Overriding Mandatory Provisions

From Max-EuP 2012

by Reinhard Ellger

1. Concept and function of overriding mandatory provisions; distinction from other provisions of a cogent nature

a) Concept and function

The private international law (PIL) rules of all EU Member States grant contractual parties the power to freely choose the law governing a contract concluded by them (choice of law by the parties). In case the parties do not agree on a choice of law, the applicable law is determined through connecting factors of an objective nature. These connecting factors are designed to let a contract be governed by the legal system to which it has the closest relationship. This way of determining the applicable law is characterized by the use of universal (multi-lateral) points of reference whereby the legal issue presented by a factual situation, eg the validity of a contract, the divorce of a married couple or the right of inheritance of a person is subsumed under the juridical categories of the relevant private international law rule (contract, divorce, succession) which, in turn, determines the applicable law. The allocation of legal issues to legal systems by universal connecting factors is independent of the material contents and intentions of the substantive norms of the legal systems concerned; this technique of reference, as a matter of principle, views all legal systems as equivalent and fungible.

The separation of universally termed conflict of laws provisions from the substantive purposes and intentions pursued by national legislations might be explained by the concept of private law as ‘the law of society’ as opposed to public law as the law of the state, an understanding that can be traced back to the separation of state and society in 19th century liberalism. However, since the end of World War I, the basis for the traditional, politically neutral private international law which allocated legal issues to legal systems according to the criteria of justice in international private law, international harmony of decisions between legal systems, the interest in a smooth performance of international transactions and the interests of the parties involved, became more and more fragile and dubious, because the political neutrality of private law as a whole was jeopardized by two political developments.

On the one hand, legislatures started to use instruments of private law for the pursuit of social policy goals and, by doing so, went far beyond the traditional role of private law of providing a framework for the ordering of legal affairs between autonomous private persons. Examples of social policy aims intruding into private law can be found in modern landlord-tenant law as well as modern labour law provisions which strive for the preservation of jobs and the safeguarding of fair work conditions.

On the other hand, European states have increasingly tended to pursue goals of public, social and economic policy through the adoption of public law acts which affected contracts concluded between private parties. Instructive examples for this legal trend are statutory precepts and prohibitions or nullity of contracts between private parties in violation of exchange regulations which aim to protect a state’s own currency as well as embargoes and restrictions on imports and exports undertaken to either create political pressure or protect a nation’s cultural identity (export bans for certain important cultural goods).

The term overriding mandatory provisions generally refers to laws protecting the fundamental political and economic structures of the states concerned, such as statutes against the restraint of competition as well as certain provisions relating to capital markets like the prohibition of insider trading under §§ 12, 14 of the German Securities Trading Act, which aims to protect the functioning of the capital markets. As a common feature, these provisions above all pursue supra-individual interests, such as public, economic and social policy goals of the law-making state and are not designed to serve the balance of interest within contractual relations between private parties. The political interest of the states in the enforcement of overriding mandatory provisions is the reason for not allowing private parties to prevent the application of such provisions by choosing a law other than the law with the mandatory provisions as the proper law of contract. At present, the rules on overriding mandatory provisions have to a certain extent been internationalized (more precisely: Europeanized) through Art 7 of the Convention on the Law Applicable to Contractual Obligations of 19 June 1980 (Rome Convention) and through Art 9 of the recently adopted Regulation 593/2008 of the European Parliament and of the Council of 17 June 2008 on the Law Applicable to Contractual Obligations (Rome I).

b) Delimitation of overriding mandatory provisions from other rules of a cogent nature

Overriding mandatory provisions form a category of so-called cogent norms which are part of the legal systems of all European states. Within this category of legal norms, three different types have to be distinguished: the merely internally cogent rules, the internationally cogent rules (overriding mandatory rules) and special private law rules (Sonderprivatrecht). It is useful to distinguish among these three categories of cogent legal rules because each type has different effects on the proper law of the contract. Of a merely internally mandatory nature are such legal norms which, under the private law rules of the Member States, cannot be derogated from by contractual agreement between the parties. Nevertheless, the choice of a legal system to govern a contract leads to the inapplicability of the internally cogent rules of the legal system which would have governed the contract in the absence of the choice of law. In such a case, the internally mandatory rules of the chosen law become applicable. An exception to this principle only takes effect if the relevant contract has—apart from the choice of a foreign law—ties to only one (other) legal system. In such a case, ‘the choice of the parties shall not prejudice the application of provisions of the law of that other country which cannot be derogated from by agreement’ (Art 3(3) Rome I; similarly Art 3(3) Rome Convention). For example, in German civil law, the general clauses of §§ 138 and 242 Bürgerliches Gesetzbuch (BGB) qualify as internally mandatory rules which do not serve the enforcement of Community or state interests, but aim to preserve justice and fairness within the contractual relations of private parties.

As opposed to the merely internally cogent provisions, overriding mandatory rules take precedence over the provisions of the proper law of contract, be it determined by choice of law or by connecting factors of an objective nature. This is why the latter category of legal norms is termed internationally mandatory provisions. Such provisions focus on the pursuit of societal interests (aims of economic, social or public policy) and are not designed to preserve justice between the individual parties of a private contract.

In between these two types of cogent rules, a third category of non-mandatory provisions can be indentified which do not qualify as purely internally mandatory norms but only take precedence over the proper law of the contract as designated by a choice of law under certain circumstances, namely if the proper law of contract applicable without a choice of law would have provided a party to the contract a particular and more favourable protection than that enjoyed under the chosen law. This category of mandatory rules is composed of provisions inspired by goals of social policy in favour of certain groups of contractual parties which are intended to correct typical imbalances between the parties to a contract. From this point of view, such rules protect interests of the individual and not necessarily those of the Community or the state. The parties are not allowed to contract at a level lower than the standard of protection provided for by the proper law of contract applicable without a choice of law. Such limited internationally mandatory provisions can be found, for example, in consumer protection law and in labour law. Hence, Art 5(2) Rome Convention and Art 6(2) Rome I stipulate for consumer contracts that a choice of law must not deprive the consumer of the level of protection he enjoys under provisions of the law in the country of his habitual residence from which a derogation by agreement is not allowed.

Similar rules are set forth for employment contracts by Art 6(1) Rome Convention and Art 8(1) Rome I. As opposed to overriding mandatory rules, the special private law provisions applicable to consumers and workers only take precedence over the proper law of contract designated by choice of law if the rules of that legal system turn out to be less favourable to consumers or employees than the provisions of law which would have been applicable in the absence of a choice of law. The precedence of the law which would be applied without a choice of law over a chosen law thus depends on a comparison of which law is more favourable for consumers or employees.

The relationship between Arts 5 and 6 Rome Convention or, alternatively, Arts 6 and 8 Rome I and the provisions concerning overriding mandatory rules in Arts 7 Rome Convention and 9 Rome I has not yet been fully explored. It seems clear, however, that certain provisions of consumer or labour law might be subject to the rules for overriding mandatory rules of Arts 7 Rome Convention, 9 Rome I rather than to Arts 5 and 6 Rome Convention and Arts 6 and 8 Rome I.

c) Classification of overriding mandatory provisions according to their origin

In assessing whether and to which extent overriding mandatory provisions should be applied or given effect, the legal system from which those provisions originate is, among other criteria, of considerable significance. Three sources of origin can be distinguished. First, a rule which according to its wording or its contents claims application in a specific case can be part of the lex fori. The overriding mandatory provision might, secondly, originate from the proper law of contract. In this context, it is questionable whether those rules are applied here as part of the proper law of contract or on the basis of a special rule of private international law independent of the proper law of contract. Finally, the overriding mandatory provision can be part of the law of a third country which is connected to the case neither as lex fori nor as the proper law of the contract.

d) Criteria for the characterization of overriding mandatory provisions

One of the most difficult problems in this field is the characterization of cogent legal norms as overriding mandatory rules and the delimitation of such provisions from other norms of a cogent nature. There is some agreement in the European discussion of the topic that internationally mandatory provisions differ from merely nationally mandatory rules by their goals of economic, social and public policy in contrast to the latter’s attempt to justly balance the interests of parties of private contracts. Nevertheless, the characterization of such provisions in a specific case oftentimes turns out to be difficult, and it does not come as a surprise that the results reached in the European jurisdictions on this question differ to a considerable extent. In German private international law, the following criteria for the characterization of a rule as an internationally mandatory provision have been developed: the clear wording of a rule expressing its intention to be applied independently from the proper law of the contract (example: § 1 of the Posted Workers Act), the enforcement of a statute by administrative compulsion or administrative penalties as well as the enforcement of statutory provisions by criminal sanctions. Statutory precepts or prohibitions which touch upon contracts between private parties might indicate that the enactment has to be characterized as an internationally mandatory provision. However, the absence of this kind of indication does not necessarily prevent that a provision will qualify as an overriding mandatory provision. This type of rule might even be found in the core sectors of private law; thus, the German Federal Supreme Court (BGH) and the Austrian Supreme Court of Justice (OGH) have both decided that the German (§ 661a Bürgerliches Gesetzbuch (BGB)) and the Austrian (§ 5j of the Federal Act Governing Provisions to Protect Consumers) private law rules determining the binding nature of prize promises (often used as a covert form of advertising), which are neither subject to administrative approval nor to criminal penalties, are to be interpreted as internationally mandatory provisions (BGH 1 December 2005, BGHZ 153, 82; ObGH 29 March 2006 [2006] Recht der Wirtschaft 431). The delimitation of an internationally mandatory provision on the basis of its classification as a rule of public or private law has proven to be inappropriate. For the characterization of internationally mandatory provisions, the ‘nature and purpose’ of the relevant enactments also have to be taken into account (see Art 7(2) Rome Convention). The characterization of the provisions of special private law relating to the protection of consumers and employees has proven to be especially difficult. Such provisions might be caught by Arts 5 or 6 Rome Convention or, alternatively, by Arts 6 or 8 Rome I on the one hand. On the other hand, such enactments might qualify as internationally mandatory rules and hence fall within the ambit of Art 7 Rome Convention, Art 9 Rome I.

2. Trends in legal developments

At present, the problem of internationally mandatory provisions has to a considerable extent found a uniform treatment under Arts 7 Rome Convention, 9 Rome I. The following trends in legal development are of particular significance and hence will be briefly highlighted here: internationally mandatory provisions form an exception to the universality of choice-of-law rules including the principle of free choice of law in international contract law in that they take preference over the proper law of contract. It is because of the exceptional character of this kind of legal norm that the acts of European uniform law on the law applicable to contractual obligations attempt to set narrow limits especially on the applicability of internationally mandatory rules of third countries. In that respect, Art 7(1) Rome Convention requires a close connection between the facts of the relevant case and the law of another country in order to justify applying or giving effect to the overriding mandatory rules of this country. Article 9(3) Rome I even raises this threshold by only permitting the application of the overriding mandatory rules of a third country if the contract at issue has to be performed within that country and if performance of the contract is deemed to be illegal under the laws of that country. By the same token, the Member States of the Rome Convention have made remarkable efforts to refuse claims of third countries for the application of their internationally mandatory rules when these rules are regarded as being exorbitant (especially embargo rules adopted by the United States whose enforcement is sought against European corporations in Europe, see Rechtbank den Haag 19 September 1982, Compagnie Européene des Pétroles SA v Sensor Nederland BV [1982] Rechtspraak van de Week v Kort Geding no 167; J Basedow (tr with note) (1983) 47 RabelsZ 141; Libyan Arab Foreign Bank v Bankers Trust Co [1989] QB 728). Moreover, European uniform law expressly stipulates that the internationally mandatory rules of the lex fori take precedence over the provisions of the proper law of contract if these rules expressly or impliedly demand application to the case. The European uniform law seems to tacitly assume that the internationally mandatory rules of the proper law of contract are applied as an integral part of that law and not on the basis of a special reference.

3. Normative structures of uniform law

Since the coming into force of the Rome Convention, concluded on 19 June 1980 and subsequently replaced by Rome I as of 17 December 2009, the fundamental aspects of the public international law provisions relating to internationally mandatory rules are unified at the European level.

a) The provision relating to internationally mandatory rules in Art 7 Rome Convention

In the negotiations preceding the conclusion of the Rome Convention, carving out the rules relating to internationally mandatory rules, especially those originating from foreign law, had proven to be difficult. As a result, the only solution which could be found—as described by the explanatory report of Giuliano and Lagarde for the EU Member States (Mario Giuliano and Paul Lagarde, Report on the Convention on the law applicable to contractual obligations [1980] OJ C282/1, 26)—was based on principles which had already been developed for this problem in the legal systems of the Member States. Article 7(1) Rome Convention deals with foreign internationally mandatory provisions. Foreign internationally mandatory provisions of a legal system which is not the proper law of the concerned contract can ‘be given effect’ if this legal system has a close connection to the case. In the decision-making process, the nature and the purpose of the mandatory provisions as well as the consequences which would result from their application or non-application have to be taken into account.

The provision does not speak of ‘applying’ foreign internationally mandatory rules, but rather ‘giving effect’ to them. This broad wording opens up room for such Member States of the Convention which refuse to apply foreign public law, but give effect to foreign internationally mandatory rules in a different constructive and doctrinal fashion. In Germany, the Federal Supreme Court (BGH) has for a considerable time rejected the notion that foreign public law is applicable in proceedings before German courts relating to conflicts within contractual relations between private parties (BGH 17 December 1959, BGHZ 36, 371). Therefore, foreign internationally mandatory rules (which are not part of the proper law of contract) are not applied by German courts as law on the basis of a special rule of private international law (Sonderanknüpfung), but are taken into account on the level of the substantive rules of the proper law of contract (which, in the cases decided by the BGH, was invariably German law). Giving effect to such rules on the level of substantive law may result in the nullity of a contract because of unconscionability under § 138 BGB (BGH 22 June 1972, BGHZ 59, 82; BGH 21 December 1960, BGHZ 34, 169) or in releasing the debtor from the performance of a contractual obligation on the basis of impossibility of performance for which the debtor is not responsible. An alternative is also the adjustment of contractual obligations to a new factual and legal posture because the contract has become frustrated (BGH 8 February 1984, NJW 1984, 1746). Other legal systems, like the French (Cass. civ. 25 January 1966, Rev. crit.dr.int.pr. 1966, 238 note Francescakis; Cass. Soc. 31 May 1972, Rev.crit.dr. int.pr. 1973, 683 note Lagarde) or the English laws (Ralli Bros v Compania Naviera Sota y Aznar [1920] 1 KB 614; [1920] 2 KB 287; Kleinwort, Sons & Co v Ungarische Baumwolle Industrie AG [1939] 2 KB 678 (CA); Regazzoni v KC Sethia Ltd [1956] 2 QB 490), have been much less reluctant in applying foreign internationally mandatory rules as legal provisions on the basis of a special norm of private international law (Sonderanknüpfung) and giving effect to such foreign rules not only on the level of substantive law. Article 22 Rome Convention grants the Member States a proviso against Art 7(1) Rome Convention. The Member States Germany, Ireland, Luxembourg, Portugal and the United Kingdom have filed such a reservation. The lodging of the proviso has neither in Germany nor in the other Member States led to the consequence that foreign internationally mandatory rules are deprived of effect. Rather, they are not given effect according to the criteria of Art 7(1) Rome Convention but are instead considered according to the requirements of the autonomous private international law of those states.

Article 7(1) Rome Convention lists certain requirements for taking into account foreign internationally mandatory rules. Thus, the ‘nature and purpose’ of the foreign provision have to justify its consideration. However, Art 7(1) Rome Convention does not describe in greater detail how the ‘nature and purpose’ of the foreign norm have to be laid down and ascertained in order to give effect to it. With regard to the scarce case law in this field, it seems easier for courts to accept foreign internationally mandatory rules if they belong to a category of norms which have been adopted with similar contents by a multitude of countries and which, thus, represent a common international standard of legislation. On the other hand, courts have more problems accepting foreign mandatory rules which have been adopted by only one country and which are internationally unusual. Thus, the Tribunal de Commerce of Mons (Belgium) refused to give effect to a provision of a Tunisian statutory rule against the restraint of competition in connection with a dealership agreement under Belgian law because the Tunisian competition law prohibited exclusive dealership agreements altogether and thereby went far beyond the internationally common restrictions for this type of agreement (Tribunal de Commerce of Mons 2 November 2000, Rev D Comm Bel 2001, 617). Moreover, Art 7(1) Rome Convention requires taking into account the consequences which might follow from the application or non-application of the foreign mandatory provision. These consequences do not only relate to an evaluation of the normative purpose pursued by the foreign legislature, but also to the consequences which might come about for the parties. Hence, it might be unreasonable for a debtor to discharge his contractual obligations in a country in which the performance of the contract in question is a criminal act or otherwise prohibited. Finally, Art 7(1) Rome Convention presupposes a close connection between the state which has adopted the internationally mandatory rule and the factual situation at hand in order to justify the giving effect to the foreign provision.

According to Art 7(2) Rome Convention, the Convention does not prevent the application of the mandatory rules of the lex fori if those rules are mandatory irrespective of the law otherwise applicable to the contract. The Convention does not contain a provision relating to the internationally mandatory rules of the proper law of contract. Apparently, the Convention assumes that those rules apply as part of the proper law of contract.

b) Art 9 Rome I

On 17 June 2008 the Council and the EU-Parliament adopted Regulation 593/2008 on the Law Applicable to Contractual Relations (Rome I). Rome I entered into force on 17 December 2009 (Art 29 Rome I) and replaces the Rome Convention between the EU Member States with the exception of Denmark which due to a proviso is not taking part in the regulation. Initially, the United Kingdom had also notified its intention to abstain from Rome I. Subsequently, however, it changed its mind and applied to the Commission to take part in the regulation; the Commission accepted this application on 22 December 2008. Consequently, the regulation is also binding for the United Kingdom.

Article 9 Rome I contains a provision relating to overriding mandatory rules which replaces Art 7 Rome Convention. Article 9 Rome I starts out in its para 1 with a statutory definition of the concept of overriding mandatory provisions. According to this definition, rules qualify as overriding mandatory provisions if they are regarded as crucial by the adopting country for the protection of its public interest, such as its political, social or economic organization, to an extent that such rules are applicable to any situation falling within their ambit, irrespective of the law otherwise applicable to the contract. This definition has been developed by the European Court of Justice in Arblade (ECJ Joined Cases C-369/96 and C-376/96 – Arblade and Leloup [1999] ECR I-8489 para 30). Such a definition should—as a matter of principle—be welcomed because it may facilitate the identification of internationally mandatory provisions and their delimitation from other types of cogent norms. However, the potential beneficial effect of the statutory definition as contained in Art 9(1) Rome I should not be overestimated. Only a short time after it handed down Arblade, the ECJ in substance held that the right of a commercial agent to claim indemnity after termination of the agency contract under Art 17 of the Commercial Agents Directive (Dir 86/653) qualifies as an overriding mandatory provision (ECJ Case C-381/98 – Ingmar GB Ltd [2000] ECR I-9325 para 24). Apart from the fact that this characterization of Art 17 Commercial Agents Directive is dubious, because the provision aims at the protection of a special group of persons rather than pursuing goals of public, social or economic policy (so decided by the BGH 30 January 1961, NJW 1961, 1062, the French Cour de Cassation Cass. civ. 28 November 2000, Bull. Civ. IV, no 183, 160 and the Dutch Rechtbank Arnhem 11 July 1991 [1992] NIPR 151 with regard to analogous provisions in their own domestic law), it is perplexing that the ECJ in Ingmar does not mention it and instead applies the criteria to characterize overriding mandatory rules which the court itself had developed hardly a year before in Arblade.

Article 9(2) Rome I deals with the overriding mandatory rules of the lex fori. The regulation does not address the application of such rules. With regard to internationally mandatory rules of the lex fori, the provision of Art 9(2) does not lead to any differences from the rule contained in Art 7(2) Rome Convention.

Article 9(3) Rome I is dedicated to overriding mandatory rules of third countries. Under this rule, effect may be given to the overriding mandatory provisions of the law of the country where the contractual obligations have to be or have been performed, insofar as those overriding mandatory provisions render the performance of the contract unlawful. This criterion is exactly in line with the requirements developed by the English courts for the application of foreign internationally mandatory rules (see eg Ralli Bros v Compania Naviera Sota y Aznar [1920] 1 KB 614; [1920] 2 KB 287 (CA); Kleinwort Sons & Co v Ungarische Baumwolle Industrie AG [1939] 2 KB 678 (CA); Kahler v Midland Bank [1950] AC 24; Regazzoni v KC Sethia Ltd [1956] 2 QB 490; Lemenda Trading Co Ltd v African Middle East Petroleum Co Ltd [1988] QB 448; Libyan Arab Foreign Bank v Bankers Trust Co [1989] QB 728). The introduction of the place of performance of the contract as a criterion for giving effect to a third country’s overriding mandatory rules is a significantly narrower requirement than that of the close connection of the third country to the context as provided for by Art 7(1) Rome Convention. It is open to doubt whether the limitation in giving effect to foreign mandatory rules resulting from Art 9(3) Rome I is appropriate or whether the new criterion excludes certain situations of fact in which a third country has a legitimate interest in having its internationally mandatory rules given effect.

One has to also take into account that it is up to the parties to determine the place where the contract between them has to be performed so that finally the parties decide whether an internationally mandatory provision will be given effect. In addition, in deciding whether to give effect to a foreign overriding mandatory provision, the nature and purpose of such provision and the consequences of its application or non-application have to be taken into account. These requirements correspond to a large extent to the criteria provided for by Art 7(1) Rome Convention. Article 9 Rome I—just like Art 7 Rome Convention—does not expressly deal with the application of mandatory rules of the proper law of contract. Therefore, it has to be assumed—as in the case of Art 7 Rome Convention—that these mandatory rules are applicable as part of the proper law of contract.


Jürgen Basedow, ‘Private Law Effects of Foreign Export Controls—An International Case Report’ (1984) 27 German Yearbook of International Law 109; Ulrich Drobnig, ‘Die Beachtung von ausländischen Eingriffsgesetzen—eine Interessenanalyse’ in Festschrift Neumayer (1985) 159; Rolf C Radtke, ‘Schuldstatut und Eingriffsrecht. Systematische Grundlagen der Berücksichtigung von zwingendem Recht nach deutschem IPR und dem EG-Schuldrechtsübereinkommen’ (1985) 84 ZVglRWiss 325; Jürgen Basedow, ‘Wirtschaftskollisionsrecht, Theoretischer Versuch über die ordnungspolitischen Normen des Forumstaates’ (1988) 52 RabelsZ 8; Yvon Loussouarn and Pierre Bourel, Droit International Privé (7th edn, 2001) 123–41; Patrick Courbe, Droit International Privé (2nd edn, 2003) 121; Gerhard Kegel and Klaus Schurig, Internationales Privatrecht (9th edn, 2004) 150–8; Robert Freitag, ‘4. Teil’ in Christoph Reithmann and Dieter Martiny (eds), Internationales Vertragsrecht (6th edn, 2004) 363–501; Jan Kropholler, Internationales Privatrecht (6th edn, 2006) 18–24 and 503–14; Lord Collins and others (eds), Dicey, Morris and Collins on the Conflict of Laws, vol II (14th edn, 2006) 1242–50.

Retrieved from Overriding Mandatory Provisions – Max-EuP 2012 on 19 May 2022.

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