In our previous Blog, we have defined the most popular dispute resolution mechanisms available in the Netherlands. Closely related to this is the question of which law applies to international agreements. It is an important decision. Below we give some tips for making the decision in an international business-to-business context.
Rome I Regulation
The Rome I Regulation (Regulation (EU) No. 593/2008 of June 17, 2008) governs the law applicable in the event of a conflict of laws in matters of contractual obligations in civil and commercial matters within the European Union.1 The Rome I Regulation has universal effect, i.e. it applies regardless of whether the designated law is that of an EU Member State or a third country. The application of the Rome I Regulation is independent of the domicile of the parties. The Dutch courts will apply the Rome I Regulation if the subject matter falls within the material scope.2
Choose where the applicable law will be chosen
The main rule of the Rome I Regulation is that an agreement is governed by the law chosen by the parties. Such choice of law must have been made expressly or can be clearly demonstrated by the terms of the contract or the circumstances of the case. In the absence of such a choice, the applicable law will be determined by the rules of the Rome I Regulation.
Since the law applicable to an agreement determines the specific rights and obligations of the parties under the agreement, failure to choose a law creates unwelcome uncertainty in the event of a dispute. Not only could this lead to lengthy and costly discussions, but it can also lead to the applicability of a legal system that was not foreseen or anticipated when the agreement was drafted (or which would have been rejected if the implications of this had been taken into account).
Example: A distribution agreement between a Dutch principal and a Spanish distributor is drafted taking Dutch law into account, but no choice of law has been made in the agreement. If the distributor is located in Spain, on the basis of Article 4 of the Rome I Regulation, Spanish law would apply.3 Therefore, if the parties were to face a dispute regarding a dispute over the distribution agreement, the parties’ claims will be decided by the court in accordance with Spanish law. It is possible that specific provisions of the distribution agreement, valid under Dutch law, are invalid or may have a different result than expected under Spanish law. Moreover, if in such a case a court in the Netherlands has jurisdiction, it must apply Spanish law, which in itself is not desirable. For parties dealing with counterparties in several countries, this quickly becomes onerous.
How to choose?
The question of jurisdiction and the applicable law are closely linked. A simple approach is to align the choice of competent court and applicable law in the agreement. For example, if the parties opt for Dutch courts to have jurisdiction, Dutch law should be declared applicable (and vice versa).
Of course, which law to choose depends on the circumstances of the case. However, in general, the choice of the applicability of Dutch law in a business-to-business context is a wise and defensible choice. This could also be an option if neither party is located in the Netherlands, as a neutral option. Dutch contract law is generally considered to be balanced and well developed. Due to the overriding principle of freedom of contract, the most common contractual provisions, which the parties wish to include in a business-to-business agreement, will normally be acceptable and enforceable. Where an agreement does not fully address certain topics, the fallback position under Dutch contract law is, in general, balanced. Due to the principles of Dutch reasonableness, excessively unreasonable decisions can be mitigated by the courts.
We have reviewed and located many agreements and the number of changes required to make an agreement enforceable under Dutch law is normally relatively small compared to other legal systems. This is partly due to the fact that, in a purely business-to-business context, there are not many mandatory provisions in Dutch law. When they exist, they usually protect the party that is considered the underlying party (for example, the agent in an agency relationship). Outside of a business-to-business context, parties such as employees and consumers are protected by European and Dutch law.
The law applicable to an agreement plays a decisive role in interpreting the scope of the obligations and rights of the parties. By not making an explicit choice of law, the interpretation of an otherwise carefully drafted and negotiated agreement is left to chance.
In our future blogs in this series, we will continue to cover aspects of international contracts.
1. There is one exception, the Rome I Regulation does not apply in Denmark. For Denmark, the Convention on the Law Applicable to Contractual Obligations (80/934 / EEC) (Rome Convention) still applies. â©
2. See also Article 10: 154 of the Dutch Civil Code which provides that for contractual obligations which do not fall within the scope of the Rome I Regulation and the relevant treaties, the provisions of the Rome I Regulation apply accordingly. . â©
3. See article 4 (1) under f of the Rome I regulation. â©