German Article: Costs of Free Choice of Law from an Economic Perspective
An interesting article written by Giesela Rühl has recently been published in the German legal journal Rabels Zeitschrift (71 RabelsZ 2007, 559 et seq.):
“Die Kosten der Rechtswahlfreiheit: Zur Anwendung ausländischen Rechts durch deutsche Gerichte”
Here’s the English abstract:
Free choice of law has been the focus of the economic analysis of law for several years. However, most of the contributions have concentrated on one aspect of choice-of-law clauses only, namely their efficiency. In contrast, few authors have taken note of other economic problems that free choice of law might pose. One of these problems is the fact that choice-of-law clauses – at least if they call for application of foreign law – incur significant costs. After all, domestic courts will have to apply a law that they do not know and whose application, therefore, is more expensive than the application of domestic law. In economic terms, these additional costs can be classified as negative external effects. They may result in inefficiencies unless the parties – when making their choice consider and, thus, internalise the additional costs associated with the applicationof foreign law. Unfortunately, under current German law no such internalisation takes place: Courts have to determine the content of foreign law ex officio. And the parties neither have to support the courts in this endeavour nor to bear all the costs involved. This article, therefore, discusses several proposals for legal reform designed to provide the parties with an incentive to consider the additional costs when making their choice of law. More specifically, it discusses the economic advantages and disadvantages of adopting a lex fori approach, of requiring the parties to plead and proof foreign law and of increasing the court fees in cases where the parties have chosen a foreign law. It comes to the conclusion that the last option complies best with economic and legal requirements and, therefore, suggests to change German law accordingly.
The questionable reform proposal by Rühl rests on the misguided premise that courts, in the absence of a choice of law clause, would have to apply the lex fori as a default rule. As a matter of fact, however, parties to international contracts or spouses in a binational marriage will often choose the applicable law in order to eliminate the legal uncertainty that is involved in the application of objective conflicts rules and the pertinent connecting factors, especially when this process boils down to defining the “most significant relationship” etc. From this perspective, allowing the parties to choose the law applicable to their legal relations actually decreases legal costs and should not be penalized by higher court fees. For this reason, the EU is right in expanding free choice of law in its recent regulations and proposals (Rome I, II, III).
In his comment von Hein rightly points out that – under the choice of law rules currently in force in Germany in matrimonial and divorce matters – parties may not always choose the lex fori. He ignores, however, that this does not argue against the suggested proposal for reform – but rather for an expansion of free choice of law. Von Hein, therefore, is right – and totally in line with the article – when he praises the European Commission for its plans to extend the scope of freedom of choice in the envisioned Rome Regulations (even though the Commission’s plan arguably do not go far enough). Unfortunately, he ignores that this expansion leads to the problems discussed in the article, namely the risk of a distorted choice of foreign law as a result of state subsidies for foreign law.
Rühl’s comment contains a refinement of her position which does not, however, go far enough. If one limits a penalty for choosing foreign law to cases where the lex fori would apply because of objective conflicts rules (i.e. a “distortion” arises, as Rühl calls it), the court would, if the parties have opted for a foreign law, still be oliged to carry out a full-blown conflicts analysis merely to decide on the distribution of costs. As a result, the gains that are produced by a clear choice of law clause — liberating the court from determining the law that would be applicable to a case in the absence of a choice of law clause — in the main proceedings would be lost in the end.