English courts, together with all other courts within the European Union, determine the applicable law of a contract in accordance with the Rome I Regulation (Regulation No 593/2008, the “Regulation”). Article 9 of the Regulation provides as follows:
“1. Overriding mandatory provisions are provisions the respect for which is regarded as crucial by a country for safeguarding its public interests, such as its political, social or economic organisation, to such an extent that they are applicable to any situation falling within their scope, irrespective of the law otherwise applicable to the contract under this Regulation
3. Effect may be given to the overriding mandatory provisions of the law of the country where the obligations arising out of the contract have to be or have been performed, in so far as those overriding mandatory provisions render the performance of the contract unlawful. In considering whether to give effect to those provisions, regard shall be had to their nature and purpose and to the consequences of their application or non-application.”
This Article allows English courts (or the courts of another EU Member State) to apply a foreign law to a contract, irrespective of its governing law. However, it only applies to ‘overriding mandatory provisions’. This is generally a small, easily identifiable class of laws and so the extra local law risk imposed by this Article is often seen as limited.
However, the temporary imposition of capital controls in Greece earlier this year provided an example of provisions that arguably fell within this definition. Financial institutions were suddenly faced with urgent questions of interpretation of Article 9. And it emerged that there were a number of hitherto unforeseen ambiguities and uncertainties within this Article. In particular:
- Whole or part
Did the test for a rule of law to count as an ‘overriding mandatory provision’ apply to a piece of legislation as a whole or to each individual rule within it?
- Location of obligations
What jurisdictions fell within the category of those where the obligations have to be performed and did there have to be any connection between the performance of that obligation and the obligation which was to be rendered unlawful?
- Meaning of unlawful
What doctrines of local law applied to make a contract ‘unlawful’?
- Unlawful for whom?
Did the performance have to be unlawful for a party to the contract or another person?
- Effect on default provisions
Given the discretionary application of Article 9, what was the effect on illegality events of default?
We consider each of these issues below and highlight the resulting risks by reference to our continuing example.
Note that English law may also contain a separate rule that covers the same ground as Article 9(3), although it is of slightly wider scope, but which applies only to English law governed contracts (the rule stems from Ralli Brothers v Compania Naviera Sota Aznar  2 KB 287). There is some doubt as to whether this rule still exists (although recent authority suggests that it does – see Eurobank Ergasias v Kalliroi  EWHC 2377 (Comm)). In any case, we will concentrate in this article on Article 9, which is of pan-European relevance.