Rule Against Reflective Loss Neither A Procedural Rule Nor An Overriding Mandatory Provision Of English Law, So Does Not Apply To Foreign Law Claims In English Court

The High Court has held that the rule against reflective loss is not a rule of procedure, so as to fall outside the Rome II Regulation, and nor is it an overriding mandatory provision of English law for the purposes of article 16 of Rome II. The rule therefore does not bar a Dutch law claim brought in the English court, even if that would be its effect in respect of the equivalent claim governed by English law: KMG International NV v Chen [2019] EWHC 2389 (Comm).

In determining applicable law, the English court (in common with all EU courts) applies the Rome I or Rome II regulation, depending on whether it is dealing with a question of the law to govern contractual or non-contractual obligations. That will remain the case even after Brexit, as the UK government has legislated to incorporate Rome I and Rome II into English law on exit day.

Rules of procedure are excluded from both Rome I and Rome II and, in the English courts, are dealt with under English law. Both Rome I and Rome II also provide for the application of “overriding mandatory provisions” of the law of the forum, even where the substantive claim is governed by a foreign law. The present decision is of interest in confirming that the English law rule against reflective loss will not be applied by the English court where, applying Rome I or Rome II, the applicable law is a foreign law.

The decision is of particular interest as a rare example of the English court considering what amounts to an overriding mandatory provision of English law. The test is, in summary, whether respect for the provision is regarded as crucial for safeguarding a country's public interests, such as its political, social or economic organisation, irrespective of the law that otherwise applies. The court's finding that the rule against reflective loss does not meet that test may not be seen as surprising. However, the decision is helpful in confirming that an overriding mandatory provision goes beyond a provision that cannot be derogated from by agreement, or is mandatory in the sense of not discretionary, or is informed by considerations of policy.

Background

The claimant obtained an arbitration award for US$200 million against a company called DPH Holding SA (DPH). It brought tort claims against the defendants in the English court, in its capacity as a creditor of DPH, for breach of duties allegedly owed by the defendants under Dutch or alternatively English law. It asserted that the defendants had caused...