An Optional European Contract Law – Chances and Risks

Prof. Dr. Carsten Herresthal, LL.M., University of Regensburg

Prof. Dr. Carsten Herresthal

I. Introduction: Common European Sales Law – a milestone towards a common European contract law?

1. A decade without progress in European contract law?

- Communication from the Commission, 11th July 2001 - COM(2001) 398 final ▪ Measures to reduce differences in contract law between Member States

▪ Reduction of obstacles to cross-border trade within the internal market

▪ „Option IV“: comprehensive legislation on the EU level, i.e. regulation with provisions on general questions of contract law and specific types of contracts

- Green Paper from the Commission on policy options for progress towards a European Contract Law for consumers and businesses, 1st July 2010 - COM(2010) 348 final

▪ „Option 4“: Regulation setting up an optional instrument of European Contract Law

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Prof. Dr. Carsten Herresthal

I. Introduction: Common European Sales Law – a milestone towards a common European contract law?

2. Harmonisation of European contract law: two approaches

- Communication from the Commission: “A more coherent European Contract Law: An Action Plan”, 12th February 2003 - COM(2003) 68

▪ Improvement of the quality and coherence of European contract law by establishing a Common Frame of Reference (CFR)

(CFR: common principles, terminology and model rules for the EU Legislator)

- Full harmonisation of contract law: a dead end

▪ Communication from the Commission: "European Contract Law and the revision of the aquis“, 11th October 2004 - COM(2004) 651

Review of the acquis communautaire in consumer contract law, removal of inconsistencies, filling of regulatory gaps

▪ Result: Directive on Consumer Rights (adoption on 10th October 2011)

Improvement of consumer rights in distance and off-premises contracts;

full harmonisation, but very limited scope: information, right of withdrawal)

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Prof. Dr. Carsten Herresthal

I. Introduction: Common European Sales Law – a milestone towards a common European contract law?

2. Harmonisation of European contract law: two approaches (cont.)

- Concept of an optional Common European Contract Law

▪ Substantial opposition of the Member States against the concept of full harmonisation of contract law by European directives

▪ Improvements and amendments, but no substantial expansion of fullyharmonising directives in contract law

▪ Substitution of (full) harmonisation of contract law by providing for optional common contract law rules

- Ultimate object of harmonisation: a binding Common European Contract Law?

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Prof. Dr. Carsten Herresthal

II. Implementation of an optional European contract Law: status quo

- “Feasibility Study” (May 2011)

▪ Study carried out by the Expert Group on European contract law;

▪ Object: an optional European Contract Law for consumers and businesses

- Proposal for a Regulation on a Common European Sales Law,

11th October 2011 - COM(2011) 635 final

▪ Content:

Regulation (scope, choice of law),

Annex I (optional contract law rules – “Common European Sales Law” -CESL),

Annex II (“Standard Information Notice”)

▪ Different title but concurring subject matter of “Feasibility Study” and “Common European Sales Law”

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III. Proposal for a Regulation on a Common European Sales Law

1. Content of the proposed Common European Sales Law (CESL)

a) Limited scope: Sales law and related service contracts

▪ Central aspects of contract Law:

Pre-contractual information and remedies in case of breach of information duty, conclusion of contract (offer and acceptance), interpretation of contract, right to withdraw, defects in consent, unfair contract terms

▪ Sales Law:

Obligations and remedies of the parties to a sales contract, conformity of the goods, specific performance, termination

▪ Service contract Law:

Obligations and remedies of the parties to a related service contract

▪ General provisions of the law of obligations:

Withholding performance, passing of the risk, damages and interest, restitution, prescription

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III. Proposal for a Regulation on a Common European Sales Law

b) Advantages and disadvantages

- Advantages of the limited scope (Sales Law, related service contracts)

▪ Reduced complexity of the project (high complexity of a statutory law of obligations; “error-prone” process of European legislation)

▪ Sales law partially harmonised by directives (B2C-contracts)

▪ Test of a contract law of limited scope on the internal market (limited financial and personal expenses)

▪ Limited harmful effects on freedom of contract in case of an excessive level of consumer protection

- Disadvantages the limited scope (Sales Law, related service contracts)

▪ Frequent application of member states law even with agreement on CESL rules (assignment, representation, legal capacity, setoff, transfer of ownership, plurality of parties,

ordre public)

▪ Small progress in harmonisation: close to scope and content of aquis directives; no genuine sales law for the internal market

▪ No nucleus for a European contract law: rules close to sales law not apt for later generalisation in case of a optional common European contract law

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III. Proposal for a Regulation on a Common European Sales Law

2. Fundamental economic concept of CESL

- Basic concept of private law: free market economy

- Constraints of the concept:

▪ Limitation of freedom of contract from the beginning (Art. 1 I CESL)

▪ Multitude of mandatory rules

▪ Multitude of (mandatory) rules on consumer protection

▪ Multitude of general clauses and vague terms

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III. Proposal for a Regulation on a Common European Sales Law

3. Fundamental principles in private law: approval by CESL

- General principles of private law in contract law:

Principles substantiated by contract law rules; rules interpreted in accordance with those principles

- Art. 4 I, II CESL: interpretation in accordance with “objectives and the principles underlying it“; questions unsettled by the rule „are to be settled in accordance with the objectives and the principles underlying it“

- General principles independent from Member States private law

- Main general principles of contract law (according to CESL):

▪ Freedom of contract

▪ Primacy of non-mandatory private law rules (Art. 1 II CSEL)

▪ Good faith and fair dealing (Art. 2 I CESL)

▪ Consumer protection

▪ Principle of reliance

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III. Proposal for a Regulation on a Common European Sales Law

4. Main shortcomings of CESL

- Very vague content of the rules:

▪ General clauses (“reasonable”; “good faith and fair dealing”; “duty to co-operate”)

▪ Vague rules embracing broad concepts (“substantially deprives the other party of what that party was entitled to expect under the contract”)

- Inconsistencies (structure of the rules)

▪ General rules with non-exhaustive enumeration of examples vs. mere examples without general rule;

▪ Multitude of rights to damages vs. one general right to damages

- Contradictions within the rules (e.g. three definitions of unfairness)

- Insufficient structuring (e.g. Art. 45 CESL - right of withdrawal; elements of duty to inform)

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III. Proposal for a Regulation on a Common European Sales Law

5. CESL as a nucleus for European methods of statutory interpretation

- Independent European methods of statutory interpretation:

Genuine methods of interpretation in European law;

CESL is European law (annex of direction)

- Principle of autonomous interpretation (Art. 4 I CESL):

Autonomous interpretation in accordance with its objectives and principles;

no binding authority: interpretation of member states law, PECL, CISG, DCFR

- Shortcoming: neither coherent preamble nor reasons by legislator

Necessity due to content: coherent set of sales law rules

- Approval of judge-made law (“Rechtsfortbildung”)

Art. 4 II CESL: issues „not expressly settled“ are to be settled “in accordance with the objectives and the principles underlying”

- Approval of lex specialis-rule (Art. 4 III CESL)

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IV. Chances and Risks of an optional CESL

1. Chances of CESL

- Modern Sales Law (structure adequate to the internal market)

▪ Current economic, technical structure of contractual relationships;

▪ structure of cross border trade; adequate level of consumer protection

- Benefits from uniform rules on the internal market

Reduction of transaction costs; entry of SME to foreign member states markets

- End of total harmonisation

End of excessive harmonisation of national contract law by consumer protection directives

- Market for contract law

Test of new contract law; development of adequate rules

- Competition of contract laws

Flexibility; possibility to influence member states laws

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IV. Chances and Risks of an optional CESL

2. Risks of CESL

- Need for the 28th set of rules?

Risk averse market participants (cf. opt out of CISG)

- Disadvantages of EU legislation (instead of member states legislation)

High demands on amendment of CESL; standstill of national contract law

- Direct and indirect transaction costs

▪ Necessity for SME to provide for CESL

▪ “Decade of uncertainty”

- Complexity of adjudication

Limits of CESL; interaction with member states law

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Prof. Dr. Carsten Herresthal

V. Fundamental aspects of Common European Sales Law

1. Applicability of CESL in Member States legal order

- Regulation (directly applicable)

- Suspension of member states law in the scope of application

- Trigger of applicability: agreement of the parties on CESL

2. Applicability inter partes

- Agreement of the parties on the rules of CESL (Art. 8 I CESL-Directive; Opt-in by parties to the contract)

- Prerequisites:

▪ Cross-border contract (habitual residence in different countries with at least one Member State)

▪ B2C or B2SME

▪ in case of B2C: consumer´s consent in explicit statement separate from contractual agreement (Art. 8 II CESL-Dir.), no standard term offer of CESL by business

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Prof. Dr. Carsten Herresthal

V. Fundamental aspects of Common European Sales Law

3. Additional options for the Member States

- Availability of CESL for national contracts

- Availability of CESL for B2B (no SME)

4. Amendment of CESL rules

- Two aspects

▪ Applicability of CESL

▪ Amendment of CESL-rules (as far as possible)

- CESL as model rules in case of amendments by standard terms

5. Mandatory consumer protection in case of cross border contracts, Art. 6 II Dir. No. 593/2008 (Rome-I)

- scientific opinion: necessity of explicit rule: possibility to deprive Member States mandatory consumer protection law

- CESL-Regulation: no deprivation (CESL in both Member States)

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Prof. Dr. Carsten Herresthal

V. Fundamental aspects of Common European Sales Law

6. ECJ: Court of appeal for the interpretation and completion of CESL

- Functioning of ECJ proceedings

- Deficits: proceedings; capacity of ECJ; competence in private law

7. Contract law and fundamental rights

- German contract law: embedded in fundamental rights legal order

- Insufficient effects of EU fundamental rights

▪ No fundamental rights adjudication ex officio (on ECJs own motion)

▪ Freedom of contract: no substantial content in ECJ adjudication

▪ EU fundamental rights no „law in action“

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Prof. Dr. Carsten Herresthal

VI. Conclusion

- CESL-Regulation as nucleus of an optional Common European Contract Law

- Market for contract laws

- Improvements of CESL necessary

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Contact:

Prof. Dr. Carsten Herresthal, LL.M.Attorney-at-Law (NY)

Chair for Private Law, Commercial Law, Corporate Law,

European Law and Theory of Law

Faculty of Law

University of Regensburg

Universitätsstr. 31

D- 93053 Regensburg

mobil +49 / (0)160 - 97861826

Tel. +49 / (0)941 - 9432631 (Sekretariat)

Fax. +49 / (0)941 - 9434965

mail@carsten-herresthal.de

www.carsten-herresthal.de

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