The conclusion of an international banking contract raises a fundamental question: which law will apply in the event of a dispute? The answer determines the interpretation of clauses, the extent of obligations and the outcome of any disputes. In this area, European law enshrines a cardinal principle that gives considerable power to the parties: party autonomy. Understanding this mechanism is essential for any manager or individual engaging in cross-border financial relations. This article sets out to dissect this principle and its limits, which define the central role of party autonomy in the wider landscape of international banking conflicts of law.
The principle of party autonomy in international banking law
At the heart of international contract law, and particularly banking law, is the freedom of contracting parties to choose the law that will govern their agreement. This principle, known as the 'law of autonomy', is enshrined in European legislation, in particular Regulation (EC) No 593/2008, known as 'Rome I', which succeeded the Rome Convention of 1980 for contracts concluded after 17 December 2009. Article 3 of this regulation is unequivocal: "The contract is governed by the law chosen by the parties.
This freedom of choice is a cornerstone of legal certainty in international trade. It allows companies and banks to select a legal framework that they are familiar with, either neutral or particularly suited to the nature of their transaction (credit, swap, guarantee, etc.). The choice can be made between the law of a European Union Member State or the law of a third country, such as Swiss law or the law of the State of New York, which are very popular for international financing. This rule is 'universal', meaning that a French judge will apply the law designated by the parties, even if it is not the law of a Member State.
Express or implicit choice of law
There are two ways of designating the applicable law. The simplest and surest is express choice. This takes the form of an "applicable law clause" (or governing law clause) clearly inserted in the contract. For example: "This contract shall be governed by and construed in accordance with French law". Such a clause removes any ambiguity.
However, the Rome I Regulation also allows for implicit or tacit choice. In this case, the intention of the parties must be "clearly apparent" from the provisions of the contract or the circumstances of the case. How does this intention manifest itself? Case law, particularly in England, has identified a number of indicators. Repeated references to articles of law specific to a particular country, the use of a standard contract known to be governed by a particular law (such as ISDA master agreements, which are often subject to English law) or a clause conferring jurisdiction on the courts of a particular State may constitute clues. However, these elements must demonstrate a common and unequivocal will. A simple isolated reference is generally not sufficient to characterise a tacit choice.
The 'skinning clause': choosing several laws
The freedom of the parties goes even further. The Rome I Regulation allows them to "carve up" the contract. In practical terms, this means that they can subject different parts of their agreement to different laws. For example, in the financing of a complex project, the clauses relating to the repayment of the loan could be governed by English law, while the associated real property guarantees would be governed by the law of the place where the property is located (the lex rei sitae).
This mechanism offers great flexibility, but must be handled with care. It must not lead to contradictions or ruin the overall coherence of the contract. If the parties choose to subject the definition of a payment default to French law and the consequences of that same default to German law, they must ensure that the two systems can be logically articulated. The aim is to build a functional legal edifice, not an assembly of incompatible rules that creates more uncertainty than it resolves.
Domestic contracts subject to foreign law
One particular situation deserves attention: where a contract, all the elements of which are located in a single country, is made subject by the parties to a foreign law. Imagine a French SME taking out a loan with a French bank to finance an asset in France, but both parties decide to make their contract subject to Luxembourg law. Is this situation possible? Yes, the principle of party autonomy allows it. However, this freedom is not absolute.
Article 3(3) of the Rome I Regulation sets a significant limit. The choice of a foreign law cannot deprive one of the parties, generally the weaker party, of the protection afforded by the "mandatory provisions" of the law of the country with which the contract is fully connected. In other words, in our example, the mandatory provisions of French law, which cannot be derogated from by contract, will continue to apply. This is to prevent the choice of a foreign law becoming a strategy for avoiding the fundamental protections provided by the natural legal order of the contract. These provisions include many protective rules, such as those on consumer protection or police lawswhich embody the requirements deemed essential by a State to safeguard its public interests.
The case of 'intra-Community' contracts
The Rome I Regulation introduced another specific protection for contracts concluded within the European Union. Where all the elements of the situation are located in one or more Member States, but the parties choose the law of a third country (for example, Swiss law), this choice must not undermine the mandatory rules of European Union law.
This provision, which stems from the case law of the Court of Justice of the European Union (in particular the Ingmar), aims to preserve the integrity of the internal market. Parties may not use the choice of a law outside the EU as a means of circumventing harmonised European directives which establish a common set of rules, particularly in the area of consumer protection. For example, the provisions of a consumer credit directive, as transposed in the Member State of the forum, will apply even if the contract is governed by a non-EU law. This guarantees a uniform minimum level of protection throughout the EU, boosting confidence in cross-border transactions.
Excluding and taking into account non-state rules
Does the autonomy of the will make it possible to choose a system of non-state rules, such as the lex mercatoria (usages of international trade) or Sharia principles to govern an Islamic financing contract? The answer provided by the Rome I Regulation is no. The choice must be made in favour of the "law of a country". A set of transnational religious rules or principles, however structured, does not constitute a state legal system within the meaning of the Regulation.
Case law, in particular the famous English case of Shamil Bank of Bahrainconfirmed this position. A contract cannot be directly subject to Sharia law. This does not mean, however, that these principles are ignored. Recital 13 of the Regulation states that the parties may "incorporate by reference" a non-state law in their contract. The nuance is significant: the contract remains governed by state law (for example, English law), but it incorporates clauses that reflect Sharia principles. The validity and interpretation of these clauses will then be assessed in the light of the chosen state law. This state law, through its own rules of public policy, may also limit the effect of certain principles incorporated in this way, acting as a compatibility filter.
Navigating between the freedom to choose the applicable law and the many limits imposed by international and European law requires precise expertise. A poorly drafted choice of law clause or an inappropriate choice can have significant financial and legal consequences. To secure your international banking contracts and benefit from strategic advice on the most appropriate law for your situation, Our law firm will help you draft and negotiate your agreements.
Sources
- Regulation (EC) No 593/2008 of the European Parliament and of the Council 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.
- Monetary and Financial Code.
- Consumer Code.
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