Legal Updates

Commercial & Corporate Law – EU Law - Proposed Cross Border Trade Laws – Detrimental for UK Companies?

According to the UK's most powerful business body, the Confederation of British Industry's (CBI), the proposed new cross-border trade laws by Brussels will ‘bog companies down in a legal quagmire’, as well as damage on-line businesses and undermine the UK's financial services sector. The CBI deputy director-general John Cridland has called on EU policy-makers to urgently review the proposed contract legislation, known as Rome I.

Under the proposed trade laws, a UK firm selling its goods and services to consumers across the European Commission (‘EU’) would no longer be principally governed by English law. Instead it would have to navigate an assault course of up to 27 different (and often conflicting!) legal regimes. The CBI believes that the more likely option for most UK businesses will be simply to not trade outside of the UK.

The businesses which are likely to be particularly affected are the financial and legal services firms because they will lose the right to decide which country's law applies to a contract with a foreign company. In the event of a dispute a court could override a business’ choice of legal jurisdiction and rule that a different legal system applies. As an example, a London firm which now sells its products to a customer in Venice under English law would find itself liable under Italian law for any complaint. Any court case would be heard in an Italian court, under Italian law with the proceedings in Italian. The same situation could also when the company accepts an order from another EU country.

The current laws fall under international legal principles agreed in 1980. The EU claims to be simply formalising the existing process by implementing these new laws. However, the CBI argues that the EU is bringing in major changes without considering the cost implications. Cridland said:

"The proposed legislation was sold as a simple legal tidying-up exercise when the European Commission embarked on the process but it has turned into a major operation. It will produce substantive new law and turn accepted cross-border trade principles on their head yet the Commission has not carried out any regulatory impact assessment and, despite serious concerns by business, shows no indication of doing so. The practical impact is likely to be immense for firms that trade across the EU."

Cridland believes that London's financial services firms will be especially hit by the changes. Under existing law companies can designate a legal jurisdiction to apply to a contract with another company. However, the new proposals will remove this right. Instead, a court will be able to override the contractual stipulations and specify a different legal regime if a judge decides it is more appropriate.

Currently, if a UK bank lends money to a French construction firm to build a bridge in Nigeria both sides could agree to be bound by English law. But under the proposals, if there was a dispute, a court could over-rule the parties and decide that the case should be heard under Nigerian law, as it is the country most connected to the contract. This change will have significantly detrimental consequences for companies signing contracts in the EU, as it means they will never be watertight and the companies will be exposed to legal risk and uncertainty. Cridland explains further:

"These proposals will have worrying consequences for the financial services sector. Legal firms will no longer be able to give their clients 'clean advice' when it comes to contracts. This will place both lawyers and their clients at a disadvantage to firms operating without the complicated burdens of this legislation, causing many firms to think about relocating operations elsewhere. The net effect would be to undermine the financial services sector of the UK and the EU yet Brussels appears to be happy to sleep-walk into this nightmare. These proposals need urgent and substantive review."

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© RT COOPERS, 2007. This Briefing Note does not provide a comprehensive or complete statement of the law relating to the issues discussed nor does it constitute legal advice. It is intended only to highlight general issues. Specialist legal advice should always be sought in relation to particular circumstances.