The law applicable to international agreements

When a business owner decides to enter into contract with a foreign company, order one of the questions to consider is which law will be applicable to the agreement. As can be imagined, the laws of each country can be different and, for example, at the time a commercial agreement is terminated, the obligations for each party can be different depending on whether the law of one country or the other is applicable. Therefore, this is no trivial matter and in order to find out the consequences that could arise from an international agreement, we must know which law is applicable to the agreement binding both parties.

In the Spanish legal system, the rules of private international law are set forth in Articles 8 to 12 of the Spanish Civil Code. However, since 1 September 1993, in order to determine the law applicable to international agreements, we must refer to the Rome Convention of 19 June 1980 on the Law Applicable to Contractual Obligations. Therefore, when a Spanish business owner contracts a foreign business owner, except in cases with specific regulations (e.g. insurance or consumer law), the Rome Convention must be applied to ascertain which law is applicable to the agreement.

As its name suggests, the Rome Convention is applicable to obligations arising from a civil or commercial agreement; however there are certain exceptions, such as obligations related to bills of exchange, cheques and promissory notes; matters related to company law or insurance contracts, as well as matters within a personal scope.

The applicable law will be the one that governs the interpretation of the agreement, the fulfilment of the obligations undertaken, the consequences of the partial or full breach of these obligations, the various ways of terminating the obligations, as well as the consequences of revocation of the agreement.

The Rome Convention firstly states that the law applicable to the agreement must be the one chosen by the parties; this choice must be expressly stated or be deduced from the terms of the agreement or the circumstances of the specific case.

If the parties have not signed an agreement, or if they have indeed signed one, they did not choose a law, the Rome Convention states that the applicable law will be the one of the country with which the agreement is most closely connected.

The Convention presumes that the agreement is most closely connected with the country where the party that must provide characteristic service of the agreement has its normal residence or, in the case of a company, its management headquarters, at the time the agreement is entered into. Although the Convention does not specify it, the general principle is that “characteristic service” is the one for which the payment is owed, i.e. the non-monetary service. Therefore, continuing with the previous example, in the case of a distribution agreement between a Spanish company and a French company, the characteristic service is the one the distributor renders therefore, if no choice has been made, French law would be applicable.

It must be borne in mind that, if no choice has been made, the previous rule is not applicable to (1) agreements when their object is a real estate in rem right or a right to use real estate property, because in such case the applicable law will be the law of the country where the property is located; (2) agreements when their object is the transport of goods, because in such case the applicable law will be the law of the freight haulage company, if it is the same country where the place of loading or unloading takes place or where the principal place of business of the dispatcher is located.

Finally, if no law has been chosen and the characteristic service cannot be determined (for example, a swap) an analysis of the particular agreement needs to be conducted to decide on the most closely connected country, which could be: the place where the contract is executed, the headquarters of the contracting party or the economic context in which the contract was entered into.

For the previous reasons, we can conclude that the question of applicable law is a sufficiently important issue for the parties to discuss and regulate. However, if they fail to do this, we can see that private international law has mechanisms to determine which law is applicable to the agreement so that the parties know which law this is.

Laia Coderch Oliva