Commercial Court considers when a contract is "manifestly more closely connected" with another country for the purpose of determining applicable law

The Commercial Court has considered the meaning of "manifestly more closely connected" with another country in Article 4 of the Rome I Regulation ((EC) No 593/2008), holding that this escape clause only applies if the cumulative weight of the factors connecting the contract to another country "clearly and decisively" outweighs the law which would otherwise apply: Molton Street Capital LLP v Shooters Hill Capital Partners LLP and another [2015] EWHC 3419 (Comm).

There has been considerable academic debate over how Article 4 is to be interpreted, and in particular whether a different approach to the escape clause is required under the Rome I Regulation than applied under its predecessor, the Rome Convention (80/934/EEC). The court considered that the changes to Article 4, and in particular the inclusion of the word "manifestly" in the escape clause, indicated that a change in approach was called for.

If this analysis is followed in other cases, the court will have less flexibility in determining the applicable law under Rome I than it did under the Rome Convention, and therefore it may be easier to predict the law that applies to a contract in the absence of party choice. However, best practice remains to include an express choice of law clause to avoid uncertainty and cost if a dispute arises.

Legal background

An English court will apply the rules in the Rome I Regulation to determine the law applicable to most contracts.

Article 4 of Rome I sets out the rules for determining which law applies where the contract does not contain an express or implied choice of law, including the following:

• It first lists in Article 4(1) specific rules regarding particular contracts, so it provides for example that in a contract for the sale of goods, the law of the country where the seller has his habitual residence will apply.
• Article 4(2) provides that, where a contract is not within 4(1), the law of the country where the party required to effect the characteristic performance of the contract has his habitual residence will apply.
• There is however an escape clause in Article 4(3), so that 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 Article 4(1) or (2), the law of that other country will apply.

The Rome I Regulation was preceded by the Rome Convention which took a rather different approach. The starting point was that a contract should be governed by the law of the country with which it was most closely connected. That was presumed to be the country where the party who was to effect characteristic performance had his habitual residence or (in the case of a company) its central administration, with particular rules for contracts entered into as part of a trade or profession. There were also particular presumptions in contracts concerning land and carriage of goods. These presumptions were however subject to an escape clause – they should be disregarded if it appeared from the circumstances as a whole that the contract was more closely connected with another country.

Factual background

The case concerned an alleged contract for the sale of junk bonds and involved an English buyer, a New York seller and negotiations with an English broker. 

Under Article 4(1) of Rome I, the starting point was that the contract was governed by New York law, being either the law of the country where the seller was habitually resident or  the place where the party required to effect characteristic performance was habitually resident (the court did not need to decide which test applied as both pointed to New York).

The buyer argued that English law nevertheless applied as the contract was manifestly more closely connected with England than New York.

Decision

The judge, Popplewell J, first considered how he should approach the test.

Under the Rome Convention, case law established that for the escape clause to apply, the factors against the presumption had to have a "preponderance of weight" (Samcrete Egypt Engineers and Contractors SAE v Land Rover Exports Ltd [2001] EWCA Civ 2019, Intercontainer Interfrigo SC (ICF) v Balkened Oosthuizen BV (Case C – 133/08)).

The text and architecture of Article 4 of Rome I is however very different from the Rome Convention. In particular, the test is as set out in Articles 4(1) and 4(2), which are no longer expressed as presumptions or as being subject to the closest connection test. The closest connection test has become an escape clause to be applied only where it is clear that the connection is manifestly closer to a different country. The word "manifestly" suggests a more stringent standard than before, as does the elevation of the criteria in Articles 4(1) and 4(2) to tests from mere presumptions of closest connection. The new language and structure suggests a higher threshold, which requires that the cumulative weight of the factors connecting the contract to another country must clearly and decisively outweigh the certainty that would be achieved by applying the relevant test in Article 4(1) or 4(2).

The judge went on to consider the factors relied on in this case as demonstrating closest connection to England, finding that they in fact mainly pointed to New York or were neutral.

Comment

This is probably not the last word on Article 4, given academic disagreement on how it should be interpreted. Even if the approach adopted in this case is followed, however, which would make the rules in 4(1) and 4(2) determinative as to the applicable law in most cases, some uncertainty will necessarily remain. It therefore remains best practice for parties to agree which law is to apply and include an express choice of law clause in the contract.