Harmonization of the law applicable to contractual obligations: existing legislation of the Republic of Moldova and the necessity for an approximation to the law of European Union

Natalia Osoianu, PhD, Senior lecturer, chair of private law, ULIM

The necessity of harmonization with the law of European Union is a very important matter for Republic of Moldova, due to the fact that Moldavian legislation in the sphere of international private law lacks consistency and contains many serious omissions and errors. This article examines the problem of applicable law in contractual obligations by means of comparative analysis (Civil Code of Republic of Moldova and Rome I Regulation of EU are being compared), emphasizing the most important provisions of Moldavian legislation which need to be modified in order to achieve the goal stipulated in the article 50 of the Partnership and Cooperation Agreement between the European Communities and the Republic of Moldova from 29th of November 1994. Keywords: international private law, rules of conflict of law, party autonomy, most closest connection, characteristic performance, contractual obligations

Гармонизация права, применимого к договорным обязательствам: действующее законодательство Республики Молдова и необходимость сближения с правом Европейского Союза Необходимость гармонизации с правом Европейского Союза представляет собой очень важную проблему для Республики Молдова в связи с тем, что молдавское законодательство в области международного частного права является непоследовательным и содержит много пробелов и ошибок. В настоящей статье исследуются вопросы определения права, применимого к договорным обязательствам, с применением сравнительного анализа (Гражданский кодекс Республики Молдова сравнивается с Регламентом «Рим I» ЕС), уделяя особое внимание тем положениям молдавского законодательства, которые необходимо изменить с целью реализации статьи 50 Соглашения о партнерстве и сотрудничества между Европейскими Сообществами и Республикой Молдова от 29 ноября 1994 г. Ключевые слова: международное частное право, коллизионная норма, автономия воли сторон, наиболее тесная связь, характерное исполнение, договорные обязательства

It can be recognized in accordance with article 50 of the Partnership and Cooperation Agreement between the European Communities and the Republic of Moldova from 29th of November 1994 that “an important condition for strengthening the economic links between the Republic of Moldova and the Community is the approximation of the Republic of Moldova’s existing and future legislation to that of the Community”. It is also stated in the same article that “the Republic of Moldova shall endeavour to ensure that its legislation will be gradually made compatible with that of the Community”1. The main topic of this article was not included in the list of areas of “particular interest” for the Agreement in case, but taking in consideration the necessity to develop and maintain legal stability and uniformity in the sphere of commercial relationships between EU member states and Republic of Moldova, it can be supposed that harmonization of the law applicable to contractual obligations will make part of one of the following reforms of Moldavian legislation. Therefore, it is relevant to explore the existing regulation and to establish which legal institutions and norms need to be changed in order to apply article 50 of the Partnership and Cooperation Agreement between the European Communities and the Republic of Moldova in a proper way. The importance of this issue cannot be underestimated, because “[t]he obligations created by [contractual] choice appear more determinate and discrete than the responsibilities engendered by other forms of human associations”2.

The law applicable to contractual obligations with foreign element(s) is regulated, as well as other matters of international private law, by the Book Five of the Civil Code of Republic of Moldova3. This legal act is the main source of conflict of law rules for our legal system. Taking in consideration the aforementioned necessity of the approximation of the Republic of Moldova’s existing and future legislation to that of the European Union, it is needed to note that the problem of law applicable to contractual obligations in EU was solved with the help of 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)4. This Regulation replaces the Rome Convention that established uniform rules for determining the law applicable to contractual obligations in the European Union (EU). In order to establish the perspectives of harmonization, we have to compare the corresponding provisions of these two legal acts.

Article 1610 of the Civil Code of Republic of Moldova stipulates as follows:

“1) A contract is regulated by the law chosen in accordance with the will of the parties.

2) The parties can establish the law applicable to the contract as a whole and to certain parts of the contract.

3) The determination of the applicable law must be express or must result from the contents of the contract or other circumstances.

4) The applicable law can be determined by the parties at any time, at the moment of conclusion of the contract or at a later date. The parties to a contract have the right to come to an understanding concerning the modification of applicable law.

5) The determination of the applicable law after the conclusion of the contract has a retroactive effect and is considered effective from the moment of the conclusion of the contract, not prejudicing in any way the formal validity of contract and the rights which were granted to the third parties in accordance with this contract.

6) If commercial terms recognized in the international circuit are used in the contract, it is considered, unless otherwise stated in the contract, that the parties have determined to use in their relations the customs and practices of commercial circuit which correspond to the relevant commercial terms.”

These provisions of Moldavian Civil Code express mostly the same ideas as the provisions of paragraphs 1 and 2 of the article 3 “Freedom of choice” from the Rome I Regulation, which are as follows5:

“1) A contract shall be governed by the law chosen by the parties. The choice shall be made expressly or clearly demonstrated by the terms of the contract or the circumstances of the case. By their choice the parties can select the law applicable to the whole or to part only of the contract.

2) The parties may at any time agree to subject the contract to a law other than that which previously governed it, whether as a result of an earlier choice made under this Article or of other provisions of this Regulation. Any change in the law to be applied that is made after the conclusion of the contract shall not prejudice its formal validity under Article 11 or adversely affect the rights of third parties.”

The main principle, from which both articles start, is the principle of “party autonomy” or “lex voluntatis” — one of the fundamental principles in private international law in matters of contractual obligations and choice of law. Giesela Ruhl mentions that “[a]s a connecting factor choice of law plays a prominent role in a globalized world: it facilitates the proper regulation of individual cases, fosters legal certainty and reduces the costs of determining the applicable law”6. Concerning the methods of indication of applicable law it must be mentioned that Recital 12 of Rome I Regulation specifies that “an agreement between the parties to confer on one or more courts or tribunals of a Member State exclusive jurisdiction to determine disputes under the contract should be one of the factors to be taken into account in determining whether a choice of law has been clearly demonstrated”. European legal doctrine clarifies this principle of “party autonomy”: “In particular, no relationship and no proximity of the contract to the law chosen are required. In other words, the parties may agree on the application of an entirely “neutral” law”7. Helmut Heiss also mentions that “the law chosen must be “law” in a technical sense and not just general principles or any other set of non–binding rules”. Giuditta Cordero–Moss concludes that “the drafting style, legal technique and language of a contract as such are not sufficient bases for a tacit choice of law or as a circumstance showing close connection capable of prevailing over other connecting factors”8. In accordance with Moldavian Civil Code, it is also possible to choose a neutral law, because no connecting factors with binding force are mentioned in article 1610, but the nature of the “law” which could be chosen is unclear. Taking in consideration the lack of judicial practice in this sphere and a constant mistrust towards foreign law, it is possible that Moldavian courts will be less likely to apply foreign law with different characteristic features than Moldavian law (i.e. common law, Islamic law). Still, the possibility to choose lex mercatoria or another type of commercial customs and practices is clearly provided in the paragraph 6 of article 1610. It must be mentioned that even if application of foreign law in contractual relations is still uncommon for the commercial societies of the Republic of Moldova, application of commercial customs and practices has already become a tradition for contracts with foreign companies (this refers especially to the well–known INCOTERMS).

Article 3 of the Rome I Regulation contains provisions that regulate another complex matters, such as application of law which cannot be derogated from by agreement and the specifics of application of Community law. This article also contains references to articles 10, 11 and 13 of the Regulation, which are concerned with the problem of the existence and validity of the consent of the parties as to the choice of the applicable law. The problem of application of EU law is — at the given moment — not relevant to the Republic of Moldova, but other questions in case are very important. This refers especially to the existence and validity of the consent of the parties.

For example, article 10 “Consent and material validity” of the Regulation stipulates that:

“1) The existence and validity of a contract, or of any term of a contract, shall be determined by the law which would govern it under this Regulation if the contract or term were valid.

2) Nevertheless, a party, in order to establish that he did not consent, may rely upon the law of the country in which he has his habitual residence if it appears from the circumstances that it would not be reasonable to determine the effect of his conduct in accordance with the law specified in paragraph 1.”

These issues are not regulated by Moldavian legislation, and therefore it is possible to include them in the list of norms that must be introduced or modified with the scope to fulfil the provisions of article 50 of the Partnership and Cooperation Agreement between the European Communities and the Republic of Moldova.

In accordance with article 13 of the Rome I Regulation,

“In a contract concluded between persons who are in the same country, a natural person who would have capacity under the law of that country may invoke his incapacity resulting from the law of another country, only if the other party to the contract was aware of that incapacity at the time of the conclusion of the contract or was not aware thereof as a result of negligence.”

This problem is regulated by the Civil Code of Republic of Moldova, but it is included in the Chapter I of the Title II which refers to the legal statute of natural persons and rules of conflict of law applied in this sphere. Paragraph 2 of the article 1590 stipulates that:

“A natural person who doesn’t have capacity under his national law has no right to invoke his incapacity if he has the capacity under the law of the country where the legal act is concluded, except for the cases when it will be proven that the other party to the legal act was aware or should have been aware of that incapacity.”

Though the formal aspect of these two norms is slightly different, the content is identical. The problem here is the fact that norms regulating similar legal relations are put into different parts of a legislative instrument. This is due to the different approach to the codification of international private law: in case of Republic of Moldova, we have not a specialized regulation, as in EU law, but a part — “Book Five” — of the main civil law statutory act.

The problem of formal validity of the contract is regulated by article 11 of the Rome I Regulation and by articles 1609 and 1613 of the Civil Code of the Republic of Moldova. The common idea for both regulations is that a contract is formally valid if it satisfies the formal requirements of the law which governs it in substance. Also both regulations provide the possibility to establish the formal validity of the contract in accordance with the law of either of the countries where either of the parties is present at the time of conclusion, the law of the country where a unilateral act was done or the law of the country where either of the parties or the person by whom a unilateral act was done had his habitual residence at that time. However, there are many differences as well. First of all, the Civil Code of Republic of Moldova provides no specific norms for formal validity of certain important categories of contracts, such as contracts the subject matter of which is a right in rem in immovable property or a tenancy of immovable property (and which shall be subject to the requirements of form of the law of the country where the property is situated, with special conditions9). Consumer contracts are not regulated specifically as well, at least not from the point of formal validity. And another problem that must be emphasized is the lack of clarity with regard to the notion of “habitual residence” in the international private law of Republic of Moldova: terms “domicile” and “residence” are used in the Civil Code without any explanation of their exact meaning and thus their application may become difficult in certain cases. Furthermore, there is another criterion for the determination of the national law of companies — it is not “habitual residence”, but the “place of incorporation” (article 1596 of the Civil Code). It must be mentioned that Recital 39 of the Rome I Regulation states that “[f]or the sake of legal certainty there should be a clear definition of habitual residence, in particular for companies and other bodies, corporate or unincorporated”. According with paragraph 1 of article 19 of the Rome I Regulation,

1) “the habitual residence of companies and other bodies, corporate or unincorporated, shall be the place of central administration”;

2) “the habitual residence of a natural person acting in the course of his business activity shall be his principal place of business”.

It is also stated in the same article 19 that “habitual residence” can be the place where the branch, agency or any other establishment is located. For the purposes of determining the habitual residence, the relevant point in time shall be the time of the conclusion of the contract. So, there is a difference in the regulation of the concept of “habitual residence” in the international private law of Republic of Moldova and European international private law, due to which the applicable law in similar situations can vary.

In accordance with article 1612 of the Civil Code of Republic of Moldova, the applicable law refers to the following spheres:

a) The interpretation of the contract;

b) The rights and obligations of the parties to the contract;

c) The performance of the contract;

d) The consequences of non–execution or inadequate performance of the contract;

e) The termination of the contract;

f) The consequences of the nullity and invalidity of the contract;

g) The assignment of a claim and delegation connected with the contract.

The provisions of this article can be correlated with article 12 of the Rome I Regulation:

“1) The law applicable to a contract by virtue of this Regulation shall govern in particular:

(a) interpretation;

(b) performance;

(c) within the limits of the powers conferred on the court by its procedural law, the consequences of a total or partial breach of obligations, including the assessment of damages in so far as it is governed by rules of law;

(d) the various ways of extinguishing obligations, and prescription and limitation of actions;

(e) the consequences of nullity of the contract.”

These two articles correspond to each other in broad terms, but in the Rome I Regulation there is one more important article concerning the scope of regulation — article 1, “Material scope”. It stipulates that the Regulation shall apply, in situations involving a conflict of laws, to contractual obligations in civil and commercial matters. It shall not apply, in particular, to revenue, customs or administrative matters. Paragraph 2 of this article includes matters which are not regulated by Rome I, and these are, for example, obligations arising out of family relationships, obligations arising out of matrimonial property regimes, obligations arising under bills of exchange, cheques and promissory notes and other negotiable instruments and other questions. The Civil Code of Republic of Moldova contains no article with such norms, and it can be stated, judging from its general sphere of application, that all legal norms concerning contractual obligations are applied on a regular basis, without exceptions, because there are none provided by the Code. This is a serious omission, which must be corrected in accordance with European legal standards.

Applicable law in the absence of choice is another important problem in the sphere of contractual obligations in international private law. According to article 1611 of the Civil Code of Republic of Moldova,

“1) In absence of an agreement between the parties concerning the applicable law of the contract, it is applied the law of the country with which the contract is most closely connected. It is considered that such connection exists with the law of the country where the debtor of the performance, at the moment of conclusion of the contract, has his domicile, residence or place of incorporation as a company.

2) In absence of an agreement between the parties concerning the applicable law of the contract, notwithstanding paragraph 1:

a) a contract concerning immovable property, as well as a contract of fiduciary management of property, is regulated by the law of the country where the property is situated;

b) a work and labour contract and a contract concerning projecting and research is regulated by the law of the country where the results of such a contract are to be created;

c) a contract of civil society is regulated by the law of the country where the performance of corresponding activity takes place;

d) a contract concluded at an auction or on a competition basis is regulated by the law of the country where the auction or competition takes place.”

This article contains several omissions. First of all, it is unclear which “performance” is to be taken into consideration in order to specify the debtor and, therefore, the applicable law, given that in the paragraph 1 it is not stated that the performance must be “characteristic”. Thus it is impossible to determine the applicable law for certain types of contracts — for example, the contract of exchange, — which have more than one performances. Secondly, the specific rules provided by the paragraph 2 do not regulate all situations when the need for such rules arises and when it is not possible to apply the conceptions of “the closest connection” or “characteristic performance”. These situations and corresponding rules are provided by paragraph 1 of the article 4 from the Rome I Regulation:

“a) a contract for the sale of goods shall be governed by the law of the country where the seller has his habitual residence;

b) a contract for the provision of services shall be governed by the law of the country where the service provider has his habitual residence;

c) a contract relating to a right in rem in immovable property or to a tenancy of immovable property shall be governed by the law of the country where the property is situated;

d) notwithstanding point (c), a tenancy of immovable property concluded for temporary private use for a period of no more than six consecutive months shall be governed by the law of the country where the landlord has his habitual residence, provided that the tenant is a natural person and has his habitual residence in the same country;

e) a franchise contract shall be governed by the law of the country where the franchisee has his habitual residence;

f) a distribution contract shall be governed by the law of the country where the distributor has his habitual residence…”

As we can see, none of these spheres is regulated by the Civil Code of Republic of Moldova. But a simple omission of a certain rule can be a less serious problem than a lack of consistency. Article 1611 in its present form leads to the misinterpretation of two important notions — “the closest connection” and “characteristic performance” — and creates a false impression that four “exceptions” from paragraph 1 are the only situations when special rules must be applied. Considering these two notions, it is possible to address Recital 21 of the Rome I Regulation, according to which:

“In the absence of choice, where the applicable law cannot be determined either on the basis of the fact that the contract can be categorised as one of the specified types or as being the law of the country of habitual residence of the party required to effect the characteristic performance of the contract, the contract should be governed by the law of the country with which it is most closely connected. In order to determine that country, account should be taken, inter alia, of whether the contract in question has a very close relationship with another contract or contracts.”

Also, it is mentioned in the Regulation that for the legal certainty in the European judicial area the conflict–of–law rules should be “highly foreseeable”. Article 1611, on the contrary, is less likely to be foreseeable and can create confusion.

There are other matters of law applicable to contractual obligations, which are not regulated by the Civil Code of Republic of Moldova and are regulated by Rome I Regulation. These include specific types of contracts, such as:

— Contracts of carriage (of goods and passengers);

— Consumer contracts;

— Insurance contracts;

— Individual employment contracts.

As Symeon C. Symeonides comments, “[t]he common denomination among these contracts… is that one party (the passenger, consumer, insured, and employee, respectively) is likely to be in a weaker bargaining position than the other party” and Recital 23 openly declares a policy of protecting the weak parties10. Individual employment contracts, due to the well–known economic and social problems of Republic of Moldova, are of a special importance for our country, and still they are not regulated at all. At the same time, article 8 of the Rome I Regulation stipulates that:

“1) An individual employment contract shall be governed by the law chosen by the parties in accordance with Article 3. Such a choice of law may not, however, have the result of depriving the employee of the protection afforded to him by provisions that cannot be derogated from by agreement under the law that, in the absence of choice, would have been applicable pursuant to paragraphs 2, 3 and 4 of this Article.

2) To the extent that the law applicable to the individual employment contract has not been chosen by the parties, the contract shall be governed by the law of the country in which or, failing that, from which the employee habitually carries out his work in performance of the contract. The country where the work is habitually carried out shall not be deemed to have changed if he is temporarily employed in another country.

3) Where the law applicable cannot be determined pursuant to paragraph 2, the contract shall be governed by the law of the country where the place of business through which the employee was engaged is situated.

4) Where it appears from the circumstances as a whole that the contract is more closely connected with a country other than that indicated in paragraphs 2 or 3, the law of that other country shall apply.”

So, it is expressly provided that there are general rules of conflicts of law for these contracts, such as “the law chosen by the parties” (lex voluntatis, party autonomy), and special rules, such as “the law of the country in which / from which the employee habitually carries out his work in performance of the contract”, “the law of the country where the place of business through which the employee was engaged is situated” and “the law of the most closest connection”. Neither of these rules can be applied to solve a labour conflict in which a Moldavian citizen is implied, because they are not provided by our national legislation. This is also one of the spheres which must be changed in order to fulfil article 50 of the Partnership and Cooperation Agreement between the European Communities and the Republic of Moldova.

It must be mentioned, that the Rome I Regulation itself has been criticized. For instance, Francisco J. Garcimartin Alferez points out that the main problems of conflicts of laws in contractual sphere have not been solved, namely: “(i) the determination of the law applicable to the external aspect of agency contracts, (ii) the relationship between article 5 (consumer contracts) and the unilateral conflict–of–laws rules contained in some Directives, (iii) the effectiveness vis–à–vis third parties of an assignment of credits, (iv) or the unification of the conflict rules applicable to insurance contracts”11. Xandra E. Kramer criticizes Article 7, stating that “the division over contracts covered by Article 7 and those covered by the general rules, as well as the complexity of Article 7 itself, still result in a difficult and unintelligible system. Rather than removing the current divergencies, the introduction of Article 7 mainly conceals them”12. Nevertheless, even if Rome I Regulation is not perfect, the level of legal regulation of contractual obligations with foreign element(s) is considerably higher in European Union, and Republic of Moldova has much to learn from European legal traditions, new as well as old.

So, in conclusion we must admit that at the present moment the regulation of applicable law in contractual obligations in the legislation of Republic of Moldova does not correspond to the European legal standards. Even if there are certain rules and principles that coincide, this is due to the fact that our legal system was affected by the same legal traditions that most countries of European Union were. But the lack of consistency and many mistakes in the provisions of “Book Five” of the Civil Code of Republic of Moldova show that our legislation in the sphere of law applicable to contractual obligations must be modified.