© Springer-Verlag Berlin Heidelberg 2015Jürgen Basedow, Ulrich Magnus and Rüdiger Wolfrum (eds.)The Hamburg Lectures on Maritime Affairs 2011-2013Hamburg Studies on Maritime AffairsInternational Max Planck Research School for Maritime Affairs at the University of Hamburg2810.1007/978-3-642-55104-8_4
Territory in the Rome I and Rome II Regulations
St Catherine’s College, Oxford, UK
University of Oxford, Oxford, UK
British Institute of International and Comparative Law, London, UK
The Max Planck Institute for International, European and Regulatory Procedural Law, Luxembourg, Luxembourg
III. Are There Any Territorial or Geographical Limits on the Situations Falling Within the Material Scope of the Rome Regulations?
V. What Is the Nature of the Link Between Particular Connecting Factors Used in the Regulation and the Country to Which They Refer?
This paper is based on a lecture given at the Max Planck Institute for Comparative and International Private Law on 27 November 2011. It departs from the original text of the lecture, in that it takes into account later research and reflection, inspired in large part by comments and questions from the audience. I am grateful to them, and to the members of the Institute for the warm welcome that I received during my stay in Hamburg.
My sense of privilege in being asked to speak at the Max Planck Institute was heightened by the fact that the invitation took the form of a letter from Professor Basedow, whose work I have long admired. The date and broad subject area of the lecture, the Rome II Regulation on the law applicable to non-contractual obligations, were soon fixed. Shortly after, however, I received a second letter from the Professor, asking whether I would be willing to speak on a topic involving application of the Regulation to maritime life, and in doing so to contribute to the Hamburg series of lectures. I should make clear, as I did in replying to Professor Basedow’s second letter, that I am no expert in maritime law and doubt whether there is much, if anything, that I could add to the contributions of others in the field. I was assured by him that there was ‘no need to talk about salt water’. On giving the matter further thought, however, the occasion seemed to present an excellent opportunity to investigate in further detail the Regulation’s territorial aspect. This subject encompasses a variety of legal issues that are significant for maritime and non-maritime lawyers alike, but it has (to my knowledge) received relatively little attention in the growing literature on the Regulation. As the Rome I Regulation on the law applicable to contractual obligations raises similar issues, it seemed useful to consider its territorial aspect at the same time.
Four questions will be addressed in the following pages:
Where do the Rome I and Rome II Regulations apply?
Are there any territorial or geographical limits on the situations falling within the material scope of the Rome Regulations?
What do the Rome Regulations mean when they refer to “the law of” a “country”?
What is the nature of the link between particular connecting factors used in the Rome Regulations and the country to which they refer?
These headline questions, which are inter-related, lead to a number of subsidiary issues, which will be identified and addressed by reference to the text, objectives and legislative background to the Rome Regulations.
II. Where Do the Rome Regulations Apply?
The answer to this question may appear straightforward, but appearances are deceptive and there are a number of layers that need to be stripped away.
1. Which Member States Are Bound by the Rome Regulations?
The final clause of both Regulations contains the usual form of words that “This Regulation shall be binding in its entirety and directly applicable in the Member States in accordance with the Treaty establishing the European Community”. This tracks the second paragraph of Article 249 of the EC Treaty,2 being the relevant treaty in force at the time that the Regulations were adopted, which states that:
A regulation shall have general application. It shall be binding in its entirety and directly applicable in all Member States.
It would, however, be wrong to read these provisions in isolation and to conclude that the Regulations apply in all 28 Member States of the European Union. As instruments adopted under Part 3, Title IV of the EC Treaty,3 the Regulations are subject to the special provision made in the Protocols for Denmark and for the United Kingdom and Ireland for measures in the area of freedom, security and justice. In the case of the Rome II Regulation, Recitals (29) and (30) state:
(39) In accordance with Article 3 of the Protocol on the position of the United Kingdom and Ireland annexed to the Treaty on European Union and to the Treaty establishing the European Community, the United Kingdom and Ireland are taking part in the adoption and application of this Regulation.
(40) In accordance with Articles 1 and 2 of the Protocol on the position of Denmark, annexed to the Treaty on European Union and to the Treaty establishing the European Community, Denmark does not take part in the adoption of this Regulation, and is not bound by it or subject to its application,
Accordingly, the United Kingdom and Ireland are bound by the Regulation, but Denmark is not.
With respect to the Rome I Regulation, the recorded position of Denmark and Ireland is exactly the same.4 With respect to the United Kingdom, however, Recital (45) states:
(45) In accordance with Articles 1 and 2 of the Protocol on the position of the United Kingdom and Ireland, annexed to the Treaty on European Union and to the Treaty establishing the European Community, and without prejudice to Article 4 of the said Protocol, the United Kingdom is not taking part in the adoption of this Regulation and is not bound by it or subject to its application.
This reflects the decision of the United Kingdom, in May 2006, not to opt-in to the Rome I Regulation.5 Following its adoption, however, that decision was overtaken by the United Kingdom’s request to participate in the Regulation6 and the Commission’s Decision approving that request.7 Accordingly, the treaty position is the same for both Regulations: they apply to all Member States of the EU, except Denmark. References in the Regulations to “Member State” or “Member States”, including in the final clauses, should be read accordingly.8
2. Where, Within Those Member States, Do the Rome Regulations Apply?
The next step in the territorial application of the Regulations is to consider the provisions of Article 299 of the EC Treaty,9 which define the territorial limits of the Treaty and of legislation made under it. Article 299(1) lists the 27 pre-Lisbon Treaty Member States (to which Croatia must now be added). Article 299(2) states that the provisions of the Treaty shall apply to the French overseas departments,10 the Azores and Madeira. Save as provided in the remaining provisions of Article 299, the Treaty does not apply to other non-European territories over which the Member States exercise sovereignty or for whose foreign relations they remain responsible. As the special association arrangements referred to in Article 299(3) are not relevant here, it remains to consider Articles 299(4)-(6), which provide as follows:
(i) The Treaty applies to the Ǻland Islands in accordance with the terms of Finland’s accession to the Treaty (Article 299(5)).11
(ii) The Treaty does not apply to the Faeroe Islands, the Sovereign Base Areas (Akrotiri and Dhekelia) of the United Kingdom in Cyprus12 or (save as to a limited extent, not relevant here) the Channel Islands and the Isle of Man (Article 299(6)).
(iii) Subject to the foregoing exclusions, the Treaty applies to the European territories for whose external relations a Member State is responsible (Article 299(4)), a provision which in practice applies only to Gibraltar.13 The sensitive issues of sovereignty in relation to Gibraltar need not be addressed here. It suffices to note that the United Kingdom is taken to be the Member State “responsible” for Gibraltar for the purposes of Article 299(4) and arrangements have been put in place to facilitate this in the context of the Treaty, without prejudice to the respective positions of the United Kingdom and Spain on the sovereignty issue.14
In examining the territorial limits of the Treaty regime, it is also relevant to consider the terms of Protocol No. 10 of the 2004 Treaty of Accession to the EC of, among other Member States, the Republic of Cyprus, concerning what is there described as the “Cyprus problem”, i.e. the fact that the Government of the Republic of Cyprus does not exercise effective control over the northern part of the island, corresponding to the territory of the self-declared (and unrecognised15) Turkish Republic of Northern Cyprus. Protocol No. 10, Article 1(1) states that:16
The application of the acquis shall be suspended in those areas of the Republic of Cyprus in which the Government of the Republic of Cyprus does not exercise effective control.
This provision was considered, and given a restrictive interpretation, by the Court of Justice (ECJ) in Apostolides v Orams.17 That case concerned proceedings in England for the enforcement of two judgments of the District Court of Nicosia18 in the Republic of Cyprus, with respect to land situated in the part of the island to which Protocol No. 10 refers. The Court held that, notwithstanding the subject matter of the action and the terms of the Protocol, the provisions of the Brussels I Regulation19 were applicable to the judgments of the District Court, with the consequence that the District Court’s judgment was enforceable in the United Kingdom under the Regulation. The ECJ expressed its conclusion as follows:20
“It follows from a literal interpretation of Article 1(1) of Protocol No 10 that the suspension for which it provides is limited to the application of the acquis communautaire in the northern area. However, in the case in the main proceedings, the judgments concerned, the recognition of which is sought by Mr Apostolides, were given by a court sitting in the Government-controlled area.
The fact that those judgments concern land situated in the northern area does not preclude the interpretation referred to in the preceding paragraph since, first, it does not nullify the obligation to apply Regulation No 44/2001 in the Government-controlled area and, second, it does not mean that that regulation must thereby be applied in the northern area.
3. Where, for These Purposes, is the Potential “Application” of the Regulation to Be Located?
The ECJ’s reasoning in the above-quoted paragraphs of the Apostolides decision has a wider significance, going beyond the impact of Protocol No. 10 to the Brussels I Regulation. It enables the analysis of the question “Where do the Rome I and Rome II Regulations apply?” to be taken a stage further, as it may be taken to support the proposition that the Regulations apply only in the places within the relevant territory of the relevant Member States21 in which courts or tribunals sit, because the rules of applicable law which the Regulations contain are only directed to those courts or tribunals. In Apostolides, it was the courtroom in Nicosia in which the Brussels I Regulation fell to be applied, and that fact led to the conclusion that Protocol No. 10 was not relevant, because Nicosia was not in the area beyond the effective control of the Republic of Cyprus.
For these purposes, there seems no reason to draw any distinction between the Brussels I Regulation (the object of the decision in Apostolides) and the Rome I and Rome II Regulations (the object of the present discussion), as all three are instruments containing rules addressed to courts and tribunals in the Member States.22 In this regard, Recital (8) to the Rome II Regulation reflects Article 1(1) of the Brussels I Regulation in stating: “This Regulation should apply irrespective of the nature of the court or tribunal seised.”
That wording, no doubt, was primarily directed at ensuring that criminal or administrative courts seised of civil or commercial matters will apply the Regulation.23 It emphasises, however, that the Regulations have as their focus actual litigation before the courts of the Member States.
This narrow view of the application by location of the Rome Regulations, restricting it to the places where courts or tribunals sit, may seem artificial, impractical or even somewhat pedantic. It is possible to anticipate certain objections, along the following lines. First, it cannot be doubted that, when a judge makes a ruling applying the provisions of the Rome Regulations to determine the law applicable to a dispute before him, the decision has an immediate legal effect on the parties (and, possibly, non-parties) irrespective of whether they are present in the courtroom or have taken part in the proceedings. That effect, however, is produced not by the rules contained in the Regulations themselves, but by rules of national law governing the in personam or in rem effects of the judgment. The territorial aspect of those rules is not here in question.24 One must, in any event, distinguish between the application of the Rome Regulations in determining a case, and the consequences of that determination.
Secondly, it may be pointed out (uncontroversially) that the Rome Regulations, and the prospect of their application by a court or tribunal in the course of deciding a dispute, will likely have a significant influence on the conduct of the parties in the litigation and their legal advisers, e.g. as to how to plead and present their case. That influence clearly extends beyond the courtroom setting, affecting decisions such as whether to make or reject a settlement offer, whether to take legal action and what terms to include in a contract under “negotiation”. Not unnaturally, therefore, the Regulations may be described as “applying” in these settings even though a court is not sitting or has not yet been seised by the parties of their dispute and even if there is no prospect of litigation between them. This broader usage is evidenced, for example, in the following statements by the English referring judge and Advocate General in Homawoo v GMF Assurances SA,25 the first reference to the ECJ on the Rome II Regulation:
Slade J (EWHC):26 “There is no reason why Rome II should only apply where legal proceedings have been commenced or are determined by a court.”
Adv Gen Mengozzi:27 “[W]ere the Court to opt for one or other of those criteria and the application of Rome II were thus to become a function of legal proceedings, as the United Kingdom Government has indicated in its written observations, there would be nothing to stop the previous law from continuing to apply to cases settled by the parties without having recourse to legal proceedings, given that no court is seised of their dispute.
Practical perspectives of this kind may, no doubt, be useful in the interpretation of particular legal rules, such as the provisions of the Rome II Regulation governing its temporal effect which were under consideration in Homawoo, insofar as they help to identify the persons and situations within the contemplation of the EU legislator and inform the court as to the Regulations’ objectives. In the context presently under discussion, however, the wider conception of what it means to “apply” the Rome Regulations is of no practical assistance, as it fails to provide a firm anchor for the territorial application of the Regulation. Those who may be influenced by the provisions of the Regulations in drafting or performing contracts, carrying on business, writing letters before action, lodging claims or preparing written submissions may be located anywhere in the world, within or outside the Member States. The only factor connecting them is that they are, actually or potentially, subject to the jurisdiction of a court or tribunal of a Member State in which the Regulations provide (or may provide) the rules for determining which country’s law is to be applied to an existing or future dispute.28 The basis of that jurisdictional link may be a rule within the Brussels I Regulation, or within another international instrument (such as the Lugano II Convention), or may be a local rule of jurisdiction.29 Absent such a jurisdictional link, or the possibility that it may exist in the future, there is no sound reason for any person (whether within or outside the Member States) to take the Regulations into account in deciding how to behave when engaging in legal activities of these kinds outside a courtroom setting.
The influence of the Rome Regulations outside the courtroom cannot be doubted. The source of that influence, however, can be traced to litigation in being or in prospect before a Member State court. Contrary to the view of Adv Gen Mengozzi,30 their application is a function of legal proceedings, but it does not follow that a different body of law applies when no proceedings are on foot. Rather than viewing the Regulations as somehow “floating in the ether” and as having at all material times a claim to “apply” to those who (wherever they may live or work) are or may be involved in such litigation, it is submitted that a more coherent picture of the Regulations’ territorial application emerges if the Regulations are understood to “apply” only at the point in time when, and in the place where, their provisions are actually given effect by a court or tribunal in determining the law applicable to a contractual (Rome I) or non-contractual obligation (Rome II) in dispute between litigating parties.
This view is consistent with the terms of the answer given by the ECJ to the question posed in Homawoo as to the temporal effect of the Rome II Regulation:31
Articles 31 and 32 of Regulation (EC) No 864/2007 of the European Parliament and of the Council of 11 July 2007 on the law applicable to non-contractual obligations (‘Rome II’), read in conjunction with Article 297 TFEU, must be interpreted as requiring a national court to apply the Regulation only to events giving rise to damage occurring after 11 January 2009 and that the date on which the proceedings seeking compensation for damage were brought or the date on which the applicable law was determined by the court seised have no bearing on determining the scope ratione temporis of the Regulation.
Here, as appears above, the Court recognised that it was for “a national court to apply the Regulation”, but only in a situation involving events giving rise to damage occurring after 11 January 2009. When such a situation has arisen, the Rome II Regulation has a potential effect (which lawyers and their clients can seek to predict) but that effect crystallises only when proceedings are brought before a Member State court and that court applies the Regulation to determine the applicable law. The analysis is the same for the Rome I Regulation, which applies to contracts entered into as from 17 December 2009.32
In conclusion, the first question posed above is to be answered in the following way: the Rome I and Rome II Regulations are addressed to courts and tribunals and they apply only at the places within the territory33 of the Member States to which they are addressed34 at which those courts or tribunals actually determine disputes in civil and commercial matters falling within their scope.
Two further points follow from this. First, the view that the Rome Regulations apply only to courts or tribunals in Member States may provide a platform for addressing other live questions concerning the application of the Regulations. For example, it remains to be settled whether and, if so, how the Regulations apply to non-curial forms of dispute resolution, and in particular to arbitration proceedings connected to a Member State.35 A more general statement that the Regulations “apply” in the territory of the 26 Member States might lead one to the conclusion that there is no good reason why an arbitration tribunal, or the parties to arbitration proceedings, should not be bound by the Regulations if the arbitration proceedings take place (i.e. if the tribunal has its seat) in, or if the parties have a substantial connection to, a Member State. If, however, the above formulation is accepted as more precisely answering the question “where do the Rome Regulations apply?”, it makes clear that the question of the Regulations’ application will not be settled by identifying the seat of the arbitration, or where the parties are located. Instead, resolution of this issue must focus on the legal question whether an arbitral tribunal falls within the (autonomous) concept of a “court or tribunal” to which the Regulations are directed. The arguments in both directions need not be repeated here. Suffice it to say that there are points to be made both ways.36
Secondly, this formulation makes clear that the Regulations do not apply to courts and tribunals located outside the territory, as defined in the EU Treaties, of the Member States to which they are addressed.37 In two situations, however, a court in a non-Member State may have occasion to refer (indirectly) to the Regulations’ rules in determining the law applicable to a claim before it:
If the non-Member State has adopted rules of applicable law which are based upon, or inspired by, those in the Regulations, in which case the Regulations’ provisions and any relevant case law (in particular, of the CJEU) may be relevant sources for a court interpreting those provisions.
If the non-Member State’s rules of applicable law for contractual or non-contractual obligations utilise the principle of renvoi, and the relevant connecting factor refers to the law of a Member State (other than Denmark). In this situation, as the doctrine of renvoi is expressly excluded in both the Rome I38 and Rome II39 Regulations, the reference to that Member State’s law (including its rules of private international law) leads directly to the provisions of the Regulation. This last point is of more than theoretical significance, not least because the Australian common law rules of applicable law for tort (and, possibly, contract as well, at least in the absence of a choice of law) have been expressed in terms which accommodate a reference to the whole of the lex causae, including rules of private international law.40 Indeed, the High Court of Australia has already encountered the Rome II Regulation in oral argument in a jurisdiction case as to the effect of a possible reference to the private international law of Belgium as the lex loci delicti.41
III. Are There Any Territorial or Geographical Limits on the Situations Falling Within the Material Scope of the Rome Regulations?
Having addressed the question of the territorial application of the Rome Regulations, we turn to examine their material scope and, in particular, to ask whether there are any territorial or geographical42 limits on the situations to which the rules of applicable law which they contain relate.
A negative answer to this question is suggested by the Rome I Regulation, Article 2 and the Rome II Regulation, Article 3 in identical terms under the heading “Universal Application”, which provide that:43
Any law specified by this Regulation shall be applied whether or not it is the law of a Member State.
It must be noted that these provisions44 do not state expressly that the Rome Regulations apply even if the matters giving rise to the contractual or non-contractual obligation occurred wholly or partly in, or are otherwise substantially connected to, a non-Member State. Nevertheless, it is clear that this was the legislative intention.45 The words “[a]ny law specified by this Regulation” should be read as referring to every rule of applicable law within the two Regulations, whatever the connecting factor adopted. This would include, for example, a non-Member State law designated on the basis that it is the law chosen by the parties,46 that it is the law of the country of habitual residence of one or both parties,47 or that it is the law of the country where a particular event occurred or is to occur.48
The proposition that the two Regulations’ rules of applicable law must be applied even if they designate the law of a non-Member State, and regardless of the absence of any significant connection to the Member States other than the fact that proceedings have been or may be commenced in the EU, accords with other provisions within the Regulations which acknowledge the possibility of connections to countries outside the European Union and the application of their laws.49 Most notably, the Rome I Regulation, Article 3(4) and the Rome II Regulation, Article 14(3) expressly contemplate that the parties may choose the law of a non-Member State to govern their contract, or non-contractual obligations, even though “all [other/the 50] elements relevant to the situation” at the relevant time51 “are located in one or more [of the 52] Member States”.
The apparently unrestricted scope of the Regulations, in terms of territorial or geographical connections, generated a debate as to whether they were within the legislative competence of the (then) European Community under the provisions of Title IV to the EC Treaty. Article 65 of that Treaty referred only to measures adopted “insofar as necessary for the proper functioning of the internal market” and this led to doubts as to whether it was within the Community’s competence to regulate questions concerning the law applicable to situations (such as a traffic accident in Omaha or a contract between Japanese and Korean parties relating to an oil rig in the South China Sea) having no direct connection to free movement of goods, persons, services or capital within the Member States.
The arguments, for and against validity, have been rehearsed elsewhere,53 but these have now been overtaken by the entry into force of the Treaty on the Functioning of European Union (TFEU) on 1 December 2009, following ratification of the Lisbon Reform Treaty. TFEU, Article 81 refers to the adoption of measures “particularly when necessary for the proper functioning of the internal market”. As a consequence, even if the Regulations were held by the ECJ to fall outside the powers of the EU legislature at the time of their adoption (a highly unlikely scenario in itself, given the Court’s record in upholding EU competences), measures in identical terms could almost certainly be adopted on the basis of the new Treaty, and this prospect would in turn likely influence the ECJ in the event of a challenge to the vires of either Regulation as originally adopted.54
The proposition, supported by the provisions confirming the Regulations’ “universal application” that there are no territorial or geographical limits on the situations falling within the material scope of the Rome Regulations must, however, be qualified in at least two ways. First, there are rules of applicable law within the Regulations that are qualified by reference to geographical or territorial criteria. A notable example within the Rome I Regulation is Article 7(3), containing rules for determining the law applicable for contracts of insurance covering risks other than large risks, and which (following the approach taken in the Insurance Directives55 which it partly replicates) applies only if the risk is situated in a Member State. Rather unsatisfactorily, the location of the risk for these purposes is fixed using territorial connecting factors set out not within the Rome I Regulation but in the Insurance Directives, as applied under Article 7(6) of the Regulation.56
Recital (33) to the Rome I Regulation emphasises the separate treatment of EU and non-EU risks in the following way:
Where an insurance contract not covering a large risk covers more than one risk, at least one of which is situated in a Member State and at least one of which is situated in a third country, the special rules on insurance contracts in this Regulation should apply only to the risk or risks situated in the relevant Member State or Member States.
Accordingly, different rules within the Regulation may be applied to a contract of insurance according to the subject matter of the policy. Article 7(3) must be applied to determine the law applicable to a contract of insurance, insofar as it relates to a non-large risk situated in a Member State. By contrast, Articles 3 and 4 of the Regulation must be applied to determine the law applicable, insofar as the contract relates to a non-large risk not situated in a Member State. In cases to which Article 7(3) applies, it deploys connections both to a Member State and to a “country” (not necessarily a Member State) in defining the limits of the parties’ freedom to choose the applicable law.57
Other rules within the two Regulations distinguish between territorial connections to Member States and territorial connections to third countries.58 In particular, the cryptically drafted provision in the Rome I Regulation, Article 3(4) and the corresponding provision in the Rome II Regulation, Article 14(3) provide for the application of non-derogable provisions of EU law, notwithstanding the choice of the law of a non-Member State, if all of the elements relevant to the situation at a given time59 “are located in one or more of the Member States”.60
Secondly, the argument exists that certain rules of applicable law (in particular, within the Rome II Regulation) are incapable of being applied in circumstances where the connecting factors which they deploy refer to the location of a particular event and that event occurred not in the territory of a State but in an area outside State sovereignty. This doubt arises, most acutely, in relation to events occurring on the High Seas,61 but arises equally in the case of activities in the Polar Regions or outer space. A similar difficulty may arise in situations where sovereignty over a particular territory is disputed.62
This is, first and foremost, a matter of construction of the connecting factors used in the Regulations. If, however, the rules in the Regulation can be interpreted in a way which enables them to be applied to situations of this kind and which serves – or at least does not disrupt – the objectives of the Regulations (and it will be argued below that this is attainable63), it is suggested that there is no compelling reason to imply a territorial limit upon the situations falling within the Regulations’ material scope. To the contrary, the conclusion that the Regulations should be universally applied is supported by the desirability of ensuring that the Brussels I, Rome I and Rome II regimes operate harmoniously.64 Take, for example, a situation involving a dispute between a shipping company and a merchant seaman employed by it. Suppose that the employee is injured when slipping on deck, while the ship is on the High Seas, and brings an action in a Member State court against his employer (alleging breach of contract and tortious negligence) and against another member of the crew (alleging tortious negligence). In this case, there is no doubt that, even though the incident occurred in an area outside State sovereignty, the jurisdiction of the Member State court must be determined in accordance with the provisions of the Brussels I Regulation.65 There is also no doubt that the law applicable to contractual obligations66 between employer and employee must be determined in accordance with the provisions of the Rome I Regulation, Article 8. As regards non-contractual obligations, however, the argument may be pressed that, as the injury was sustained in an area outside State sovereignty, the connecting factor in the Rome II Regulation, Article 4(1) (referring to “the law of the country in which the damage occurs”) is unworkable, and that the provision must therefore be treated as failing, leaving a potential gap in the Regulation’s material scope. If that argument were to be accepted, it would leave a curious lacuna in the system of EU private international law established by the three Regulations and that would be contrary to the objectives of the Rome II Regulation of ensuring a consistency of approach between Member State courts in determining the law applicable to cross-border claims.67 Questions of characterisation of an obligation as “contractual” or “non-contractual”68 would take on greater significance as a result.
It must, of course, be acknowledged that questions of liability for activities in areas outside State sovereignty are, to a significant degree, regulated by international Conventions69 and that those Conventions have force of law (and overriding effect) in the Member States which are parties to them. The Conventions, however, do not have effect in all Member States70 and, even where they do apply, they do not generally regulate all questions of liability arising out of an incident.71 A role remains, therefore, for principles of private international law and, within the European Union, it is desirable that the applicable principles should be common to the Member States, and not divergent. Maritime law, despite its common tradition in mercantile custom, is not immune from the phenomenon of conflicting national laws – there is no “maritime law of the world”.72
The view that the Regulations apply even though the relevant connection is to an area outside State sovereignty is consistent with the travaux préparatoires to the Rome II Regulation.73 Article 4 of the Commission’s preliminary draft proposal74 and Article 18 of its formal Proposal75 contained provisions to regulate the law applicable to situations in areas outside the territory of a State. Article 18 was not, however, retained in the Commission’s later amended Proposal,76 or in the final version of the Regulation. The apparent justification for the deletion of Article 18 during the legislative process that the provision’s subject matter – the extension of the concept of “territory of a State” – was more related to “public law” (apparently, a reference to “public international law”) than to private international law.77 It does not appear to have been suggested at the time that it would be unlawful or objectionable for the European Union to regulate the law applicable to torts etc. occurring in areas outside State sovereignty within the proposed Rome II instrument.
In conclusion, and subject to the more detailed examination in Part 4, below, of the connecting factors used in the Regulation, it is submitted that there are no territorial or geographical limits upon the situations falling within the material scope of the Regulations. In particular, the Regulations may apply to acts or other events occurring on the High Seas or other areas outside State sovereignty.
IV. What Do the Regulations Mean When They Refer to “the Law of the Country”?
At the next stage, the terms of the rules of applicable law in the Rome I and Rome II Regulations must be considered. Given the number of distinct rules that they contain, and the diversity of their subject matter, it is not surprising that a wide variety of connecting factors is used within the two Regulations. For example, the Rome I Regulation, Article 3(1) refers to “the law chosen by the parties”, Article 4(1)(b) to “the law of the country where the service provider has his habitual residence”, Article 4(3) to “the law of the country with which [the contract] is most closely connected” and Article 7(3), 3rd para to “the law of the Member State in which the risk is situated”. In the Rome II Regulation, for example, Article 4(1) refers to “the law of the country in which the damage occurs”, Article 8(1) to “the law of the country for which protection is claimed” and Article 10(1) to “the law that governs that relationship”.78
Further attention is given to the nature of particular connecting factors in Part 4, below. This Part considers, more generally, what the Regulations mean when they refer to a contractual or non-contractual obligations being governed by “the law of” a particular “country”. The formulation “law of the country” appears in the majority, but (as the examples given above demonstrate) by no means all, of the rules of applicable law contained in the Regulations. Even where the words “of the country” do not expressly appear after the word “law”, this requirement that the applicable law be that of a “country” is implicit.
Most significantly, although the key provisions regulating party autonomy in the Rome I Regulation, Article 3(1)79 and the Rome II Regulation, Article 14(1) refer to “the law chosen by the parties” (Article 3(1)) and “the law of their choice” (Article 14(1)), there is little doubt that the parties may choose only “the law of a country”.80 That view is supported not only by the wording of Rome I Regulation, Article 3(3) and Rome II Regulation, Article 14(2) (referring to “the country whose law has been chosen”), but also (a) by the terms of the exclusions of renvoi in Rome I Regulation, Article 20, and Rome II Regulation, Article 24,81 (b) by Rome I Regulation, Recital (13), which refers to the possibility of the parties incorporating by reference into their contract a non-State body of law or an international Convention (without mentioning the possibility of the parties making a choice of law in those terms)82 and (c) by the legislative background to that Recital, involving the rejection of the Commission Proposal to allow the parties to choose as the applicable law “the principles and rules of the substantive law of contract recognized internationally or in the Community”.83 Restricting the parties’ autonomy to choosing the law of a country would also reflect the position under the Rome Convention,84 although it must be noted that Article 1(1) of that Convention expressly provided that its rules apply to contractual obligations in “any situation involving a choice between the laws of different countries” and this wording is not carried forward into the Regulation.
It is proposed to approach the task of interpreting the expression “the law of the country” in two stages. The following paragraphs will consider, first, the Regulations’ concept of a “country” and, secondly, what the Regulations treat as “the law of” a country.
2. The Meaning of “Country” in the Rome I and Rome II Regulations
The concept of “country” is defined by near identical provisions in the Rome I Regulation, Article 22(1) and the Rome II Regulation, Article 25(1) (headed “States with more than one legal system”) in the following terms:
Where a State comprises several territorial units, each of which has its own rules of law in respect of [non-85]contractual obligations, each territorial unit shall be considered as a country for the purposes of identifying the law applicable under this Regulation.
This wording reflects the Rome Convention, Article 19, which was in turn based on similar provisions contained in some of the applicable law Conventions of the Hague Conference.86 In its Proposal leading to the Rome II Regulation, the Commission stated:87
The uniform rules also apply where several legal systems coexist in a single State. Where a State has several territorial units each with its own rules of law, each of those units is considered a country for the purposes of private international law. Examples of those States are the United Kingdom, Canada, the United States and Australia. For example, if damage is sustained in Scotland, the law designated by Article 3(1) is Scots law.
With respect to the corresponding provision in its Rome I Proposal, the Commission stated:88
Where a State consists of several territorial units each with its own substantive law of contractual obligations, this Regulation must also apply to conflicts of laws between those territorial units so as to ensure foreseeability and certainty on the law and the uniform application of European rules to all conflict situations.
Accordingly, for the purposes of the Regulations, a “State” may “comprise” more than one “territorial unit”, each of which “has its own rules of law in respect of contractual [or, as the case may be, non-contractual] obligations” and is taken to be a separate “country” whose law may be applied to contractual or non-contractual obligations. From this starting point, it is necessary to consider a number of issues, as follows.
3. The Concept of a “State”
The capitalised term “State” in Rome I Regulation, Article 22(1)/Rome II Regulation, Article 25(1) should be understood as referring to a recognised, sovereign State, consistently with the references to “Member States” in Article 22(2)/25(2) and elsewhere in the Regulations.89
If this proposition is accepted, it prompts the further questions, (a) “recognised by whom?” and (b) “according to what principles?” Absent any guidance within the Regulations, it is tempting to conclude that these questions cannot receive any answers other than that (a) the State must be recognised by the Member State seised of the dispute, and (b) recognition or non-recognition is a matter for the authority or authorities of that Member State responsible under its constitutional principles for determining questions of these kinds. For example, in the United Kingdom, the recognition of States falls within the foreign affairs prerogative of the executive branch of the Crown and a certificate by the Foreign and Commonwealth Office to the effect that a State is or is not recognised is generally treated as conclusive by United Kingdom courts.90
In the context of EU legislative instruments such as the Regulations, however, due account must also be taken of the common foreign and security policy of the EU and the role of the High Representative under Title V of the TEU. In some cases, as demonstrated by the approach taken by the (then) Member States of the European Community upon the dissolution of the former Soviet Union and Yugoslavia, the Member States may act in concert in recognising (or not recognising) States, or in establishing procedures for their recognition or non-recognition.91 Under TEU, Article 25, the Union is required to conduct its foreign and security policy, inter alia, by defining general guidelines and adopting decisions defining actions and positions to be taken. Article 26 requires the Council and High Representative to “ensure the unity, consistency and effectiveness of action by the Union”. Under Article 27(1), the High Representative shall make proposals for developing the common foreign and security policy. Member States may also make proposals under Article 30, and Article 32 requires Member States to consult one another on any matter of foreign and security policy of general interest in order to determine a common approach. Finally, it may be noted that the provisions relating to the common foreign and security policy and acts adopted on the basis of those provisions fall outside the jurisdiction of the ECJ.92
One author,93 with considerable experience in the field, has observed that “formulation of an updated and coherent policy on the recognition of new States would be a highly suitable task” for the European External Action Service (EEAS), established under Decision 2010/427/EU.94 For the time being, however, no such general guidelines have been established and, although common ground exists between the Member States in relation to some questions of recognition or non-recognition,95 there remains room for significant differences of opinion.96 At least for the time being, therefore, there cannot be a uniform concept of “State” among the Member States.
4. A “Territorial Unit” With “Its Own Rules of Law”
If the proposition that the references to “State” in Rome I Regulation, Article 22(1)/Rome II Regulation, Article 25(1) are to a recognised sovereign State is accepted,97 that conclusion will inform the meanings given to the linked expressions “territorial unit” and “its own rules of law”98 in these provisions, as well as to the references in the Regulations to “the law of” a “country”.
In this connection, three possible approaches to the definition of a “country” for the purposes of the Regulations will be considered in the following paragraphs. First, that the Member State court should examine the position “on the ground” in a given territorial area to ascertain whether rules laid down by the authorities in effective control of that territorial area are made to bind inhabitants of the territory as legal rules, whether or not those authorities are recognised by the State as having the power to regulate civil matters (fact-based approach). Secondly, that questions as to whether a “territorial unit” has it own “rules of law” should be answered by a Member State court, at least primarily,99 by reference to the constitutional and other laws of the State which is recognised as exercising sovereignty or lawful authority100 over the territory in question (law of the State approach).101 Thirdly, and by contrast to the first two approaches, which seek to ensure a measure of uniformity between Member States, that the question whether there exists, within a State, a “territorial unit” with “its own rules of law” should be answered by reference to the law of the forum, including its rules of private international law (law of the forum approach).
a) A Fact-based Approach?
Support for the second (fact-based) approach may be garnered from the judicial practice of a number of States, including Member States, when considering private international law problems of various kinds. This practice recognises the practical and legal difficulties for private actors which may result from situations in which the lawful government of a State is not in effective control of its entire territory, and in which those actors are subjected in their day-to-day lives to rules imposed by other (not internationally recognised) authorities.102
In England, the relevant jurisprudence can be traced to two principal sources. First, the following (obiter) statement in 1966 by Lord Wilberforce in Carl Zeiss Stiftung v Rayner & Keeler Ltd:103
In the United States some glimmerings can be found of the idea that non-recognition cannot be pressed to its ultimate logical limit, and that where private rights, or acts of everyday occurrence, or perfunctory acts of administration are concerned (the scope of these exceptions has never been precisely defined) the courts may, in the interests of justice and common sense, where no consideration of public policy to the contrary has to prevail, give recognition to the actual facts or realities found to exist in the territory in question.104 […] No trace of any such doctrine is yet to be found in English law, but equally, in my opinion, there is nothing in those English decisions, in which recognition has been refused to particular acts of non-recognised governments, which would prevent its acceptance or which prescribes the absolute and total invalidity of all laws and acts flowing from unrecognised governments. In view of the conclusion I have reached on the effect to be attributed to non-recognition in this case, it is not necessary here to resort to this doctrine but, for my part, I should wish to regard it as an open question, in English law in any future case whether and to what extent it can be invoked.
Secondly, from the domain of public international law, the statement by the International Court of Justice in its advisory opinion in the Namibia (South West Africa) 105 case that:
In general, the non-recognition of South Africa’s administration of the Territory should not result in depriving the people of Namibia of any advantages derived from international co-operation. In particular, while official acts performed by the Government of South Africa on behalf of or concerning Namibia after the termination of the Mandate are illegal and invalid, this invalidity cannot be extended to those acts, such as, for instance the registration of births, deaths and marriages the effects of which can be ignored only to the detriment of the inhabitants of the Territory.
These statements have been influential in later decisions concerning the effectiveness of legislative and other acts of the authorities of the self-declared “Turkish Republic of Northern Cyprus”.106 In particular, in Hesperides Hotels Ltd v Aegean Turkish Holidays Ltd,107 Lord Denning MR stated:
If it were necessary to make a choice between these conflicting doctrines, I would unhesitatingly hold that the courts of this country can recognise the laws or acts of a body which is in effective control of a territory even though it has not been recognised by Her Majesty’s Government de jure or de facto: at any rate, in regard to the laws which regulate the day to day affairs of the people, such as their marriages, their divorces, their leases, their occupations, and so forth: and furthermore that the courts can receive evidence of the state of affairs so as to see whether the body is in effective control or not.
His Lordship also suggested a possible reconciliation of this proposition with principles of public international law governing the recognition of States and governments, referring to his own statement in a dissenting judgment in an earlier case that:108
When a lawful sovereign is ousted for the time being by a usurper, the lawful sovereign still remains under a duty to do all he can to preserve law and order within the territory: and, as he can no longer do it himself, he is held to give an implied mandate to his subjects to do what is necessary for the maintenance of law and order rather than expose them to all the disorders of anarchy.
Within English private international law, the limits of Lord Denning MR’s proposition have yet to be determined. There exist (in terms of precedent, non-binding) statements in later cases that the recognition of the “laws” of non-recognised authorities may extend to “laws relating to commercial obligations or matters of private law between individuals”,109 an expression of principle which appears rather broader than the “inhabitant” focussed language in the Namibia and Hesperides Hotels cases. Moreover, in a family law context, one High Court judge has held that the self-declared “Turkish Republic of Northern Cyprus” does constitute a “country” within the statutory definition of that term in the Family Law Act 1986, s. 49, with the consequence that a divorce issued by a court of “the Turkish Republic” could be recognised in England.110 Sub-sections (1) and (2) of s. 49, it may be noted, bear a certain resemblance to the provisions of Rome I Regulation, Article 22(1)/Rome I Regulation, Article 25(1):
Modifications of Part II in relation to countries comprising territories having different systems of law
(1) In relation to a country comprising territories in which different systems of law are in force in matters of divorce, annulment or legal separation, the provisions of this Part mentioned in subsections (2) to (5) below shall have effect subject to the modifications there specified.
(2) In the case of a divorce, annulment or legal separation the recognition of the validity of which depends on whether the requirements of subsection (1)(b)(i) or (ii) of section 46 of this Act are satisfied, that section and, in the case of a legal separation, section 47(2) of this Act shall have effect as if each territory were a separate country.
In this case, the judge held that “recognition is possible because the Republic of Cyprus is one country but with two territories, each with their own system of law within s 49(1) of the 1986 Act”.111
In addition to this body of State practice, the adoption of a fact-based approach in the definition of a “country” under Rome I Regulation, Article 22(1) and Rome II Regulation, Article 25(1) could be supported by arguments founded on the need for legal certainty and uniformity in the application of the Rome Regulations among the Member States.112 A requirement that all Member State courts apply a test focussed on the factual question whether the body under whose ultimate authority a “law” is made is in “effective control” of a territorial area113 may be thought to be more likely than other approaches (including those discussed below) to ensure a uniform outcome wherever proceedings are brought. It would also side-step differences between the Member States as to whether the relevant State should be recognised or as to the territory over which a State exercises sovereignty or lawful authority,114 and avoid the need for Member State courts to resolve potentially sensitive questions of statehood and sovereignty.115 For example, Member State A may recognise the “State of Ruritania” while Member State B may refuse to recognise it; but on this approach it would remain open to the courts of both countries to conclude that the Ruritanian authorities are in effective control of a particular territorial area and that the “laws” adopted by them should be applied under the Regulations when there is a relevant connection to Ruritania.
b) Arguments Against the Fact-based Approach
Nevertheless, a strong argument can be marshalled against the adoption of the fact-based approach as a uniform solution within the Rome Regulations.
First, it is notable that Lord Wilberforce’s formulation in Carl Zeiss of the “facts or realities” principle suggests specific qualifications on its application: that the application of the law of the non-recognised entity must be “in the interests of justice and common sense” and must not be contrary to public policy. These qualifications were explicitly acknowledged by the Hong Kong Court of Final Appeal in Chen v Ting 116 in applying his Lordship’s reasoning to support the recognition and enforcement in Hong Kong of a Taiwanese bankruptcy judgment. Other writers have suggested similar limits on the principle.117 However, these qualifications cannot easily be accommodated within the Regulation. Even if the public policy exceptions in the two Regulations118 could be taken to justify a refusal to apply the “laws” of an unrecognised authority, having regard to the circumstances of its usurpation of control over the territory, the proposition that such “laws” should be applied only when they serve the interests of justice, or when common sense requires, (a) is extremely difficult to reconcile with the wording of Rome I Regulation, Article 22(1)/Rome II Regulation, Article 25(1), (b) goes beyond the limits of “public policy” as developed by the ECJ in relation to other EU private international law instruments,119 and (c) seems likely to engender considerable uncertainty.
Secondly, the authorities referred to above as supporting the “fact-based” approach raise other problems of delineation and definition. The ICJ in the Namibia (South West Africa) case referred only to “acts […] the effects of which can be ignored only to the detriment of the inhabitants of the Territory” and Lord Denning MR in Hesperides Hotels to “the laws which regulate the day to day affairs of the people”. The subject matter scope, however, of the Rome Regulations is much broader – they may apply in situations which have little or nothing to do with the inhabitants (permanent or temporary) of the territorial area in which the connecting factor is located or to which it points. In particular, the acceptance in both the Rome I120 and Rome II121 Regulations of the principle of party autonomy means that the parties may choose to apply the law of a country even if their contract has no connection at all to the territory of that country, and is of no direct or indirect concern to its inhabitants.122 It is, for example, far from clear that Lord Wilberforce would have considered that “the interests of justice and common sense” require that the parties’ choice of the “laws” of a non-recognised regime should be upheld in these circumstances.123
Moreover, and in addition to the evidential difficulty of proving the position on the ground, the fact-based approach also requires that uniform meaning be given to the expression (to use Lord Denning’s formulation) “effective control of a territory”, and this presents its own difficulties. No doubt, because I do not question the ultimate sovereign authority of the United Kingdom Government, I am not (for these purposes) in “effective control” of the land on which my house stands, with the consequence that any rules that I make for my children or visitors are to be treated as “laws”. By contrast, is there any reason why, if the fact-based approach were to be applied, the status of “country” could not be ascribed to the Principality of Sealand (a fortified tower off the English coast)124 or to a self-declared “independent” enclave,125 enabling contracting parties to choose the “laws” of these places to govern their relationships?
Finally, the European Union membership of the Republic of Cyprus, and the sensitive issues raised by the “Cyprus problem”, must also be borne in mind. As noted, Protocol No. 10 to the 2004 Accession Convention acknowledges that the Republic of Cyprus does not exercise effective control over the northern part of the islands and the case law referred to above suggests that the existence of the self-styled “Turkish Republic of Northern Cyprus” (“TRNC”) is likely to generate problems in practice if a fact-based approach were imposed on the courts of all of the Member States of the EU, including the Republic of Cyprus. Although, as has been noted, limited recognition has been given by the English courts to the “laws” of the TRNC under common law and statutory rules of English private international law, it is submitted that it would be an entirely different matter for such recognition to be given under an EU legislative instrument such as the Rome I or Rome II Regulations contrary to the constitution and laws of another Member State, the Republic of Cyprus.126 It would also be highly unattractive if the Courts of the Republic of Cyprus were obliged to recognise the TRNC as a “country” and then, on every occasion in which TRNC “laws” governing contractual and non-contractual obligations were in issue, be required to invoke the public policy exceptions in the Rome Regulations to deny recognition to them. The fact-based approach would also present difficulties for Member States whose constitutional structures and traditions require the courts to “speak with one voice” with the executive on matters of foreign policy – the judiciary’s recognition under the Rome Regulations of the acts of a non-recognised entity as “laws” may place it in conflict with the executive’s refusal to engage with that entity or to acknowledge it as a State or as the lawful government of a State. Again, the public policy exception appears an unsatisfactory route out of this conflict.
In this connection, it is notable that the case law of the European Court of Human Rights concerning the private rights of Greek Cypriots dispossessed of land situated in the northern part of the island has denied the efficacy of the TRNC constitution in affecting the claimants’ title to land, while at the same time acknowledging (in line with the ICJ’s dictum in the Namibia case127) “that international law recognises the legitimacy of certain legal arrangements and transactions in such a situation, for instance as regards the registration of births, deaths and marriages”.128 The Court appears, therefore, to have taken a narrow view as to what (to use Lord Wilberforce’s expression129) “the interests of justice and common sense” require. This line of case law, in turn, appears to have been influential in the decision of the District Court of Nicosia in Apostolides v Orams 130 to reject the Orams’ claim to title under TRNC law. From a summary of that decision appearing in a later judgment in the English enforcement proceedings, it appears that the Court held that neither the title deed issued by the TRNC authorities nor “local custom” provided the Orams with a defence to the trespass claim brought against them.131 As the claim was one in tort, the adoption of a fact-based approach in the Rome II Regulation would require, at the very least, a more elaborate process of reasoning to achieve the same outcome if a claim were now to be brought with respect to the occupation of the land after 11 January 2009.
c) Arguments in Favour of the Law of the State Approach
Overall, given the problems which adoption of the fact-based approach as a uniform solution would cause, it does not appear to be a favourable solution at this stage in the development of EU private international law. If this option is put to one side, the choice would appear to lie between the law of the State approach and the law of the forum approach. The law of the State approach seems more in line not only with the terms of the two Articles (which refer to a “State” which “comprises” “territorial units”) but also with the two Regulations’ objectives.132 This approach would impose a more uniform choice of law rule, while accommodating differences between the Member States’ positions on questions of sovereign recognition.133 By contrast, the law of the forum approach would leave each Member State free to apply its own rules of private international law governing the identification of a “country” for choice of law purposes.
The law of the State approach also accords with the international law principle of State equality134 and the related domestic law principle that “every sovereign State is bound to respect the independence of every other sovereign State, and the courts of one country will not sit in judgment on the acts of the government of another done within its own territory”.135 The regulation of a State’s internal constitutional order and territorial administration would appear to be paradigm examples of matters falling within the scope of these principles.
d) Conclusion – a Preference for the Law of the State Approach
Overall, therefore it is submitted that the law of the State approach should prevail in the application of the Rome Regulations. If that solution is thought too ambitious, the non-uniform, law of forum approach should be adopted instead. The fact-based approach should be rejected as a uniform solution.
e) Application of the Law of the State Approach – in General
The proposition that questions as to whether a “territorial unit” exists and whether it has its own “rules of law” must be determined in a Member State court by reference to the constitutional and other laws of the recognised State which lawfully exercises sovereign or governmental authority over that territorial unit requires some qualification and further explanation.
In the first place, and consistently with the approach taken to the Regulations’ concept of a “State”,136 questions involving the limits of a State’s territory and recognition of the constitutional legislative, executive and judicial law-making bodies of the State must still fall to be determined by reference to the law of the Member State seised of the dispute (the law of the forum), taking such account of relevant principles of public international law as may be admitted by that law. In the United Kingdom, the recognition of a body as the de jure or de facto government137 of a State and the territorial limits of a State’s sovereign authority are also matters within the foreign affairs prerogative of the Crown and a certificate of recognition or non-recognition is generally treated as conclusive by United Kingdom courts.138 Nevertheless, the current practice of the United Kingdom government (dating back to 1980) is not to recognise governments formally, leaving it to the courts to determine whether a particular body of persons is to be treated as the government of a State having regard to all the circumstances, including relations between the UK government and representatives of that body.139 As recently demonstrated in relation to the Libyan uprising, however, the Crown may still take a formal position as to recognition of the government of a State, which will be determinative.140 In other cases, the existence of a dispute between States as to sovereignty over particular territory may, however, render such matters unsuitable for judicial determination.141
More generally, the references in the Rome Regulation, Article 22(1) and the Rome II Regulation, Article 25(1) to a “territorial unit” suggests that the rules of law which specifically relate to the “unit” must be rules that operate within a geographical area which is defined or capable of definition, and not (for example) rules that apply to a particular population group wherever located within the State. Further, the examples given by the Commission in its 2003 Rome II Proposal142 of States to which what is now Article 25(1) of the Regulation would apply (the United Kingdom, Canada, the United States and Australia) suggest that some degree of constitutional separation of the “unit” is necessary.143 Nevertheless, those examples also support the conclusion that it is not necessary that the “country” should have a separate court system,144 and confirm that the “rules of law” referred to need not be the only rules governing contractual and non-contractual obligations which apply to that territory. Nor, indeed, should it be required that the rules of law that are specific to the “unit” be applicable, or even potentially applicable to the facts of the individual case, or that they extend to the entire range of contractual or non-contractual obligations.
For example, under its constitutional arrangements, the Commonwealth of Australia has a single common law145 and its Parliament may adopt legislation in certain areas,146 but Australia’s states and territories may (subject to the Constitution and to federal legislation in force) adopt their own legislation in areas falling outside the exclusive legislative competence of the Commonwealth147 and are treated as separate jurisdictions, or law areas, for private international law purposes.148 Consequently, each of the states and territories of the Commonwealth of Australia is undoubtedly a “country” for the purposes of the Rome I and Rome II Regulations and should be treated as such for all purposes, even if the matter before a Member State court is one which would be determined by reference only to rules of the Australian common law or contained within federal legislation. Further, it seems doubtful whether, in view of its constitutional arrangements, “Australia” can itself be regarded for these purposes as a “country” separate from its states and territories, although the common law and federal legislation apply to its territory as a whole.149 By contrast, Germany is a single country, and the Länder are not to be treated as individual countries, because German contract law consists of federal law.150
f) Application of the Law of the State approach – “Non-recognised” States as “Countries”
If the law of the State approach is adopted, a “non-recognised State” or a territorial area controlled by a non-recognised regime cannot constitute a “country” under the Rome Regulations unless it constitutes a “territorial unit” within the sovereignty, or under the lawful authority,151 of a recognised State having its own rules of law in respect of contractual or non-contractual obligations. Whether it does so is a matter, principally (subject to the qualifications discussed above) for the law of the State which is recognised by the forum State as having sovereignty or lawful authority over the territory in question.
On this view, the question to be determined by the Member State court is not whether, as a matter of fact, there exist bodies exercising, or purporting to exercise, effective power within a particular territorial area to create rules152 which are in practical terms binding on local residents.153 Rather, it is whether the sovereign State, under its constitution and other laws, either (1) exercises its own authority to create rules of law for a territorial unit and which relate to contractual or non-contractual obligations, or (2) recognises the acts of others, including those in effective control of a territorial area, as having the binding effect of law, or an effect which is tantamount to law, for the territory with respect to contractual or non-contractual obligations.
Importantly, the non-recognition by the Member State seised of the dispute of a self-proclaimed “State” whose authorities purport to exercise jurisdiction over a particular territorial area does not conclude the question whether the territorial area is capable of constituting a “country” under the Rome I or Rome II Regulations. Recognition as a “country” (i.e. a “territorial unit” having “its own rules of law”) may be attained if it is shown that154 the State which is recognised by the Member State of the forum as having sovereignty or as exercising lawful authority over that area explicitly or implicitly recognises that there exist rules, in the field of contractual or non-contractual obligations, which have the force of law (or equivalent effect) and which apply specifically to a defined or definable area within its territory. For example, in the English case155 of Carl Zeiss Stiftung v Rayner & Keeler Ltd,156 the legislative act of the German Democratic Republic authorities establishing a body corporate was recognised and given effect, despite a certificate of non-recognition of the GDR given by the UK government, because the UK government recognised the Soviet Union as exercising sovereign authority over East Germany and the GDR was held to be a subordinate body exercising its powers under the authority of the Soviet Union. There was no inconsistency between non-recognition by the United Kingdom of the GDR as a State, and recognition of the acts of GDR authorities as “laws”.157 If the same issue had arisen before a court in the Federal Republic of Germany, it is understood that the same conclusion could (subject to questions of public policy) have been reached by a different route, on the basis that, although the territory of the GDR in Soviet occupation was considered to remain part of the sovereign territory of Germany, the “laws” promulgated by the GDR authorities which were effective in the territory over which they exercised control were applied in decisions of the courts of the Federal Republic under a fact-based approach.158