International banking law is a field in which the contractual freedom of the parties, in particular the choice of the law applicable to their agreement, is a cardinal principle. However, this autonomy is not without limits. There are rules that are so fundamental to the organisation of a State that they apply to everyone, derogating from the law normally chosen. These are known as overriding mandatory rules, a major exception that can upset the balance of an international contract. Understanding their nature and scope is essential for any operator, because they represent one of the main exceptions to the law of party autonomy in international banking transactions.
What is a 'police act' in international banking law?
A mandatory law, or imperative provision, is a legal standard whose observance is considered essential by a State to safeguard its public interests. Think of the country's political, social or economic organisation. Its importance is such that it must apply to any situation falling within its scope, regardless of the law that the parties have designated to govern their contract. Article 9 of the European 'Rome I' regulation on the law applicable to contractual obligations provides a clear definition. It is a mechanism that makes it possible to preserve the foundations of a national legal system. in the face of the principle of the autonomy of the will which dominates international contract law.
These provisions are not simply rules of domestic public policy. They are international in scope and have particular force. The difficulty, for the uninitiated as well as for legal experts, lies in identifying them. Not all mandatory laws in a country are public policy laws. Only those that protect interests deemed vital are given this status, which gives rise to a case-by-case analysis by the courts.
Police laws of the forum versus foreign police laws
It is important to distinguish between two situations. On the one hand, the mandatory rules of the country of the court hearing the case (the "forum"). On the other hand, the laws of a foreign country.
Judges are obliged to apply the police laws of their own country. This is a manifestation of the sovereignty of the State he represents. He has no discretion in this respect. If a contractual situation, even one governed by foreign law, falls within the scope of French mandatory rules, the French court must apply them.
The situation is different for the mandatory rules of another state. The Rome I Regulation provides that the court may "give effect" to the mandatory rules of the country where the contractual obligations are to be performed or have been performed, but only if these rules render the performance of the contract unlawful. The court then has a discretionary power. To decide, he must take into account the nature and purpose of these mandatory provisions, as well as the consequences of their application or non-application. It is a delicate balancing act between respect for the interests of a third country and the legal certainty of the contract.
Criteria for classifying police acts in banking matters
The classification of a rule as a public policy law is at the heart of judicial debates. It is not enough for a law to be "of public order" in domestic law for it to be binding in an international context. Case law has gradually defined the contours of this concept in banking matters, by examining whether the rule protects a private interest or a fundamental public interest.
Over-indebtedness protection: a mandatory police law?
The provisions of the French Consumer Code relating to the treatment of over-indebtedness of individuals are a topical example of police legislation. The Court of Cassation has consistently ruled that these rules, which are designed to protect people in serious financial difficulty and preserve social equilibrium, apply to all creditors, including foreign banks. Thus, a loan contract governed by foreign law cannot prevent the opening of over-indebtedness proceedings in France for a borrower domiciled there. The objective of safeguarding the social and economic organisation of the country takes precedence here over the law chosen by the parties.
Formalities of guarantees and police laws
On the other hand, the very strict formalities governing guarantees taken out by natural persons are not generally considered to be police legislation. The Court of Cassation has specified that the requirements for handwritten information, such as those set out in the former articles L. 341-2 and L. 341-3 of the Consumer Code, are intended to protect the private interests of the guarantor. They are intended to ensure that the guarantor has given informed consent, but do not affect fundamental public interests of the State. Consequently, if a contract of guarantee is validly subject to a foreign law that does not have this formalism, the guarantor will not be able to rely on it to contest his commitment before a French court. The protection of the weaker party, however legitimate, is not sufficient to transform a rule into a mandatory rule.
Interest rates and limitation periods: debate on whether they are police laws
The question of the nature of interest rate rules is more debated. Some court rulings have qualified the French provisions on the Total Effective Rate (TEG) or usury as police laws, considering that they contribute to economic organisation and the protection of public order. However, other decisions have rejected this classification, in particular for business loans. There is no unified position, and the analysis often depends on the specific circumstances of the case.
As regards time limits for bringing legal proceedings, such as the two-year foreclosure period for consumer credit or the limitation period, the trend in case law is clear. These rules are considered to be procedural or civil law provisions which, although of domestic public policy, are not 'crucial' to the organisation of the State. They are therefore not classified as overriding mandatory rules and may be set aside in favour of the time limits provided for by the foreign law chosen by the parties.
The relationship between consumer protection and police laws
One question that regularly arises is what happens if the specific consumer protection conditions set out in European legislation are not met. Can borrowers still invoke certain national provisions as mandatory rules in order to protect themselves? Article 6 of the Rome I Regulation contains specific rules to protect consumers, guaranteeing them the benefit of the law of their country of residence if the professional directs his or her activity to that country. But if these conditions are not met, does the door to mandatory rules remain open?
Case law has accepted that the two mechanisms can be combined. Even if a contract does not fall within the scope of Article 6 of the Rome I Regulation, a protective national provision may be classified as a mandatory rule and applied for that reason. This is what was ruled in particular for the rules of exclusive jurisdiction of the tribunal d'instance in consumer credit matters. This duality of protection illustrates the complexity of situations where consumer protection intersects with the concept of police laws and the need for a detailed analysis of each situation.
Consequences of the application of a police law
The application of a mandatory rule has a direct and sometimes brutal effect: it displaces the law normally applicable to the contract, whether that law was chosen by the parties or determined by the rules of conflict of laws. In practical terms, the court sets aside one or more provisions of the contract law and replaces them with the mandatory provision of the overriding statute. This partial substitution can upset the economic and legal balance intended by the contracting parties and create significant legal uncertainty.
For the foreign bank, this means that it may be subject to obligations or prohibitions that it had not anticipated, because they derive from a law other than the one governing the contract. For the borrower or guarantor, this may offer unexpected protection or, on the contrary, deprive them of a right they thought they had acquired under the chosen law. Determining the existence and scope of any mandatory rules is therefore a major issue when entering into and performing international banking contracts.
Identifying and interpreting overriding mandatory rules in international banking law is a complex exercise that requires an in-depth knowledge not only of the texts but also of the case law. The classification of a rule as a mandatory rule can have a decisive impact on the outcome of a dispute. For an analysis of your contract and a legal advice in disputes involving the application of police laws in banking lawIn such cases, the assistance of a lawyer is essential.
Sources
- Regulation (EC) No 593/2008 of 17 June 2008 on the law applicable to contractual obligations (Rome I)
- Rome Convention of 19 June 1980 on the law applicable to contractual obligations
- Consumer Code
- Monetary and Financial Code
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