UK: Might Your Contracts Soon Be Governed By EU Contract Law?

Last Updated: 16 February 2011
Article by Sophie Palmer

"The internal market is built on a multitude of contracts governed by different national contract laws. Yet, differences between national contract laws may entail additional transaction costs and legal uncertainty for businesses and lead to a lack of consumer confidence in the internal market. Divergences in contract law rules may require businesses to adapt their contractual terms."
EC European Contract Law Green Paper

The responses to the European Commission's July 2010 green paper containing proposals for some form of EU-wide contract law have now been submitted. The UK responses show little appetite for the more radical proposals but the response from mainland Europe appears somewhat warmer. So now seems a good time to recap on the significance of the proposals and what they might mean for you.

The proposals

Research commissioned by the Commission has suggested that the differences between national contract laws may be creating additional transaction costs, legal uncertainty and a lack of consumer confidence, and that consumers and businesses have expressed support for some form of EU-wide contract law. The Commission is considering various different solutions ranging from (i) a "toolbox" for EU lawmakers when they adopt new legislation to (ii) an optional EU Contract Law which could be chosen as an alternative to the existing national contract laws to (iii) creating a European Civil Code which would not only establish a European Contract Law but would also cover other non-contractual types obligations.

One major source for the terms of any EU contract law will be the Principles of European Contract Law developed by European academics on the basis of the Draft Common Frame of Reference which covers principles, definitions and model rules of civil law, including contract law. Any EU contract law is likely to contain overarching principles of good faith and fair dealing such as already exist in civil law jurisdictions, but not in general English contract law. Of course, the UK has for many years incorporated European law into domestic legislation, including some that is based on legal traditions from other EU states – the Commercial Agents Regulations 1993 are an example of this. However, until now this has been limited to discrete areas of law. The possibility of wholesale change to an entire area of law is unprecedented. This is particularly significant for laws such as English law and Dutch law which are frequently chosen to govern commercial contracts between parties who do not themselves have any connection with those jurisdictions.

UK response to the proposals

The suggestion of replacing national contract law with an EU alternative, even on an optional basis, has met with a negative response from parties within the UK. The OFT's response makes the point that the significant time and costs needed to implement the proposals will not necessarily be proportionate to the benefits to be gained from the process. It also notes that there is existing EU consumer protection legislation which applies to both domestic and cross-border transactions, and it is hard to see the benefit of developing a further set of relevant principles which might only apply to cross-border transactions. A further widely-made objection is that each Member State will interpret European contract law in its own way so differences will soon appear at a national level in any event. Indeed, the UK government's position is that the availability of different contract laws across Europe is a strength rather than a weakness.

In fact, there is some scepticism about the way the EC research was framed in the first place, and about the suggestion that businesses and consumers would be more likely to trade across borders if there was a European Contract Law in place. The prevailing view in the UK is that the difficulties are more practical, and will always exist whether or not contract law is standardised across the EU. These difficulties arise from cultural, language and regulatory barriers. The real issues are such matters as accessibility for redress of problems in a cross-border contract, and the differences in procedures, available remedies, time taken and costs which apply at national level within the EU Member States. That said, surveys have revealed a marked preference amongst consumers in certain other EU member states (Italy, for example) for some kind of EU-wide contract law.

What might this mean for you?

There are many variables to consider. Even after a particular option has been chosen, there will be other issues to be resolved such as (i) whether any EU contract law should cover both business-to-consumer and business-to-business contracts; (ii) whether online transactions should be covered; (iii) whether EU contract law should be restricted to cross-border transactions or whether it could be adopted for domestic transactions, and so forth. This will all take time. However, the European Commission has indicated it intends to prepare its proposals before 2012. The idea of an optional EU contract law has been more warmly received in mainland Europe.

Such a proposal could mean that businesses will need to:

  • review their existing terms and conditions to determine whether they could or indeed should adopt the optional EU contract law;
  • consider whether there is a commercial case for offering customers contracts under the optional EU contract law;
  • face the possibility that another party (perhaps with stronger bargaining power) will insist on its use;
  • bear in mind that the option EU contract law will almost certainly contain overarching principles unfamiliar to general English contract law which could have a significant impact on UK-based businesses' approach to their business-to-business dealings;

all of which will mean that in-house lawyers will in due course need to be trained in the resulting EU contract law legislation.

Significant change is not imminent but it appears to be on its way.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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