The UK's Financial Markets Law Committee (FMLC) has warned that if proposed European Commission (EC) reforms to the Rome Convention are adopted, this could result in legal uncertainty for letter of credit (L/C) contracts.

The FMLC also warns that the reforms could be anti-business and make L/C transactions less attractive.

Applicable law

When it comes to L/Cs, the FMLC is particularly concerned about Article 4 in the proposed reforms. It specifies how the applicable law is to be identified where there is no express choice of law in several specified situations. This apparently leaves the courts operating under the Rome Convention with no room for discretion.

The FMLC says that this principle goes against current market practice with L/Cs, where the law applicable at the place of presentation and payment will governthe separate contracts between the beneficiary and, respectively, the confirmingand issuing banks.

Not market practice

Article 4 does not expressly contemplate financial contracts according to the FMLC, which says this would trigger a presumption that would lead to the applicabilityof the law of the country in which the principal place of business of the bank islocated (or to a relevant branch under Article 18).

"It is not market practice to include governing law clauses in letters of credit," concludes the FMLC, which points out that this is the principle that "allows credit to be extended promptly, using standard documentation, without addressing the identity of the applicable law".

Spirit of convention

The intention of the Rome Convention is to create at least a harmonised if not a unified body of law within the European Union (EU). The FMLC's observation, however, is that the proposed reforms would result in "lack of clarity".

In this sense the reforms would appear to be against the spirit of the Rome Convention.

FMLC

The FMLC exists to identify issues of legal uncertainty or misunderstanding, present and future, in the framework of the wholesale financial markets, which might give rise to material risks, and to consider how such issues should be addressed. It will also act as a bridge to the judiciary to help UK courts remain up-to-date with developments in financial markets practice.

A full copy of the FMLC's report 'Legal assessment of the conversion of the Rome Convention to a Community instrument and the provisions of the proposed Rome I Regulations' can be found at http://www.fmlc.org/papers/April06Issue121.pdf

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.