Observations about mandatory rules imposed on transatlantic commercial relationships.

• Author: Erauw, Johan
• Position: Transatlantic Business Transactions: Choice of Law, Jurisdiction, and Judgments

1. INTRODUCTION

   The United States and European Union (E.U.) cooperate in broad sections of the field of international law. However, approaches to the law and to market regulation sometimes differ on the two sides of the Atlantic. This article examines some of the remaining frictions and adverse tendencies between the United States and the E.U. First, it reflects on the tension between party autonomy and mandatory rules. Next, it discusses the public law taboo--the divide between private law and public law, where the question is: Can rules be found that can harness the ambitions of a state to have prescriptive jurisdiction in these areas of mandatory rules, or can judges devise rules of conflict and of cooperation in the field of public law?

   Europe, as a geopolitical concept, has seen a lot of integration in the hot to distant past. One result of this European cooperation is the development of a European convention that determines the law applicable to commercial transactions. Of course, Europe is principally confronted with the private--international law rules of all the E.U. Member States. There is not a supranational "European State," or any corollary to the federal system of the United States. Furthermore, there is no federal judiciary in Europe. However, it is very clear that national judges and, in far fewer numbers, arbitration tribunals apply the rules of European law. While the United States has federal judges, it does not have a federal set of rules with regard to private--international law or conflicts of law such as those found in Europe. Thus, a more creative chaos can be found in the United States when it comes to resolving the conflicts of which law applies to any international commercial transaction. (1)

   Although there have been convergences in the laws of the United States and the laws of the E.U. member states, it should be acknowledged that since there are many differences in governmental policies and in legal principals that apply to international transactions, unavoidable tensions will arise between the E.U. and the United States in the application of mandatory rules.

   While the Convention on the Law Applicable to Contractual Obligations of 1980 (2) [hereinafter Rome Convention] gives autonomy to the parties, it marginally limits the autonomy through Article 3. (3) If the parties did not chose the national law applicable to their agreement, then Article 4 of the Rome Convention applies the law of the place of the business or establishment of the party that is to perform the relevant characteristic performance. (4)

   Part II of this article begins with a discussion of Article 7 of the Rome Convention, which has influenced European scholarship and practice with regard to mandatory rules. Part III discusses how the European community has generally failed to eliminate discrimination against non-European entities found within the laws of the E.U. member states. Part IV addresses the possibility that in the near future a double layer of "mandatory" rules will appear. These rules may complicate transactions between European and non-European actors. While the E.U. always had "national" mandatory rules, currently it is slowly being confronted with so-called "European" mandatory rules. The article next inspects a few examples of this "communitarization" of these mandatory rules. This analysis will focus on the European Court of Justice's (ECJ) apparent elevation of E.U. harmonized rules into public rules per se. In addition, an observation is made about planned changes to the Rome Convention decreasing the grounds for referencing foreign mandatory rules. Part V analyzes a case where a U.S. law was too ambitious in its demands for cooperation from European judges. In this case, the tools for weighing and balancing the conflicting public policies seem to have worked well. The article concludes with general observations on the conflict of public rules and their resolution in the field of commercial transactions.

2. ARTICLE 7 OF THE ROME CONVENTION--ITS EFFECT AND ITS RELATION TO ARTICLE 3

   Article 7, Mandatory Rules, of the Rome Convention states:

   (1) When applying under this Convention the law of a country, effect may be given to the mandatory rules of the law of another country with which the situation has a close connection, if and in so far as, under the law of the latter country, those rules must be applied whatever the law applicable to the contract. In considering whether to give effect to these mandatory rules, regard shall be had to their nature and purpose and to the consequences of their application or non-application. (2) Nothing in this Convention shall restrict the application of the rules of the law of the forum in a situation where they are mandatory irrespective of the law otherwise applicable to the contract. The second subsection of Article 7 of the Rome Convention is self-evident: Every member state can enforce its own mandatory rules on a contractual relationship and the Convention does not intervene. As discussed infra in regards to Article 3(3) of the Rome Convention, "mandatory rules" refers to those rules of national law which must be applied to a given transaction or dispute, no matter where the transaction is performed or where the dispute is litigated. (5) In the past, mandatory rules from foreign countries have been applied by courts. In Europe, when the applicable law--either the law consensually chosen by the parties or the law objectively determined where no choice of law was made--is the law of a foreign European or non-European country, mandatory rules are applied through reliance on contract law (lex contractus or lex causae). This remains the case as long as there is no true conflict with the mandatory rules. Thus the second subsection of Article 7 limits the freedom of the parties in their choice of law because of the mandatory rules of the forum. (6)

   The first subsection of Article 7 is the more difficult rule. This subsection opens up the possibility for a judge to apply mandatory rules from another country, rather than applying lex causae--the latter law being the chosen law of the relationship. Professor Andreas Lowenfeld has said he was not aware that this has actually ever led to any application of foreign "public rules." Although there has been much talk about this possibility, it is unclear if there has been a case where this has occurred. However, there have been interesting developments in The Netherlands. Dutch commentators are proud that at least in one Dutch Supreme Court case there was extensive discussion about the possible respect that a Dutch judge could show towards Belgian imperative rules. (7) However, in the end, the decision did not apply or positively "respect" the Belgian rule. In Part V of this article returns to the application of this rule, and discusses the treatment an American embargo in the court of The Hague.

   The principle of protection against the parties eluding mandatory laws is operative in Article 3(3) of the Rome Convention and limits the parties' freedom to select the lex causae:

   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 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 of that country which cannot be derogated from by contract, hereinafter called mandatory rules. (8) Because this is the article introduces the definition of mandatory rules, Article 3 is important theoretically, and it would gain importance if Article 7(1) of the Convention is eliminated in the future.

   Article 3(3) is evidently very limited in imposing the mandatory rules of a presumably European country. (9) It only limits those cases where the parties have chosen the applicable law linking one country to the particular contract through all connecting factors except the voluntary choice itself. (10) The text says that "where all the other elements relevant to the situation" shall be linked to the same country. (11) Thus, Article 3(3) leaves open a small amount of uncertainty regarding what might be an "irrelevant" foreign connection, which would still require imposing the rule of mandatory law. (12) It only refers to deviating legislation valid at the time of the agreement. Article 3(3) clearly contemplates cases that are not truly "international." Notably, it does not justify a country's desire to impose its own mandatory rules just because an important connecting factor--for example, the principal's place of business--links the case to that country. Clearly, the application of such a national law is strictly conditioned on all the connections pointing in one direction.

   A single important connecting factor of a contract with a country does not establish a predominant connection with that country. On that basis, judges cannot alleviate a country's fears of evasion of its mandatory rules. One such serious connecting factor--for example, the place of establishment of an agent in an international agency--might, however, be enough under Article 7 of the Rome Convention.

   Notably, neither the conflicts provisions of Article 3(3) nor the rules of Article 7(1)-(2) mention an act of an institution of the E.U. as the source of mandatory rules to be safeguarded. In the case of the E.U. directive, this was transposed into Member States' national law and, as such, could be implemented as a mandatory national rule. The E.U.'s ambition as a community legislator has made attentive observers note that there was no specific legal ground for making sure that the content of the typical E.U. legislative product would be safeguarded as a public-policy minimum. New developments are further discussed in proceeding sections of this article.

3. EUROPE ACCEPTS UNEQUAL TREATMENT OF JURISDICTION CLAUSES FOR NON-EUROPEAN JUDGES

   European treaties and regulations on judicial jurisdiction and...