The Commission has published its proposal for an optional Common European Sales Law which it says is aimed at facilitating cross-border transactions in the EU. The proposal follows the Commission's Green Paper in July 2010, which set out a series of possible options for a European contract law regime, and the publication of a feasibility study in May 2011 containing a draft contract code. The Commission has long favoured an optional 28th contract law regime that would exist alongside the current national regimes. It believes that such an optional instrument will protect consumers and small businesses across Europe and help to increase cross-border trade. See our European contract law reform e-bulletin of 16 February 2011 for further details of the consultation process.
It is not clear whether the optional instrument will achieve the goals set out by the Commission. The Commission is convinced that the current system under which 27 national contract laws apply throughout the EU is hampering internal trade because it believes this increases legal costs for businesses when engaging in cross-border sales and creates legal uncertainty for consumers as to their rights under the various legal systems. An optional 28th regime is therefore seen by the Commission as the obvious solution to these perceived obstacles, but the Commission fails to recognise a number of important issues that will inevitably result from such an optional instrument.
A uniform system may seem attractive at first sight, but an optional regime will not function in a vacuum, and its operation will depend on the local rules of civil procedure which differ greatly from Member State to Member State. The single body of rules may remove the necessity for judges and legal practitioners to investigate foreign laws, but there will be no jurisprudence on the new contract law and a whole new body of guiding case law will need to be built up. As the optional regime will be an instrument of European law, any doubtful meanings will ultimately need to be resolved by the European Court of Justice, a court that is already greatly overburdened and where it is not unusual for a preliminary ruling case to take up to two years.
The introduction of a new regime will also have considerable cost implications. Any court or tribunal in the EU will have to know and apply the new European law. Each Member State will in effect get a new and parallel system of contract law. Businesses with an in-house legal team, law firms, law schools and courts will have to bear the cost of training lawyers, professors, students and judges in two parallel systems.
The proposed Common European Sales Law
The proposed Common European Sales Law is set out in a draft EU Regulation which contains a comprehensive set of uniform contract law rules for cross-border contracts for the sale of tangible, movable items or the supply of digital content and, in each case, the supply of related services, such as installation and repair.
The provisions cover the whole life-cycle of a contract dealing with matters such as pre-contractual information duties, formation of a contract, right of withdrawal, rights and obligations of the parties and remedies for non-performance. While the Common European Sales Law starts from a position of freedom of contract there are several mandatory articles which contracting parties cannot contract out of. In addition there is a general principle that contracting parties must act in accordance with good faith and fair dealing, something which is not familiar to those used to a common law approach.
Adoption by parties on a voluntary basis
The Common European Sales Law would only apply where the following conditions are met:
- both parties voluntarily and expressly agree to it
- the contract is a cross-border contract, although Member States will have the option to make the law applicable to domestic contracts as well
- the contract is for the sale of goods, including digital content contracts (music, movies, software or smart phone applications)
- one of the parties is established in one of the EU Member States.
The regime will be available for both business-to-consumer and business-to-business transactions.
Proposals for further implementing measures
The Commission has also indicated that it will adopt future supporting measures in order to ensure the effective application and uniform interpretation of the Common European Sales Law. These include a database of European and national judicial decisions which relate to the interpretation of the Common European Sales Law, although this will obviously take a number of years to build up. A common concern about the proposals is that the courts of each Member State will continue to interpret the new law differently, despite the fact that there is an express requirement for it to be interpreted without recourse to national laws.
In addition a group of experts will be asked to develop a model contract based on the Common European Sales Law. The Commission recognises that this could be helpful to traders who wish to conclude cross-border contracts based on the Common European Sales Law. However work on developing such a model contract will not start until three months after the Common European Sales Law has come into force, so in the interim any traders who wish to contract on the basis of the new law will have to develop their own contract, ensuring that it is compliant with the new provisions.
Legal basis for the Regulation
The issue of the legal basis of the proposed Regulation is important and if a specified legal basis is not appropriate, an action for annulment of that measure can be brought before the European courts. The Commission's proposal is based on Article 114 of the Treaty on the Functioning of the European Union, which provides for harmonisation of national rules. Measures can only be adopted on the basis of Article 114 if it can be demonstrated that:
- disparities in contract law have an actual, rather than a theoretical, effect on market integration, and
- the proposed instrument would actually contribute to eliminating those obstacles.
The European Court of Justice has previously held that a mere finding of disparities between national rules and of the abstract risk of obstacles is insufficient to provide a legal basis under this provision. Given that there is certainly no unanimous support for the Commission's view that disparities in national contract laws actually deter cross-border trade in the EU, this may be a weak point in the Commission's proposal leaving it open to future legal challenge.
Next steps for adoption of the proposal
The Commission is determined to ensure that the proposal is adopted in 2012 which is the 20th anniversary year of the Single Market. The proposal will be adopted under the ordinary legislative procedure (the co-decision procedure) by qualified majority. This means that both the European Parliament and the Council of Ministers will have to reach a consensus and approve the proposal. The European Parliament has long been a supporter of an EU- wide contract law regime and has adopted a resolution earlier this year signalling its support for an optional EU-wide regime. It is however unclear at this stage how many Member States will support the proposal and therefore whether it will receive the required endorsement from the Council of Ministers.
If the Regulation is passed it will come into force 20 days after its publication in the EU's Official Journal and, at the moment, the proposal is that it will apply six months later. As it is a Regulation it will be directly applicable in every Member State, on a par with national laws, with no action needed at Member State level to implement the Regulation.
Opposition to the proposal by the UK Government
The UK Government has always robustly challenged the need for an instrument such as the Common European Sales Law and has raised serious doubts about the EU's competence to pursue it. In its response to the Commission's Green Paper the Ministry of Justice highlighted a number of points in relation to such an instrument, including the extra costs that would inevitably result from its introduction, the remaining uncertainty given the differences in interpretation by courts in different Member States, its impact on the current commercial position of English law and the risk that it would in fact be rarely used as it would not reflect any particular legal or cultural heritage and would be "comfortable and familiar to no one".
More recently Ken Clarke, the Lord Chancellor, has said that he considers the proposals as potentially unnecessary, disproportionate and damaging if taken too far. He remains unconvinced that the existence of 27 systems of contract law is causing real difficulties for traders or consumers and, even if it were, he doubts that the right response is to create another system of law.
Consumer organisations across Europe are also opposed to the plans which they see as potentially undermining the national consumer protection laws. The UK consumer group Which?, for example, has called on the UK Government to "scrap the proposals" and calls on the Commission to focus on bigger issues, particularly the introduction of an EU-wide alternative dispute resolution service.
Clearly the publication of the controversial proposals is just the start of the next stage in what is already a heated debate.