The applicable law in cross-border litigation – a frontrunner’s choice?

June 2019 | EXPERT BRIEFING | LITIGATION & DISPUTE RESOLUTION

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Choice of jurisdiction and applicable law clauses are some of the most controversial points during contract negotiations. Contracting parties want to make sure that contractual disputes are adjudicated in their ‘home court’ and in accordance with their ‘own’ law.

The benefits of such choices of jurisdiction and applicable law are notorious. First, litigation takes place in a party’s own language, so that there is no need for time-consuming translations. Second, a party can rely on its trusted legal advisers instead of having to find and hire lawyers abroad. Third, the risk of (unpleasant) material and procedural surprises is limited, as a party more or less knows what to expect. These are only a few examples of why parties often consider ‘home advantage’ to be important. Accordingly, written contracts regularly expressly determine the aspects of jurisdiction and applicable law expressly.

What if, however, the cross-border dispute does not arise from a breach of a written agreement but from extra-contractual circumstances not regulated by any agreement and thus in the absence of a forum and an applicable law agreed upon by the litigating parties? This question will be discussed in the following, whereby the article will focus on non-contractual disputes involving a party from Switzerland and a party from a Member State of the European Union.

Jurisdictional aspects

In such cases, jurisdiction for cross-border disputes regularly has to be established in accordance with the convention on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters, better known as the Lugano Convention of 2007. The Lugano Convention is applicable in the entire territory of the EU as well as in the European Free Trade Association (EFTA) states, with the exception of Liechtenstein.

It is quite common that the Lugano Convention provides a plaintiff with several possible fora, whereby one of them is normally in the state where the defendant has its domicile. In matters relating to tort, an action may, e.g., also be brought before the courts of the place where the harmful event occurred.

Article 27, paragraph 1 of the Lugano Convention states: “Where proceedings involving the same cause of action and between the same parties are brought in the courts of different States bound by this Convention, any court other than the court first seised shall of its own motion stay its proceedings until such time as the jurisdiction of the court first seised is established.” Para. 2 continues by stating that “[w]here the jurisdiction of the court first seised is established, any court other than the court first seised shall decline jurisdiction in favour of that court”.

In addition, Article 33, paragraph 1 of the Lugano Convention provides that “[a] judgment given in a State bound by this Convention shall be recognised in the other States bound by this Convention”, and Article 36 makes clear that “[u]nder no circumstances may a foreign judgment be reviewed as to its substance”.

In summary, the Lugano Convention sets up a ‘strict’ regime, which ensures that the same cause of action is adjudicated in one court only and judgments from other Lugano jurisdictions must be recognised and enforced.

Determination of the applicable law

Having said that, the Lugano Convention does not govern the law applicable to cross-border disputes. The applicable law is determined by the lex fori, i.e., the conflict of laws principles of the state where the court that adjudicates the dispute is located. These principles vary between EU Member States and Switzerland.

In the EU, the applicable law in non-contractual matters is determined in accordance with Regulation No 864/2007 of 11 July 2007 on the law applicable to non-contractual obligations, better known as the Rome II Regulation. In contrast, Swiss courts determine the applicable law in accordance with the Federal Act on Private International Law of 18 December 1987 (PILA). In other words, unlike the rules on jurisdiction in civil and commercial matters, the conflict of laws principles of the EU and Switzerland are not harmonised.

Differences between the Rome II Regulation and the PILA

The principles set forth in the PILA are largely congruent with the provisions contained in the Rome II Regulation, meaning that they lead to the same applicable law. Nonetheless, in some areas this harmony is disturbed by important exceptions which may lead to the application of different laws to a cross-border dispute. This can be illustrated by the examples relating to general tort and antitrust law below.

In the area of tort law, both Article 4, paragraph 2 of the Rome II Regulation and Article 133, paragraph 1 of the PILA primarily lead to the application of the laws of the state where the perpetrator and the victim both have their residence. In the absence of such common state of residence, the Rome II Regulation and the PILA in principle refer to the laws of the state where the harm occurred. However, unlike the Rome II Regulation, the PILA leads to the application of the laws of the state where the wrongful act was committed, i.e., the place of action – in case the perpetrator could not expect that the harm will occur where it actually occurred. The PILA thus takes into consideration subjective elements as well, whereas the Rome II Regulation relies on objective criteria only.

In respect of antitrust law, both Article 6, paragraph 3 of the Rome II Regulation and Article 137, paragraph 1 of the PILA generally lead to the application of the laws of the state where the anti-competitive conduct deployed its effects. In case a victim has been harmed in several states, Article 6 of the Rome II Regulation enables the victim to base all its claims on the laws of the state where the court that adjudicates the dispute is located, provided that this state was also affected by the anti-competitive conduct. In contrast, the PILA does not provide for such uniform applicable law. Instead, an entire ‘bundle’ of laws of different states must be applied. In addition, Article 137, paragraph 2 of the PILA states that even if foreign law is applied, a Swiss court cannot order performances which exceed what would be possible under Swiss law.

The applicable law as a frontrunner’s choice

The two examples above show that the choice of the forum, in which a non-contractual dispute will be adjudicated, may not be decisive only with regard to the language and course of the proceedings or the question how evidence can be obtained. It can indirectly also decide which laws will govern the dispute on the merits, since courts determine the applicable law on the basis of the lex fori, i.e., their own conflict of laws principles.

For these reasons, in cases where several jurisdictions for the adjudication of a cross-border dispute are available, parties to non-contractual disputes are well advised to consult the conflict of laws principles of the available fora and to analyse what the effects of the choice of a forum on the applicable law will be prior to the initiation of legal proceedings. Such effect should be taken into due consideration when choosing the forum where litigation shall be initiated. Indeed, due to the importance of the applicable law for the outcome of a case, the effects on the applicable law may become the primary aspect influencing the choice of a forum. Certainly, having to litigate in a foreign language abroad may create some nuisance and inconveniences, but these are of subordinate importance compared to the outcome of the case on the merits.

The analysis of the effects of the choice of a forum on the applicable law and the decision where to initiate litigation are time-sensitive and should be conducted by both the presumptive debtor (perpetrator) and the presumptive creditor (victim). Many jurisdictions, including Switzerland, provide a presumptive debtor with the possibility to file a negative declaratory action, requesting a court to confirm that no claims exist. Once pending, such negative declaratory action blocks a subsequent action for performance (damages) in another ‘Lugano state’ (Article 27 of the Lugano Convention).

The legal institution of the negative declaratory action therefore provides the presumptive debtor with the same opportunity as the presumptive creditor to choose the forum, so that ‘forum running’ may occur. Moreover, since the choice of the forum may, in the absence of harmonised conflict of laws principles, even extend to a determination of the applicable law, a ‘forum running’ may potentially even amount to ‘applicable law running’. At the same time, judgements from Switzerland must be recognised and may under no circumstances be reviewed as to their substance by the courts of an EU Member State and vice versa under the rules set forth in the Lugano Convention.

Conclusion

In summary, the applicable law in cross-border litigation may indeed amount to a frontrunner’s choice, notably in cases where the rules on jurisdiction, recognition and enforcement of foreign judgements are harmonised, but differing conflict of laws principles apply. This concerns, in particular, disputes involving a party from Switzerland, on the one side, and a party from another ‘Lugano state’, such as EU Member States, on the other side. In such a case, the party being the first to initiate a dispute before a court – be it the presumptive creditor by means of an action for performance or the presumptive debtor by means of a negative declaratory action – may indirectly also choose the law governing the dispute.

Renato Bucher is attorney at law at Meyerlustenberger Lachenal (MLL). He can be contacted on +41 (44) 396 9159 or by email: renato.bucher@mll-legal.com.

Renato Bucher

Meyerlustenberger Lachenal (MLL)