With effect from 17 December 2009, the Regulation on the law applicable to contractual obligations (‘Rome I Regulation’) applies to contracts from after that date. Rome I replaces the Convention on the Law Applicable to Contractual Obligations of 19 June 1980. In this article, the validity of an oral contract of suretyship between a Dutch company and an English company will be assessed with reference to Rome I.
A Mexican company orders products from a Dutch company. Because of the payment risk, the Dutch company wants suretyship from the English parent company for its Mexican subsidiary’s payment obligation. During a conference call between the representatives of the Dutch company and the English company, the English company declares that it will stand as guarantor for payment of the purchase price. The Dutch company supplies the products. The Mexican company goes into liquidation. Can the Dutch company successfully sue the English company for payment of the purchase price?
Difference in formal requirements between the Netherlands and England
Suretyship is provided for in Title 14 of Book 7 of the Dutch Civil Code. Dutch law does not stipulate any formal requirements for corporate surety. The contract of suretyship only needs to be entered into in writing if a private individual stands as guarantor (Article 7:859 (1)). Under Dutch law, corporate surety agreed orally is therefore valid.
Under English law, any suretyship, whether corporate or private, may only be successfully claimed if the contract of suretyship was entered into in writing. Section 4 of the Statute of Fraud states the following in this context:
‘No action shall be brought (…) whereby to charge the defendant upon any special promise to answer for the debt, default or miscarriage of another person (…) unless the agreement upon which such action shall be brought, or memorandum of note thereof, shall be in writing, and signed by the party to be charged therewith, or some other person thereunto by him lawfully authorised.’
The law that applies to the suretyship
The Netherlands and England are both members of the European Union. That is why judges in the Netherlands and in England must refer to Rome I in order to assess which law applies to the suretyship.
Since the parties did not make any choice of law, which law applies to the suretyship must be determined on the basis of Article 4 of Rome I. Article 4 (1) of Rome I stipulates the applicable law for eight types of contracts. The contract of suretyship is not included in this list. So Article 4 (2) of Rome I must be looked at. Pursuant to this article, the suretyship is governed by the law of the country where the party that must carry out the characteristic performance has its habitual residence. As guarantor, the English company must carry out the characteristic performance. English law therefore applies to the suretyship.
The law that determines whether there is a valid contract of suretyship
The contract of suretyship does not satisfy the formal requirements prescribed by English law. This does not automatically mean, however, that there is no valid suretyship. The suretyship can also be valid even if the contract does not satisfy the formal requirements of the law of the country that is applicable to the suretyship. Article 11 (2) of Rome I states:
‘A contract concluded between persons who, or whose agents, are in different countries at the time of its conclusion is formally valid if it satisfies the formal requirements of the law which governs it in substance under this Regulation, or of the law of either of the countries where either of the parties or their agent is present at the time of conclusion, or of the law of the country where either of the parties had his habitual residence at that time.’
The contract of suretyship is therefore formally valid if the contract satisfies the formal requirements of the law that applies to the contract pursuant to the Rome Treaty (in this case, English law) or the formal requirements of the law of one of the countries where the representatives were located at the time of the conference call (the Netherlands or England), or the formal requirements of the law of the country where one of the parties had its habitual residence at that time (the Netherlands or England). It does not matter in this case therefore that English law is applicable to the contract of suretyship. A valid contract of suretyship has been concluded between the English company and the Dutch company if a legally valid suretyship has been concluded under at least one of these two legal systems. As stated above, Dutch law does not prescribe any specific formal requirements for corporate suretyship. The suretyship agreed on orally is therefore valid.
Situation if the contract had been made in England
If the suretyship had been concluded in England, the situation would be provided for in Article 11 (1) of Rome I. This article states:
‘A contract concluded between persons who, or whose agents, are in the same country at the time of its conclusion is formally valid if it satisfies the formal requirements of the law which governs it in substance under this Regulation or of the law of the country where it is concluded.’
In that case, the validity of the contract would have to be assessed only on the basis of English law.
The Dutch company will get what is owed to it. The suretyship agreed orally must be honoured by the English company. The outcome would have been different if the oral agreement had been made during a discussion in England rather than during the conference call. In that case, the suretyship could not have been enforced. The validity of a contract can depend on in which country the contract was concluded, therefore.