applicable to their contract of sale of a product manufactured in Romania and delivered in Czechia will be English law. Although the transaction has no other English “element,” such a choice of law will be valid according to Rome I.

The only exception to this freedom of choice (leaving aside very narrow and rarely occurring situations in commercial practice, such as compulsory jurisdiction) is the obligation to apply mandatory provisions (i.e. those that cannot be excluded by contract) of the law of a state where all elements of the factual state occur except for the choice of foreign law. In the same way, EU rules that cannot be excluded by contract also apply to contracts where all elements of the factual state are in the countries of the European Union and the parties have chosen the law of a non-EU country.

Example: Two Polish companies conclude a contract for construction work to be performed entirely in Poland. Since there is no foreign element (i.e. the entire factual state “takes place” in Poland), if the parties make a choice of English law, Polish regulations that cannot be contractually excluded under Polish law will also apply.

At this point, it should be mentioned that although the scope of Rome I is very broad and governs most matters relating to the determination of the law applicable to contracts, issues such as the following are explicitly excluded from its application:

  • Civil status and (for the most part) legal capacity of natural persons
  • Obligations arising from family relationships and matrimonial property regimes, inheritance law, bills of exchange, cheques, promissory notes and other negotiable instruments
  • The law of companies and trusts, as well as certain insurance matters
  • Obligations arising out of business contacts occurring prior to conclusion of the contract
  • Arbitration clauses and agreements on the jurisdiction of courts.

Choice of law and choice of court are two separate issues and are assessed on the basis of two different EU regulations.

Returning to the possibility of choosing the law applicable to a contract, it should be recalled that the law chosen by the parties need not be the law of an EU member state.

Example: A German company and a Greek company agree that the law of Colombia will apply to the contract between them. According to Rome I, such a choice will be considered valid, as the regulation expressly provides that the law adopted will apply whether or not it is the law of a member state.

Moreover, contrary to a popular misconception, even if countries outside the European Union are involved in a transaction, the Polish court will still apply Rome I to assess whether a given choice of law is valid. In other words, Rome I is treated like any other EU regulation, and Polish courts will not leap to thinking in terms of an international treaty. This issue is particularly relevant to Brexit.

Example: English and Polish banks grant loans to a Polish company on the basis of a loan agreement with a choice of English law. From the perspective of Polish law, assessment of the correctness of the choice of law will still be made from the point of view of Rome I, even after the transition period. Therefore, both before and after Brexit, the court will reach the same result: the choice of English law is correct.

The British copy EU law

The above considerations apply to the Polish perspective, so the question remains what will be the approach under English law. The result will be the same, as the UK has decided to keep the same legislation in place. Rome I has become part of “retained EU law,” with minor technical amendments. Therefore, for the time being, the question of choice of law is resolved in the same way in the remaining member states (except for Denmark) and in English law, although in the future differences may arise if the EU or the UK decides to implement changes.

In conclusion, Brexit will bring a lot of uncertainty for businesses, including in the legal sphere, especially if it is done in the hard version, without a commercial agreement between the European Union and the United Kingdom. Luckily, choice of law is a stable area. Here, businesses can sleep peacefully.

Patrycja Polasz, attorney-at-law, Banking & Project Finance practice, Common Law Desk, Wardyński & Partners